Frequently Asked Questions
about...
How risky is this...
How risky is this strategy?
I would call this a relatively low-risk strategy. Downside risk in stock market investing is often expressed in terms of maximum drawdown - the maximum loss experienced in a single peak-to-trough downturn before a new peak is attained. The max drawdown (maxDD) for The 12% Solution since 2008 has been relatively low compared to, for example, holding the S&P 500. More specifically, the maxDD of SPY, which mirrors the S&P 500, was -51.9% over the 13-year backtest (2008 to 2020). The long-term Treasury fund TLT had a maxDD of -26.6% over the same 13 years.
The 12% Solution, tested over the same period, had a maxDD of -13.9%. That, coupled with a relatively low volatility, makes The 12% Solution a top pick for safety and peace of mind.
That said, I always caution investors that these are historical numbers. Maximum drawdowns do not represent floors or safety nets. Be aware that any trading model you participate in, at any point in time, could set a new max drawdown - taking your money down for the ride. So while MaxDD figures offer a valuable insight into past declines, the past is the past.
On that note, let's not forget the age-old axiom: Past Performance Is No Guarantee Of Future Results.
I would call this a relatively low-risk strategy. Downside risk in stock market investing is often expressed in terms of maximum drawdown - the maximum loss experienced in a single peak-to-trough downturn before a new peak is attained. The max drawdown (maxDD) for The 12% Solution since 2008 has been relatively low compared to, for example, holding the S&P 500. More specifically, the maxDD of SPY, which mirrors the S&P 500, was -51.9% over the 13-year backtest (2008 to 2020). The long-term Treasury fund TLT had a maxDD of -26.6% over the same 13 years.
The 12% Solution, tested over the same period, had a maxDD of -13.9%. That, coupled with a relatively low volatility, makes The 12% Solution a top pick for safety and peace of mind.
That said, I always caution investors that these are historical numbers. Maximum drawdowns do not represent floors or safety nets. Be aware that any trading model you participate in, at any point in time, could set a new max drawdown - taking your money down for the ride. So while MaxDD figures offer a valuable insight into past declines, the past is the past.
On that note, let's not forget the age-old axiom: Past Performance Is No Guarantee Of Future Results.
Extended backtesting...
Have you tested your strategy going back further than 2008?
As you may know, the book focuses on tests running back to 2008. I would have preferred a longer term, too. Unfortunately, the inception date for some of the funds that make up the strategy dictate the timing for the backtest. For example, at least one of the funds in our strategy's universe only came into being in 2007.
Not to be deterred, in the Second Edition of the book I dedicate an entire section to an exercise in extended backtesting. Using mutual funds as proxies for the ETFs in question, I was able to run a backtest from the year 2000 to 2018 (the last full year prior to the 2nd publication in 2019).
While the average annual return slipped a bit from the 12% (due to the Dot Com Crash), the strategy still managed to beat SPY by an average of 4.4% annually throughout the 19 years.
Readers can see all the details in Appendix A in the back of the Second Edition.
As you may know, the book focuses on tests running back to 2008. I would have preferred a longer term, too. Unfortunately, the inception date for some of the funds that make up the strategy dictate the timing for the backtest. For example, at least one of the funds in our strategy's universe only came into being in 2007.
Not to be deterred, in the Second Edition of the book I dedicate an entire section to an exercise in extended backtesting. Using mutual funds as proxies for the ETFs in question, I was able to run a backtest from the year 2000 to 2018 (the last full year prior to the 2nd publication in 2019).
While the average annual return slipped a bit from the 12% (due to the Dot Com Crash), the strategy still managed to beat SPY by an average of 4.4% annually throughout the 19 years.
Readers can see all the details in Appendix A in the back of the Second Edition.
nervous about your strategy...
I'm most concerned about preservation of capital. What would you say to someone nervous about implementing your strategy?
ANSWER: Preservation of capital is key for me, too. Keep in mind that no system is perfect; there will still be volatility and still be drawdowns with The 12% Solution.
How do investors approach the strategy? Some folks leg into it -- initially allocating 25% or 50% of the funds they eventually intend to invest, giving them a chance to see the model work and get a feel for the trades. A few months or a year later, allocate another percentage. Not a bad idea for any new strategy.
Others are content to apply the strategy only to a portion of their account while continuing to trade or hold the individual stocks or funds they're more familiar with. Individual stocks and funds can always be protected (to some extent) with stop-loss orders or trailing stops. For that matter, you can do the same with the components of The 12% Solution for any given month.
My own personal risk-management strategy revolves around the use of multiple strategies. For example, I'll pair The 12% Solution and Bond Bulls together with American Muscle or The White Knuckle, all in the same account [explore those last three subscription strategies at TrendlineProfits.com].
I'll overweight the first two, as they are more conservative strategies, and underweight the latter. This allows me to harness multiple mechanisms for identifying market trends, provides for a greater diversity of funds, and ultimately reduces overall risk in the portfolio.
I'm not suggesting this is the solution for everyone, but it works for me.
Just a few thoughts.
ANSWER: Preservation of capital is key for me, too. Keep in mind that no system is perfect; there will still be volatility and still be drawdowns with The 12% Solution.
