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Comment by lewisl9029 | Hacker News Reader

Buy and hold forever is generally great advice, until it isn't.

I'd much rather not have 30%+ of my life savings wiped out in a single recession with the rest of the market.

In my humble opinion, thoroughly backtested trading algorithms based on hard statistics is the only rational way to participate in the market. The market is fundamentally an irrational entity, and investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.

Check out Quantopian:

https://www.quantopian.com/home

Even a trivial moving average crossover algorithm like the one I currently have deployed can give you surprisingly robust protection against severe downswings, and outperform the overall market significantly over the long term despite the small losses caused by false positives.

http://i.imgur.com/ZhN0QIp.png

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thoroughly backtested trading algorithms based on hard statistics is the only rational way to participate in the market. The market is fundamentally an irrational entity

You do realize those two statements contradict each other?

What's also funny to me is that 'thoroughly backtested trading algorithms based on hard statistics' will work consistently until they fail miserably.

During a recession event the 30% loss isn't real until you close your position, with trading algorithms the time to hold is so low that any losses are very quickly realized.

"backtested trading algorithms"

Your algorithm can predict the past.

Congratulations.

I don't think you know how these work

tosseraccount has an excellent point. Overfitting is a huge danger. In the end only trading the live market for some time will tell you whether you have a profitable strategy.

If you're invested in an index fund, wouldn't the only way to realize the loss during a recession be to sell? Anyone who stayed the course after 2008 would have seen record gains in the years following.

You're right, but it would still be better to realize a small loss early in the crash and and buy back in at the bottom than just ride the whole thing out. Of course, that kind of timing is pretty much impossible so everyone suggests you don't do it.

Yes, but consider the "accumulation phase" (pre-retirement) vs. the "distribution phase" (retirement). At some point, you need to sell part of your portfolio to to pay your bills []. Check out "sequence of returns risks".

Or buy annuities, setup a bond ladder, or hold dividend stocks, but these have their own, related issues.

Early in the accumulation phase, however, I completely agree with you -- you're making the central argument for a long-term buy-and-hold strategy.

Your algorithm will likely not stand up to Walk Forward Analysis/Optimization/Testing: https://en.wikipedia.org/wiki/Walk_forward_optimization

I recommend reading "The Evaluation and Optimization of Trading Strategies" by Robert Pardo.

It's really the most fundamental rule for every type of machine learning task -- there should be both a (1) test set and (2) a separate holdout validation set. No matter if the task is classification, sequence prediction, regression, manifold learning, clustering, whatever.

Really surprising how so few amateur traders understand this fundamental principal. Scientists too.

> Buy and hold forever is generally great advice, until it isn't.

That's a truism. I could say the same thing about algorithmic trading.

The fact of the matter is that the median hedge fund manager has negative alpha. It is extremely difficult to pick winners via any strategy. In fact, it's so difficult that for people who can do it, the resulting lifestyle and compensation is so great that the asset management shops that they work out have almost zero attrition.

Moreover, the whole point of passive investment is that the odds of that kind of a market-wide crash affecting your money over a 30-year timespan are infinitesimal. If the market actually were to devolve like that, nobody would make money in the market, regardless of strategy.

> Investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.

Yes, it's called diversification.

I won't harp on the backtesting point, but what I will say is this: I'm sure that you understand the risk-reward tradeoff. It would be impossible to participate in any sort of finance and not know this concept. Quite frankly, the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low. You eat some return at the expense of lower volatility, but we're talking about a 401(k) here. We want that kind of expected stability.

"the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low"

The crash of 69 : 36%

The crash of 73: 48%

The crash of 87: 33%

The dotcom crash 2000: 50%

Housing Bubble 2007: 56%

[ source : http://traderhq.com/illustrated-history-every-s-p-500-bear-m... ]

The odds that at some point a portfolio of S&P 500 stocks will be 30% off a recent high is actually very high.

Wars. Panics. Depressions. Plagues. Recessions. Revolutions.

They still happen.

I don't know much about the market, and know even less about actual investing strategy-ish stuff, but what does the loss look like five years later?

I guess what I mean is, for an "index fund", crashes don't seem to be... permanent?

Perhaps that's small comfort for someone who's set to retire the month after one of these 30% crashes, but I guess that's what the whole "invest more conservatively as you get older" thing is supposed to help with?

> I guess that's what the whole "invest more conservatively as you get older" thing is supposed to help with?

The big index and mutual fund companies offer different allocations between stocks and bonds. You might start out with 80% of your account in an index fund (or other diversified basket of stocks) and 20% in a hedged basket of investment-grade, low-risk bonds. This percentage allocation would change over time as you got closer to retirement.

You're not going to get insanely rich off of this, but it is a decent replacement for the fact that savings account interest rates are effectively 0% these days.

'Wiped out' to me implies more than a temporary difference between recent high and recent low which both probably existed for far too little time for you to be the first person to realize to sell at the peek and first person to buy at the bottom.

Yes, they do. I did not dispute that. But as I said (perhaps not sufficiently clearly--my mistake), and as other posters have pointed out, this neutralizes out over the 30-year time horizon of an index fund investment. One dollar invested in the S&P 500 in 1970 would become $43.12 in 2000, for example, despite the crashes of 73, 87, and 2000.

