Wednesday, August 5, 2009

Serial Correlation

So I am looking at the S&P500 index for the year. The index is currently up about 10% on the year. I am looking at my own investment portfolio and it is only up about 0.3%, should I be worried that I am losing my touch. Have I lost the alpha control on trading the index? No and no is the resounding reply.

Here is why.

What this two tables show is the return of the S&P and then below the return of the trading strategy. Then the following table tracks your investment dollar from the beginning of 2000 to the current date. So it shows that I have missed out on the rally from the March lows, but it also shows that I missed the carnage in 2000, 2001, 2002 and 2008. Meanwhile in bull years I lead in 4 out of the 5 years of the sample.

The main point is that one cannot be remiss if one misses out on the beginning of a market run. You must stick to your plan and trade your plan only. When you start deviating to "correct" your trades to what you are seeing in the market is when you will really start to lose money. That is why I like to look at this chart and know that my money grew 60% over the past 9 1/2 years and a buy and holder of the S&P 500 has lost 20%. It steadies my feet when I want to start buying options to lever and catch up.

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