How do investors approach the strategy? Some folks leg into it -- initially allocating 25% or 50% of the funds they eventually intend to invest, giving them a chance to see the model work and get a feel for the trades. A few months or a year later, allocate another percentage. Not a bad idea for any new strategy.
Others are content to apply the strategy only to a portion of their account while continuing to trade or hold the individual stocks or funds they're more familiar with. Individual stocks and funds can always be protected (to some extent) with stop-loss orders or trailing stops. For that matter, you can do the same with the components of The 12% Solution for any given month.
My own personal risk-management strategy revolves around the use of multiple strategies. For example, I'll pair The 12% Solution and Bond Bulls together with American Muscle or The White Knuckle, all in the same account [explore those last three subscription strategies at TrendlineProfits.com].
I'll overweight the first two, as they are more conservative strategies, and underweight the latter. This allows me to harness multiple mechanisms for identifying market trends, provides for a greater diversity of funds, and ultimately reduces overall risk in the portfolio.
I'm not suggesting this is the solution for everyone, but it works for me.
Just a few thoughts.
cost...
What does your strategy cost?
The cost of the strategy is the price of the book. So, either $7.99 for the Kindle eBook, or $19.99 for the paperback.
The 12% Solution is a do-it-yourself strategy. And everything you need to know in order to "do it yourself" is explained in the book.
The cost of the strategy is the price of the book. So, either $7.99 for the Kindle eBook, or $19.99 for the paperback.
The 12% Solution is a do-it-yourself strategy. And everything you need to know in order to "do it yourself" is explained in the book.
same-day trading...
Each month your strategy requires that I sell one ETF then buy another. BUT the process of selling and buying is not simultaneous, as it takes a couple of days for the sale to settle before I can buy. So if I sell on the 1st of the month, I would not be able to buy until, say, the 3rd. Is that correct, or am I missing something?
If you’re trading in a cash account or a retirement account, yes, it’s technically true that funds from the sale of an asset require 2 business days to settle before placing new trades with that money. However, in practice, most if not all brokers offer the following courtesy: If you're holding Asset A in your cash or retirement account, you can sell that and immediately turn around and buy Asset B with the proceeds -- so long as you don't subsequently sell Asset B before the 2-day settlement period.
That last part is important: if you violate it, your account could face restrictions.
So for our purposes, because we trade once a month, we're able to sell one ETF and buy another immediately - same day. Again, as long as we don't sell the second for 2-3 days.
I mentioned that most if not all brokers extend this courtesy. I advise investors to confirm this policy with their particular broker just to be on the safe side. I know of at least one broker who does not extend this courtesy in their retirement accounts.
By the way, if you're trading in a cash account and you’re up against a broker that requires you to wait for settled funds, the fix is to turn that cash account into a margin account. You fill out a form with your broker, and that's it. You’ve now got the freedom to rebalance the strategy on the same day. And as long as you don't use borrowed funds beyond that settlement date, there’s no cost to you.
If you’re trading in a cash account or a retirement account, yes, it’s technically true that funds from the sale of an asset require 2 business days to settle before placing new trades with that money. However, in practice, most if not all brokers offer the following courtesy: If you're holding Asset A in your cash or retirement account, you can sell that and immediately turn around and buy Asset B with the proceeds -- so long as you don't subsequently sell Asset B before the 2-day settlement period.
That last part is important: if you violate it, your account could face restrictions.
So for our purposes, because we trade once a month, we're able to sell one ETF and buy another immediately - same day. Again, as long as we don't sell the second for 2-3 days.
I mentioned that most if not all brokers extend this courtesy. I advise investors to confirm this policy with their particular broker just to be on the safe side. I know of at least one broker who does not extend this courtesy in their retirement accounts.
By the way, if you're trading in a cash account and you’re up against a broker that requires you to wait for settled funds, the fix is to turn that cash account into a margin account. You fill out a form with your broker, and that's it. You’ve now got the freedom to rebalance the strategy on the same day. And as long as you don't use borrowed funds beyond that settlement date, there’s no cost to you.
market at an all-time high...
I just read your book and I'm eager to get started. But the market is at an all-time high. Any advice?
For folks who are new to the stock market, I always advise going easy when implementing something new. For example, you might want to "leg in" to the strategy. That is, if your intention is to invest X dollars in The 12% Solution, start by investing 1/3 or 1/2 of X. That will give you a chance to see how the strategy works, and observe the action of the selected ETFs on a daily, weekly or monthly basis. You can always increase your investment in the strategy as time goes on, and as you grow more comfortable.
For someone who is putting money to work in the market for the first time, I would tell them to expect the next correction (10%+ down) to be lurking right around the corner. Old timers who have been through a few of these know what to expect and can more easily stay fully invested. But newcomers can be quite disheartened to watch their hard-earned money take a 10% dive shortly after their first trade. So, either prepare yourself emotionally, or temper that possibility by investing less than you would like - to start with.
Keep in mind this is a long game, and there will be up times and down times.
