"Trailing Stop Order" on your portfolio or part of it

MikeM

I was thinking of how some investors, especially retirees, can protect themselves from massive sell-offs like we just had. This idea came to my head. What about using a "Trailing Stop Order" on a portfolio? (maybe this hibernation gives me to much time to think )

These are typically used when you are buying or selling stocks. It sets discipline on when to sell. There is one set of diversified portfolio ETFs that you could do this with, the BlackRock iShares allocation funds, AOM, AOR, AOA. These are actually pretty good diversified "balance" funds, conservative, moderate and aggressive. The one closest to 60:40 allocation is AOR. This fund compares well to Vanguards balanced index fund VBINX. I think @davidrmoran brought these ETFs to my attention a few years ago. I have not been able to find other balanced ETFs that are diversified like these.

The idea would be to hold one of these ETFs as your core portfolio holding, maybe the bulk of the portfolio or whatever % you deem appropriate. If you want to limit your loss to say 10% of the funds high you set up the trailing stop order to sell at -10%. You protect the bulk of your retirement savings. Especially important if you are already retired and massive 20%+ really hurts maybe more so than for people still in the accumulative stage.

Any opinions + or - on this idea? I am contemplating this idea in my retirement savings so that I am not a deer in the head lights.

sma3

The problem is that when markets are so volatile , stocks and etfs frequently gap down or open well below yesterday's close ( and your stop order) so you get sold out at a much lower price than you expected

BenWP

I believe @sma3 is referring to "flash crashes," the more recent ones occurring in 2010 and 2013, IIRC. Stocks fell so fast, but recovered very quickly, with the result that positions were sold automatically, adding to the market fall and leaving the shareholders with sales they probably didn't want to make. I believe brokerages made corrections, especially for the cases in which some people who had automatic buy orders way below market prices were not able to profit from the "unnatural" declines.

MikeM

Thanks @sma3 and @BenWP for the input. I have seen where individual stocks and maybe even specific indexes open with a big spike down but adjust a bit higher after. I wouldn't expect to see huge opening falls with a diversified portfolio of index funds, both equity and income.

Don't know if I'm ready to do something like this yet. Maybe even too late for this one.

FD1000

Mike, that's not a bad idea for some of your money but I would use only wide and very liquid indexes such as SPY and/or QQQ.

MikeM

@FD100, but what the idea is is to stay invested in a diversified balanced portfolio through the good years and exit automatically when a black swan event unexpectedly pushes you into some place you don't want to be, 20-25% loss. I don't think many retirees want to take more than a 10-15% loss on retirement money in an unexpected occurrence. With minimizing the loss you may not have any long term affect on your life style.

I agree though that if done, it should be a % of the total. But maybe a substantial %.

Old_Skeet

Hi @MikeM,

I'm thinking there are ways a retired investor, like myself, can manage their portfolio through troubling times and still over time come out ahead. No doubt, you have been exploring ideas and thoughts as to how you might better govern. I'm by no means throwing cold water on your idea. I encourage you if you feel this is a better way for you to govern then back test your idea. This might not be as hard as you think. You know where you stand with current positions and your portfolio's performance. Now, all you have to do is figure out how your portfolio would have performed if it was configured based upon the sell stop orders on the proposed selected etf's incorporated within the portfolio.

For me, I'm still with my multi fund sleeve management system and using my operating base asset allocation of 20% cash, 40% income and 40% equity which in order to play the anticipated rebound from the recent downdraft I have moved to a temporary allocation of 10% cash, 45% income and 45% equity with a rebalance threshold set at +(or -) 2% from the neutral weightings. Thus far, I'm performing pretty much like a conservative asset allocation fund. As I write, I am now down less than 10% from my 52 week high and my portfolio is generating a good income stream. I plan to let my overweight equity allocation (now at 48%) run until my barometer scores the S&P 500 Index as overbought.

A fund that many like on the board, but I do not own, is VWINX. It is down ytd -3.84% with a five year average retrun of +5.24% with a yield of 3.1%. For me, come June when CFTAX makes it's mid year distribution ... I'm going to increase my position in it as I have a CD maturing towards the end of May. CTFAX ytd is up 6.55% with a five year return of 5.71%. It generates its distributions from both its bond positions along with capital gain distributions coming mostly from moving in and out of stock positions. You might wish to study this fund because it uses a similar strategy as to what you have described; but with a little different twist.

Best of luck to you. I'm sure you will come up with something tailored to fit your style of investing.

Skeet

Old_Joe

@Old_Skeet- I just wanted to tell you that I think that your posting advice and suggestions are one of the major contributions to MFO, right up there with @msf. Thanks for your good work!

Regards- OJ

carew388

@Old_Skeet I agree with oldjoe- CFTAX is one of the best fund suggestions I've seen on this board !

