Hello All, I will get straight to the point. Questions: 1. What is the purpose of a Diversified Algo Portfolio when I can just DCA SP 500 index the rest of my life for like $500 a month? 2. Is it possible the portfolio will return +50% every year the next 20 years? 3. Are Diversified Algo Portfolio for yearly income for traders? In the automated trading systems teachings, books, and research document I read the holy grail is something similar to Build a portfolio of robust, low correlated, diversified algos that are built from trading in both directions, long and short. Preferable the algos must have profit factor greater than 2. Back test these algos for +10 years of historical data. For example, see below of an example of the so-called holy grail algo building. Comments 1. I am not understanding the reason to perform all this work, energy, and effort, when I or someone can just simply dollar cost average the SP 500 index for the next 20 years, and will most likely beat the portfolio of diversified algos in the end. DCA in SP500 index seems less risk, less work, less effort, and the returns good enough. 2. The cost to build all these algos per market will cost about +$200,000 I believe. Seems just DCA that money in SP500 index an individual will perform better. 3. I believe that running 1 or 2 algo and scaling that 1-2 algos in contract size has more favorable returns and a better goal. Maybe I am confused, just not sure I see the benefit of Diversified Algo Portfolio unless it is for yearly income reasons. For example, take the $200,000 and hope for 20% return a year and make $40,000 income per year. Now that sounds realistic. Please share your input on why you have the Diversified Algo Portfolio or believe in it.
Hello All, I will add to my post. I think the best case scenario is this for the reason to have a Diversified Algo Portfolio Trader has 1 goal year to year: Obtain income from risk adjusted returns which means a steady return % with less drawdown on the portfolio as possible. Use the SP500 index DCA as long term wealth building. Trader has starting capital of $100,000 and uses the Diversified Algo Portfolio to obtain +10-20% return per year with about minimum of 5- 10% drawdown. So trader makes about $20,000 per year income. Perhaps this is the reasons traders want Diversified Algo Portfolio? Now this makes sense.
if you have 2 investments A and B both expect $10 and a standard deviation of $100. If you only invest in one of them then you expect $10 with std of $100. But if you put half in each you still expect $10 but std is $100/sqrt(2) ...about $70 and sharpe increased from .1 to .14
Stocks are still overvalued and could go a decade or more with zero returns...which is actually a big loss after inflation. In theory, a portfolio of digital algos would have little to no correlation with the markets. You may have trend-following, countertrend, market neutral option strategies, etc. It sounds great, but in practice I haven't seen any of those systems perform well long-term for retail traders. I'm talking about the kind you can run in accounts ranging from say $10K to $100K. If you have access to HFT and Jim Simons' type strategies, that's a completely different thing. So to answer your question, a diversified set of algos would probably be complimentary to other investments like stocks, bonds, real estate, etc. since they risk profile is so much different. I wouldn't look at it as either-or. But good luck finding a group of retail algos that "play well" together and don't fall apart every few years. Trying to manage that can be a real pain and result in a lot more losses than gains.
Good Morning MKTrader, Thanks for your reply and comments. Yes, this is my point. I have not seen any portfolio of algos that can beat the SP 500 index over the past +5 years. Where can I find the retail trader which such portfolio that is winning with this effort? Me either and I do not know any traders, but common sense to me and experience with algo development, I believe this effort complex and not worth the true efforts vs reward for the retail trader in the future market business for the retail trader. Even though the algo world pushes this effort on the retail trader. Yes, I agree. $100K for such portfolio is alot of money. Yes, this I agree. Having a portfolio of algos in addition with other money making assets is a good idea. But the trader would still have to produce edge driven algos diversified. Yes, good point. Jim team returned about 66% return year to year for about 30 years. Can the retail trader produce returns like this with a $100K account? I am not sure, but it is a big challenge I am not against any trader who wants to pursue this effort of Diversified Algo Portfolio Allocation, but I would say be realistic in the effort and expected returns and initial capital requirement.
You also have to decide whether you want to use some leverage or not. With Mometum strategies you can achieve something about 20% or 25% p.a. on stocks. But you also have higher drawdowns here. When you decide to use leverage then you should look for minimzing drawdowns so you are safe enough with your chosen leverage. And with higher interest rates leverage also gets more expensive, so certain strategies with high leverage but only capable to 7% p.a. are no more attractive in actual and coming environment. You need to take this into account too.
Here's one guy who has books and probably coaching. However, when he put some of his systems on an auto-trading platform about 5 years ago, they didn't do well. They did outperform the market for maybe 6 to 12 months, then started underperforming and eventually had losses. Award Winning Algo Trading System Strategy | KJTrading (kjtradingsystems.com)
Good Morning MKTrader, Great comment. I am aware of Kevin Davey. I reviewed his website and here is the major flaw which is a BIG disadvantage to retail trader: 1. NOWHERE on his site does he prove or show a portfolio of algos that is beating the SP 500 index year after year, yet he is charging $5848.96 to teach. No proof of results of him or students. 2. NOWHERE on his site does he prove or show his portfolio of algos year after year results, yet he selling how to build edge driven algos. No proof of results of him or students. Yet he is charging $5848.96 to teach. And this is my point, the retail trader pay $5848.96 for this, yet the retail trader have no realistic view or understanding of the realistic returns of this portfolio Kevin is about to teach to him. So that is one disadvtange