Last week, I showed you groundbreaking research that by using only the 30 stocks of the Dow Jones Industrial Average, it was possible to beat the returns of the DJIA over the past four years.
Think of how difficult this task was. We were limited to owning all 30 stocks of the DJIA and our only ability to control this investment was by rebalancing all of the stocks on an annual basis so that we were taking the same amount of dollar risk in each stock. We were forced to own some stocks that were trending lower (something I personally hate doing).
And the results were still very good.
The return of the DJIA over this period of time was +33.6%. The return of the annually rebalanced DJIA was +38.6%. That’s an improvement of nearly 15% just by using the Risk Rebalancer.
But I wanted to see if we could improve on even that outperformance by incorporating the Stock State Indicator system (SSI) into the methodology.
Now keep in mind that this exercise limits us to only 30 stocks. And when a stock is replaced, i.e. when Goldman Sachs replaced Bank of America, the system is forced to sell that position and rebalance.
For the purposes of this study, we were always fully invested amongst the stocks in the DJIA that had active SSI signals (i.e., were not stopped out by the SSI). We rebalanced annually or whenever a new stock entered or exited the portfolio.
Yes, that was a lot of rebalancing, more than I would recommend you try to do at home (or at least use a low commission IRA account), but the results are instructive (and I’m still working on a final study that optimizes the rebalancing periods).
So, what were the results? Well, I was hoping that the SSI signals would be a slight improvement. I was wrong. Using the SSI signals was a huge improvement. Take a look:
From the very beginning, you can see that incorporating the SSI created a significant positive impact … and during periods of market turbulence, the outperformance was astounding.
Ultimately, over the four-year period, the “TradeStops DJIA” returned 53.7%! Or nearly 60% better than the 33.6% return of the DJIA itself over the same period of time. (Even if we factor in $10 commissions per trade on a $100,000 portfolio, the net gains are still 42.6%.)
The SSI kept us out of most stocks during the two major downturns in the last year. And as new SSI Entry signals were triggered, we added those positions back to our TradeStops DJIA.
During the bullish market of 2013 and 2014, this system was in almost every stock. As the markets moved lower in 2015, the SSI triggered stop alerts and those caused the system to exit many of the stocks. In the market’s climb over the past four months, the SSI Entry signals have initiated many new positions.
Something I’ve been talking about for years now is that as individual investors we must have a system that favors our winners over our losers … because we tend to do exactly the opposite when left to our own devices.
That’s exactly what the SSI does. It exits losers, holds on to winners and captures the middle two thirds of big moves … and it outperforms even when it has one hand tied behind its back.
Wishing you 60% improvements across all of your portfolios,
Richard M. Smith, PhD
CEO & Founder, TradeStops