FD1000

MikeM said:

@FD100, but what the idea is is to stay invested in a diversified balanced portfolio through the good years and exit automatically when a black swan event unexpectedly pushes you into some place you don't want to be, 20-25% loss. I don't think many retirees want to take more than a 10-15% loss on retirement money in an unexpected occurrence. With minimizing the loss you may not have any long term affect on your life style.

I agree though that if done, it should be a % of the total. But maybe a substantial %.

You can do the above. Suppose your portfolio is 50/50 and you invested 20%(out of the 50%) in SPY with a trailing stop market at 10%. It means that as long as SPY goes up the trailing stop follows but when SPY starts going down and eventually hits it SPY will be sold at 10% (could be higher if the market is moving really fast) loss and now you will have only 30% in stocks.

FD1000

I measure portfolios with max 60% in stocks against my 2 long term funds.
For a portfolio of 30-40% stocks, I use VWIAX.
For 1 portfolio of 60-65 stocks, I use PRWCX.

So VWIAX VS CFTAX shows that VWIAX was a better choice since inception in 2012 (link)

CAGR...VWIAX 5.85%...CFTAX 5.67%
SD.........VWIAX 4.49%...CFTAX 5.1% (lower is better)
Worse year + Max draw...VWIAX leads by a lot
Sharpe+Sortino...VWIAX leads

CFTAX ER=0.69%...VWIAX ER=0.16%

BUT
If you test it for 3 years CFTAX comes ahead (link) with similar performance but only about half of the SD=volatility.

Old_Skeet

Interesting. However, I am finding that CTFAX's inception date is 2OO2. I wonder how this would change things. For me, CTFAX is not a complete investment strategy. I am using it to play stock market swings automatically rather than doing it manually. For me it seems to be the better fit.

FD1000

Old_Skeet said:

Interesting. However, I am finding that CTFAX's inception date is 2OO2. I wonder how this would change things. For me, CTFAX is not a complete investment strategy. I am using it to play stock market swings automatically rather than doing it manually. For me it seems to be the better fit.

In your previous post you mentioned 2 funds CFTAX + CTFAX. I guess we are talking about CTFAX.
PV (link) has data since 2003 and shows that both VWIAX+PRWCX were a better risk-adjusted choices than CTFAX but in the last 5 years (link) CTFAX was the better choice because YTD (chart) was great.

Your manual changes are a personal choice and what works for you.
Most investors can't/won't switch funds and I don't blame them, it's much harder.
VWIAX is a great LT, and low ER fund with a great management for most retirees.

I do trades all the time but I check it too. My LT goals are to make over 6% annually with SD < 3 and never lose more than 3% from any last top. Schwab calculates annual average performance + SD. My portfolio performance is higher than 6% and SD < 2(actually 1.71) and I never lost more than 1% from any last top in about 3 years.

Old_Skeet

@FD1000. In your analysis you reference CTFAX's inception date being 2012. This is wrong. The fund's inception date is 2002. Going back to 2002 takes into account the Great Recession. Why is this important because when stocks are cheap CTFAX loads equities and when they are expensive it holds less of them. CTFAX's investment strategy is entirely different than VWINX. My point in using it was to reflect during the recent market volatility that CTFAX was the better performer and a way for a retail investor like myself could play market volatility. I was pointing out that you had CTFAX's fund inception date wrong in your analysis. Again, the correct date is 2002 rather than 2012 which you used in your analysis. I'm thinking using the correct date will change things a good bit within your analysis. Within the past year its equity allocation has ranged from a low of 15% on upwards, most recently, towards 70%, perhaps more. Morningstar has it currently classified as 15% to 30% equity allocation fund. This could change and I think worth watching.

In addition, if one were to use a different share class COTZX rather than the A share version that I referenced this changes things a good bit performance wise as CTFAX performance since 2002 is 6.85% while it lower er cousin (COTZX) is 7.12%.

My reasons for owning the fund are listed below.

Takes advantage of market shifts. Follows a disciplined approach to adapt to market changes.
Rebalances automatically. Aims to buy low and sell high by adjusting equity exposure based on the price level of the S&P 500 Index. Pursues risk-adjusted returns.

Your analysis is interesting; but, it is not fully reflective of the CTFAX's performance since it's inception date is inaccurate and differs from my own alalysis which is detailed below.

Below is my performance findings using Morningstar's performance numbers as of 4/14/2020. Three month advantage CTFAX +8.02% vs VWIAX -3.31%, YTD advantage CTFAX +8.44% vs. VWIAX -2.99%, 1 Year advantage CTFAX +17.75% vs VWIAX +5.74, 3 Year advantage CTFAX +28.82 vs VWIAX +19.11, 5 Year advantage CTFAX +35.24% vs VWIAX +31.99%, 10 Year advantage CTFAX +108.70% vs VWIAX +105.51%.

