Thursday, October 14, 2004

Analysis of the effect of drawdowns

The trick is to avoid portfolio drawdowns because then you are only compounding your gains. I've been obsessed with market timing techniques for months so that I can do just that.

In the table at the bottom of this post, I have listed the montly close price of the nasdaq index for the last year, and computed its gains or losses for the month. At the bottom of the table you can see that over the last year, after compounding the monthly gains and losses, the nasdaq lost 0.6%. However, if we were able to sit out the months where the nasdaq went down, we would be up 19%.

Is it possible to sit out for most of the drawdowns without increasing risk and missing too many periods where meaningful gains could have been made? I think so. I'll be posting more ideas on this subject in the future.

Date (monthly)Close pricechange from prev (multiple)compoundedcompounded excluding drawdowns
10-13-031932.211.0001.0001.000
11-3-031960.261.0151.0151.015
12-1-032003.371.0221.0371.037
1-2-042066.151.0311.0691.069
2-2-042029.820.9821.0511.069
3-1-041994.220.9821.0321.069
4-1-041920.150.9630.9941.069
5-3-041986.741.0351.0281.106
6-1-042047.791.0311.0601.140
7-1-041887.360.9220.9771.140
8-2-041838.10.9740.9511.140
9-1-041896.841.0320.9821.176
10-1-041920.531.0120.9941.190

0 Comments:

Post a Comment

<< Home