Drawdowns in History

S&P 500 drawdowns from 1950 to 2019-04
Red = On the way down, Yellow = Recovering from trough, Cyan = No -10% drawdown



We focus on the drawdowns exceeding -10% - giving us a sample size of 23.

A simple average would indicate that such drawdowns occur on average every 3.04 years.

The average time between such occurrences (from the end of one to the start of another) is 452 days.

Start End Duration (Days) Nadir (Lowest Point) Date of Nadir
13/6/1950 22/9/1950 101 -14.02% 17/7/1950
6/1/1953 11/3/1954 429 -14.82% 14/9/1953
26/9/1955 14/11/1955 49 -10.59% 11/10/1955
6/8/1956 24/9/1958 779 -21.47% 22/10/1957
4/8/1959 27/1/1961 542 -14.02% 25/10/1960
13/12/1961 3/9/1963 629 -27.97% 26/6/1962
10/2/1966 4/5/1967 448 -22.18% 7/10/1966
26/9/1967 29/4/1968 216 -10.11% 5/3/1968
2/12/1968 6/3/1972 1190 -36.06% 26/5/1970
12/1/1973 17/7/1980 2743 -48.20% 3/10/1974
1/12/1980 3/11/1982 702 -27.11% 12/8/1982
11/10/1983 21/1/1985 468 -14.38% 24/7/1984
26/8/1987 26/7/1989 700 -33.51% 4/12/1987
10/10/1989 29/5/1990 231 -10.23% 30/1/1990
17/7/1990 13/2/1991 211 -19.92% 11/10/1990
8/10/1997 5/12/1997 58 -10.80% 27/10/1997
20/7/1998 23/11/1998 126 -19.34% 31/8/1998
19/7/1999 16/11/1999 120 -12.08% 15/10/1999
27/3/2000 30/5/2007 2620 -49.15% 9/10/2002
10/10/2007 28/3/2013 1996 -56.78% 9/3/2009
22/5/2015 11/7/2016 416 -14.16% 11/2/2016
29/1/2018 24/8/2018 207 -10.16% 8/2/2018
21/9/2018 23/4/2019 214 -19.78% 24/12/2018


Continue reading "Drawdowns in History"

Should you currency hedge your USD portfolio? (Part 2)

Continuing from Part 1 where we concluded that the costs of hedging will almost certainly outweigh the benefits, we now look into detail as to the return drivers of the hedge, and why they amount to nothing.



Currency hedging typically works well when the  foreign currency is negatively correlated with the foreign asset, as this means that the currency hedge gains when the asset is falling and vice versa, with a net effect of reducing the volatility of the hedged portfolio.

In this case, the Pearson correlation between the returns of SPX and the hedge (short USDSGD) is +0.235 (slightly positive), and so that does not help in reducing volatility.

From the scatter plot we can see that the returns are rather evenly clustered around the origin. The R-squared value for the linear regression is a mere 0.055 - suggesting that linear relationship of the two returns are very weak.

Taking a look at rolling correlations, the monthly returns of SGD (short USDSGD a.k.a. the hedge) have been more positive than in earlier periods (1990s and ~2005).

Notably, the 2008 crisis caused the SGD to be rather highly correlated to the SPX for several years. It has more recently subsided to the ranges of 0.30 but this is still positive and this means that leaving it unhedged actually provides some diversification benefits, as the USD strengthens (against SGD) when the S&P is not doing well, and vice versa.

Thus, in the short term, we don't expect to gain much from the hedge.


Fundamentals and regime shifts

Taking a longer-term perspective, it is unlikely that the SGD can repeat such a dramatic ascent from its levels of 2.0 USDSGD to present levels of 1.35, representing a 48% increase in value (SGD terms). This rise can be attributed to Singapore's rapid development which brought her into the ranks of developed countries, which is an unrepeatable event.

Source: United Nations HDI (http://hdr.undp.org/en/content/human-development-index-hdi)

Thus, in the long term, we don't expect to gain much from the hedge either.

Altogether, it continues to argue for the case that we should leave the USD unhedged.

Review of Trade-Ideas.com AI strategies

2018 performance for the 3 A.I. stock trading strategies at trade-ideas.com

I recently paid for a membership to take a detailed look at the strategies, and having trawled through the historical data, I present my findings below. 

The very short conclusion is that you cannot simply follow the A.I. signals regardless of Risk On or Risk Off method.

Major edit to this article: I'd like to stress that while I present Risk On on a statistical basis, the underlying data that was presented to me has a fundamental flaw and so the results are biased and misleading (more details in post).

The Risk Off method remains a true reflection of 2018 performance.


Expectations vs Reality

The strategy itself seems good - taking every single trade (at standard lot size of 100 shares) would have earned you $69,829 for the Risk On method, and  $27,463 for the Risk Off method.

Continue reading "Review of Trade-Ideas.com AI strategies"

Should you currency hedge your USD portfolio? (Part 1)

If you have the S&P 500 as part of your portfolio, should you hedge your USD exposure by regularly converting it to SGD? Doing this will remove the currency risk from your foreign (US) investment. But does it produce better returns?

The short answer is: No

This article compares between two portfolios:

  1. Unhedged - an investment in the S&P
  2. Hedged - an investment in the S&P, hedged monthly

The unhedged portfolio is one we all have to bear as the starting point, as the investment is in USD but we have to account for our wealth using SGD.

The hedged portfolio uses a simple method of hedging - hedge the exact amount of USD exposure based on month-end values. For example, if the month-end value is 2,200 we will simply sell 2,200 USDSGD. The result is the undhedged portfolio, plus any gains/losses from the currency hedge.


Chart 1b (below, middle) shows that the absolute dollar-value difference between the Hedged and the Unhedged portfolio is negligible. Chart 1c shows the cumulative outperformance of the Hedged vs the Unhedged portfolio, and shows no clear trend of outperformance.

Chart 1 - Absolute dollar-value comparisons

Chart 2 below compares the outperformance of the Hedged portfolio vs the Unhedged portfolio in their monthly returns, percentage terms.

Chart 2 - Monthly returns outperformance

The percentage outperformance shows no distinct bias, and its average is indeed near zero (0.02%). Together, the results from charts 1 and 2 suggest that outperformance is random and close to zero.

If the difference in the returns are negligible, what about the standard deviation of the returns? Perhaps the hedged portfolio can give us a more predictable monthly return?

Unhedged (SGD) Hedged (SGD)
Average monthly return 0.64% 0.66%
Standard deviation 4.17% 4.62%
Sharpe 0.155 0.144

Unfortunately, wWhile the hedged portfolio has marginally better monthly returns, the variance of the hedged returns are also higher, leader to a lower risk-adjusted return measure.

Thus, if we include transaction costs and effort/time spent for hedging, it is likely it will not be worthwhile to hedge.

Continue reading "Should you currency hedge your USD portfolio? (Part 1)"

A simple market timing model

While no market timing model will perfectly save you from all price drops, a fix as easy as using a 9-month simple moving average can improve the performance of your long equity portfolio. Performance  is superior to buy and hold - not only in terms of absolute gain, but also with lower risks (volatility of portfolio and drawdowns).

Jan 1994 - Aug 2017
Portfolio Initial Balance Final Balance CAGR Stdev Best Year Worst Year Max. Drawdown
Timing Portfolio $10,000 $120,581 11.09% 10.04% 38.05% -4.42% -15.28%
Buy & Hold Portfolio $10,000 $82,060 9.30% 14.45% 38.05% -36.81% -50.80%

Continue reading "A simple market timing model"