Again, what I was communicating in my opening comment was that to play stock market volatility that CTFAX was a better choice over the widely followed, and touted by some, VWIAX. I'm thinking I just now provided the support, through the above analysis, necessary to posture my opening comment even on out through a 10 year period.

I'm still with my plan to increase my position in CTFAX with it soon to become one of my top five holdings due to its strong recent and time tested performance.

One can learn more about CTFAX through the below link.

https://www.columbiathreadneedleus.com/investment-products/mutual-funds/Columbia-Thermostat-Fund/Class-A/details/?cusip=197199755&_n=1

Skeet

Note: CFTAX was a typo error it should have read CTFAX.

In a comparison of CTFAX vs. PRWCX ... CTFAX betters PRWCX up to and through three years but trails in the 5 year and ten year comparison.

FD1000

@Old_Skeet
You pretty much covered everything I mentioned already

In your analysis you reference CTFAX's inception date being 2012. This is wrong.

In your previous post you mentioned 2 funds CFTAX + CTFAX.

CTFAX's investment strategy is entirely different than VWINX. My point in using it was to reflect during the recent market volatility that CTFAX was the better performer and a way for a retail investor like myself could play market volatility.

I know that and why I mentioned numbers since inception but also the last 5 years + YTD

Below is my performance findings using Morningstar's performance numbers as of 4/14/2020

Correct, M* is up to date on performance BUT I look deeper at SD, Sharp,Max Draw,Sortino and these numbers are monthly one. I can easily find funds with better performance which is one criterion, what about the rest? I also look longer term because a fund can be great for 1-3-6 months but not 3-5-10 years. An investor who wants to hold long term these numbers are important.

When I checked CTFAX long term, it handled YTD amazingly and did a pretty good job for 3 years. If you look further VWIAX had better volatility, in 2008 Max draw for VWIAX was -18.7 while CTFAX -42.55
So, I'm guessing they changed the formula which is great because it's a good option.

BTW, COTZX is not available at Fidelity and Schwab which are 2 major discount brokers.

Here is my bottom line: CTFAX risk-adjusted performance for YTD and for 3 years are very good.

MikeM

You can do the above. Suppose your portfolio is 50/50 and you invested 20%(out of the 50%) in SPY with a trailing stop market at 10%. It means that as long as SPY goes up the trailing stop follows but when SPY starts going down and eventually hits it SPY will be sold at 10% (could be higher if the market is moving really fast) loss and now you will have only 30% in stocks.

@FD1000: Yes, I know. But I'm looking at this not as getting out of a single holding and changing the balance of the portfolio. The idea is to safe guard your entire portfolio, your retirement savings, to some pre-specified loss. SPY may drop 10% but if your portfolio only dropped 5% and that is within your risk tolerance, why would you run to safety or sell SPY at that point ?

If you work with an adviser or even if you do things yourself, setting up a portfolio is based on your risk tolerance. So much equity, so much bonds, so much cash. You decide you're comfortable with a 10% loss or a 20% loss, ect... A stop limit order on the portfolio would set that risk or acceptable loss tolerance without emotion. The Blackrock iShare ETFs as far a I can see are the only balanced portfolio ETFs that can execute this idea.

Just talking through the idea. I'm a buy and hold investor with small buy-sell-swap adjustments on the side like most everyone else here.

FD1000

@MikeM
Why would you use allocation fund with "Trailing Stop Order". The idea is to sell only stocks in a market meltdown while bonds protect you. It depends on the bonds of course. In a real meltdown treasuries are the best. When you sell your stocks you are safe guard your entire portfolio. It depends on what and how you do it.

I also don't like AOM, AOR, AOA as much as SPY because they have much lower volume and that can be a problem in a panic market.

"If you work with an adviser or even if you do things yourself, setting up a portfolio is based on your risk tolerance. So much equity, so much bonds, so much cash. You decide you're comfortable with a 10% loss or a 20% loss, ect... A stop limit order on the portfolio would set that risk or acceptable loss tolerance without emotion. The Blackrock iShare ETFs as far a I can see are the only balanced portfolio ETFs that can execute this idea."

Can you explain how you do it using the BlackRock iShares allocation funds, AOM, AOR, AOA that you posted at the top?
Suppose you want only 10% loss and SPY goes down 20%, up 10%, down 20%, up 20% down 30%. It gets worse, most times stocks just lose up to 15-20% and rebound and very seldom lose 50% and it takes more than a year.
You will find pretty quickly how challenging it is.

I have talked to many advisors and so far couldn't find one that can guarantee a simple max loss of a specific number. Some use programs to adjust the asset allocation, rebalancing but never a specific max loss.

MikeM

FD, I can't explain any more than I have.