I repeat, if the market were bad enough that these crashes actually wiped out your account over a 30 year period, nobody would make money in the market at all. Index funds are a low-risk, low-return investment with low management fees. They're a much better investment choice for a retirement account than algorithmically trading that money. And if you were good enough at algo trading to make solid returns over time, you might as well quit your day job and open a hedge fund or asset management shop.

check out Nikkei 225 past 25 years... http://finance.yahoo.com/echarts?s=^n225+interactive#{%22ran...

Can you show the forward performance, starting from the date when you chose those 4 parameters - 165.12, 172.44, 164.23, 156.02?

As you know, backtested results with carefully tuned magic numbers can potentially mean nothing.

you should start a hedge fund, and charge 2.5%!

joking aside, i've played with quantopian way back, and think its a fun/cool concept

The only quibble I have is that taxes would outweigh the advantages here. You either do this in a tax free account, or your trading needs to be a lot better!

Your overall point is not a bad one, but investors don't need "thoroughly backtested trading algorithms" to protect themselves. Frankly, many of the people who use "thoroughly backtested trading algorithms" don't do as well as they supposedly should.

It is, on the other hand, entirely possible for an average investor to learn basic technical analysis concepts and apply them visually to charts. At a minimum, for instance, if you can draw a trend line on a price chart and identify when price breaks important trend lines, you can easily avoid losses from major declines without having to write a single line of code or spend more than 5-10 minutes a day checking on your portfolio.

A decent book in this vein is The Visual Investor[1].

[1] http://www.amazon.com/The-Visual-Investor-Market-Trends/dp/0...

There's not a shred of evidence that technical analysis is anything but a charlatan's tool - same as trying to time the market. Technical analysis is bound to yield only losses for the investor and fees for the broker. The evidence points strongly against technical analysis as a method for building wealth - . And buying during upswings / selling during declines guarantees you lose.

Long-term value investing performs best, low cost index funds perform well, Wealthfront will underperform due to fees, and technical analysis will turn even a billionaire into a millionaire.

There is plenty of charlatanism in the world of technical analysis, just as there is in the world of fundamental analysis. But you're missing a key point: "technical analysis" is not monolithic. There isn't a single set of rules and indicators, all applied the same way over the same time periods. Most investors (and traders) lose money because of lack of discipline, poor money management, etc. This is true whether technical analysis is used or not.

Instead of creating a straw man argument, let's discuss something simple: trend lines. And let's discuss the most fundamental truth about trend lines: it is absolutely impossible for the current trend to reverse without key trend lines being broken.

Don't take my word for it. Pull up a chart of the S&P 500. The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well. Just by use of trend lines alone (and no other technical indicators) you could have identified key turning points in the market.

How you act upon this information, if at all, is your choice. But that has nothing to do with technical analysis. That's investment/trading strategy.

>The bull market that ended in late 2007 was easily identified by the breaking of long-term trend lines. And the bear market that ended in 2009 was easily identified by the breaking of trend lines as well.

Trends are broken in periods surrounding major market corrections, indeed. How many false positives are there in between, in which you're turning over your portfolio for no reason?

Not all trend lines are created equal. Some are more important than others. You too are confusing technical analysis with investment/trading strategy. The breaking of a short or intermediate term trend line does not inherently call for "turning over your portfolio."

Depending on where you are in a trend, the breaking of a short-term trend line, for instance, could set up an opportunity to add to an existing position when the trend resumes.

Ahh, you can't have it both ways. Does a simple trend line, e.g. 12 month moving average, suffice to tell you to get in or out of a stock ("the bear market that ended in 2009 was easily identified by the breaking of trend lines")? Or does it have to be the right trend line? Moreover, how do I know what trend line to choose? I can choose great trend lines with the benefit of hindsight.

Also, forgetusername's point on false positives remains critical. Breaking trend lines is only a useful if it's right most of the time.

My advice to anyone who wants to be an enterprising investor (i.e. put more time into investing and try to achieve higher returns) is to read Ben Graham's The Intelligent Investor. Instead of trading based on the emotions in the market, invest by choosing great companies that are bargains.

A moving average is not a trend line. It's difficult to have a meaningful discussion if we are talking about two different things.

As for false positives, nobody reasonable will tell you that they don't exist. But again, there's a difference between short, intermediate and long-term trend lines. Even under the most unfavorable scenarios, anybody with a modicum of knowledge of trend lines would have been out of the market before the 2008 crash and back in the market by early 2010 because major trend lines were broken. Incidentally, I was one of those people.

As for your advice: there's nothing wrong with fundamental analysis. Although many people fail to make money using it (just like technical analysis), it's worth noting that quite a few savvy professionals use fundamental and technical analysis together.

http://www.followingthetrend.com/2014/05/why-technical-analy...

This is downvoted to light grey, but it's excellent advice. All you really need to understand are the concepts of support, resistance, momentum, and trending.

Support: a price which a significant number of market players have decided is probably the least amount the stock could be worth. That is, if the price drops to that point, they will buy. They might be wrong, but it will require an even larger number of people who think the stock is definitely worth less to make them wrong.

Resistance: the flip side of support: a price at which a significant number of market players will sell.

Momentum: the tendency of price to continue in the direction that it's going until it encounters support or resistance. Many traders attempt to profit from the short-term price swings caused by momentum. By doing so, they tend to cause the price to continue to go in that direction.

Trending: what happens when changes in the economy are reflected in the prices of stocks. Such changes don't happen instantaneously; they take time.

Momentum and trending are obviously similar, but I distinguish them in this way: momentum is mostly caused by the flow of information within the markets; trending is caused by changes in the fundamentals.

If you understand these concepts, you can see everything a long-term investor needs to see when looking at a chart.

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