For folks who are new to the stock market, I always advise going easy when implementing something new. For example, you might want to "leg in" to the strategy. That is, if your intention is to invest X dollars in The 12% Solution, start by investing 1/3 or 1/2 of X. That will give you a chance to see how the strategy works, and observe the action of the selected ETFs on a daily, weekly or monthly basis. You can always increase your investment in the strategy as time goes on, and as you grow more comfortable.
For someone who is putting money to work in the market for the first time, I would tell them to expect the next correction (10%+ down) to be lurking right around the corner. Old timers who have been through a few of these know what to expect and can more easily stay fully invested. But newcomers can be quite disheartened to watch their hard-earned money take a 10% dive shortly after their first trade. So, either prepare yourself emotionally, or temper that possibility by investing less than you would like - to start with.
Keep in mind this is a long game, and there will be up times and down times.
Broker Recommendation...
Can you recommend a broker?
I've been happy with T.D. Ameritrade and Charles Schwab. I especially like Schwab's trading platform called StreetSmart Edge. But others swear by T.D. Ameritrade's Think-or-Swim. [Both firms have fast-to-learn web platforms for simpler trades, research and more.] In years past I've had good experiences with ETrade and Fidelity. I've tried Interactive Brokers, but I found their trading platform unusually complicated.
My latest find? M1 Finance. I set up a small account with this online broker about a year ago to test the waters, and I've been pleasantly surprised at how easy it is to handle the monthly rebalancing. Piece of cake - or rather, pie. Your portfolio is a "pie" and each slice of that pie can be whatever you want - one or more individual stocks, and ETF or two, or in my case, a strategy made up of multiple funds. Percentage and dollar returns are tracked for each slice of the pie, so it's easy to see how groups of assets (or strategies) are doing over time. If you're interested in checking them out, using this link [M1 Finance] gets you $30.00 if you end up opening and funding an account.
Finally, if you're just starting out, I'd go to the websites of the top 3 or 4 commission-free brokers, look around, pull up any tutorials they might have to offer, and just get a general feel about them. You might even call them up and see how customer service reps/brokers respond to a question or two. Since prices have leveled out, a lot of it comes down to the vibe you get from the company and how intuitive you find the trading platform. And both of those are subjective.
I've been happy with T.D. Ameritrade and Charles Schwab. I especially like Schwab's trading platform called StreetSmart Edge. But others swear by T.D. Ameritrade's Think-or-Swim. [Both firms have fast-to-learn web platforms for simpler trades, research and more.] In years past I've had good experiences with ETrade and Fidelity. I've tried Interactive Brokers, but I found their trading platform unusually complicated.
My latest find? M1 Finance. I set up a small account with this online broker about a year ago to test the waters, and I've been pleasantly surprised at how easy it is to handle the monthly rebalancing. Piece of cake - or rather, pie. Your portfolio is a "pie" and each slice of that pie can be whatever you want - one or more individual stocks, and ETF or two, or in my case, a strategy made up of multiple funds. Percentage and dollar returns are tracked for each slice of the pie, so it's easy to see how groups of assets (or strategies) are doing over time. If you're interested in checking them out, using this link [M1 Finance] gets you $30.00 if you end up opening and funding an account.
Finally, if you're just starting out, I'd go to the websites of the top 3 or 4 commission-free brokers, look around, pull up any tutorials they might have to offer, and just get a general feel about them. You might even call them up and see how customer service reps/brokers respond to a question or two. Since prices have leveled out, a lot of it comes down to the vibe you get from the company and how intuitive you find the trading platform. And both of those are subjective.
commission-free trades...
What's this I hear about commission-free trades?
Sparked by competition from the likes of financial startup Robinhood ("Investing with Robinhood is commission free, now and forever." states their website), certain major online brokers began offering commission-free trades in September and October of 2019.
Interactive Brokers was the first big player to reduce commission rates to zero with their IBKR Lite platform. Charles Schwab announced commission-free trades on all stocks and ETFs effective October 7, 2019. Not to be outdone, TD Ameritrade, ETrade, and Fidelity quickly followed suit (and now Vanguard, with some restrictions). Most analysts believe this is a trend that will continue until all major brokers are onboard with zero commissions for online trades, with fees remaining on broker-assisted trades (i.e, on trades placed by phone), options, foreign transactions, and certain accounts.
For frequent traders it's been a game changer. But even for investors in our monthly rotation strategy, it means more money in our pockets at the end of the year.
Sparked by competition from the likes of financial startup Robinhood ("Investing with Robinhood is commission free, now and forever." states their website), certain major online brokers began offering commission-free trades in September and October of 2019.
Interactive Brokers was the first big player to reduce commission rates to zero with their IBKR Lite platform. Charles Schwab announced commission-free trades on all stocks and ETFs effective October 7, 2019. Not to be outdone, TD Ameritrade, ETrade, and Fidelity quickly followed suit (and now Vanguard, with some restrictions). Most analysts believe this is a trend that will continue until all major brokers are onboard with zero commissions for online trades, with fees remaining on broker-assisted trades (i.e, on trades placed by phone), options, foreign transactions, and certain accounts.
For frequent traders it's been a game changer. But even for investors in our monthly rotation strategy, it means more money in our pockets at the end of the year.