The answers to Frequently Asked Questions (FAQs) are grouped below. Find your question, then click on it.
Questions About the Website
What's this site about?
What's the Moose Club?
Why publish a free signal?
Why charge so little for your newsletter?
Do you sell signals from your other models?
Do you sell visitors' names and email addresses?
Are you being paid to mention funds or brokers?
Do you invest in the securities you mention on the site?
Questions About Market Timing
Market timing? Isn't that illegal?
Does market timing work?
What is benchmarking?
Isn't timing more expensive than holding?
Isn't timing high maintenance?
Questions About the Moose
What is Decision Moose?
How does Decision Moose work?
Why invest 100%in one asset at a time?
What's a long-only model?
Would a short-and-long model do even better?
What's a margin account?
What is the "Fed Check"?
What's with the ranking table on the Moosecalls Page?
Questions About the Funds
Why use funds instead of individual securities?
What kinds of funds work best in the Moose?
Why not use more funds?
Why use these particular funds?
Do I have to use the funds in the model?
Some of these funds are thinly traded; is that a problem?
Where can I find out more about the funds you use?
Questions About Moose Performance
Is the model ever wrong?
Can the Moose beat buy-and-hold after expenses?
Should I expect similar returns to those on this site?
How does the model treat switch signals?
Could your signals move the market?
What other factors may have an impact on my returns?
Is the Moose riskier than buy-and-hold?
What is the Sharpe Ratio?
What is passive buy-and-hold investing?
Questions About Using the Moose
Who should consider using the Moose?
Am I too wild or uptight for the Moose?
How much money do I need?
When is the best time to check the Moose?
Should I act immediately on a switch signal?
Should I buy an asset when the signal is "HOLD"?
What do "Bullish" and "Bearish" mean?
WHAT'S THIS SITE ABOUT?
This site is about timing financial markets. It does not suggest that timing should become a part of your overall investment strategy, only that if you dismiss it entirely you may be missing something. Specifically, the site demonstrates one version of the Decision Moose framework, INDEX MOOSE, which uses exchange traded index funds in an attempt to time the markets. The model's signal is provided free of charge each week. Readers may also join the Moose Club for a modest fee, and gain access to the author's online newsletter on the global financial markets.
The Moose first appeared on the internet in 1997. Between 1997 and 2000, while the S&P 500 was gaining an impressive 79%, Index Moose fared even better, up 179%. It went into cyber-hibernation in April 2000 when the author, William Dirlam, took a position with a new investment advisory firm and had to pull the site from the internet. U.S. stocks then suffered their worst bear market since 1929, while Index Moose returned about 300% through January 2004, at which point the model returned to the internet.
Trivia: Decision Moose is named for a cartoon character created by the model's author while earning his MBA and publishing the campus newspaper at Harvard Business School.
WHAT'S THE MOOSE CLUB?
The Moose Club is the private password-protected section of the site. A nominal fee buys access to what is essentially an online newsletter about current global financial conditions based on the author's reading of the model. (For a pdf example of the newsletter, click here.) Joining the Moose Club is not essential to getting the weekly signal which is free, but it does provide both a broader perspective and a little investor education. The site is provided by Quant$treet Corporation, a privately held, limited liability Maryland corporation (est. 1989) engaged in high net worth portfolio management and financial publishing. It has no affiliation whatsoever with financial services being marketed at quantstreet.com (2010). William Dirlam is both the author of this site and the president of Quant$treet. Dirlam holds a Masters in Economics from Georgetown University and a Harvard MBA. He has thirty years in banking and finance in both the public and private sectors.
WHY PUBLISH A FREE SIGNAL?
True, the free part of the site adds an hour or so a week to my workload. The process is automated for the most part, however, and I have to run the models anyway. Writing it down helps me think. I also enjoy seeing it work. When it does, call it an ego boost. When it does not, call it a discipline: it piques my curiosity and forces me back to the drawing board. Besides, having it live on the internet for years validates its performance over time-- I have witnesses.
WHY CHARGE SO LITTLE FOR YOUR NEWSLETTER?
True, the average newsletter competing with Moose Club may be four to eight times more expensive, and provide inferior insight, but every business has to make its own pricing decisions. The Moose Club's goal is investor education-- reaching as many people as possible in an affordable way.So let's just say I'm generous. Actually, Index Moose is only one aspect of the Moose framework, a conceptual demonstration primarily suited for smaller accounts. From a business standpoint, folks who surf the net for financial help are a more hands-on, do it yourself demographic than those who hire professionals to manage their money. A do-it-your-selfer's portfolio is also typically much smaller, and professional help may not make economic sense, especially when the manager quotes a minimum fee or account size, as most do.
DO YOU SELL SIGNALS FROM YOUR OTHER MODELS?
No. We do not sell subscriptions to any model signals. Ancillary models are used primarily for account management in larger ($500K and above) portfolios. As a practical matter, in larger accounts, the lack of liquidity in some ETFs may require a more diversified approach than Index Moose offers.
DO YOU SELL VISITORS' NAMES AND E-MAIL ADDRESSES?
No, Decision Moose does not sell, rent or lease your personal information to other third party companies. Moreover, we secure your personal information from unauthorized access, use or disclosure.Decision Moose secures the personal information you provide on computer servers in a controlled, secure environment, protected from unauthorized access, use or disclosure. When personal information (such as a credit card number or personal data to join Moose Club) is transmitted to other websites, it is protected through the use of encryption, such as the Secure Socket Layer (SSL) protocol.
ARE YOU BEING PAID TO MENTION FUNDS OR BROKERS?
No. No one associated with this site receives remuneration (hard or soft) from any fund provider or brokerage house for being mentioned here. Moreover, this site does not accept any advertising, insuring an independent viewpoint.
DO YOU INVEST IN THE SECURITIES YOU MENTION ON THE SITE?
Yes, we do occasionally invest in the funds in this model. Since the model deals exclusively with broad index funds, however, it is virtually impossible for concerted action by a few Mooseaholics to move asset prices.
MARKET TIMING? ISN'T THAT ILLEGAL?
Different kind of market timing. The illegal version in the news in early 2004 is more aptly called "market manipulation". It pertains to open-end mutual funds, which are supposed to set their price at the market close each day, but bend those rules for special customers, to the detriment of its presumably less special customers. Market timing using ETFs and Index Moose actually avoids mutual funds engaging in that activity.
DOES MARKET TIMING WORK?
Market timing is unproven. That said, every mutual fund salesman you'll meet-- except maybe the Vanguard 500 guy-- would have you believe that his fund manager is a better stock picker than anyone else in the world, and although few like to mention it, good timing is implicit in good picking. On the other side, academia continues to go to great lengths to disprove timing and promote diversified buy-and-hold investing. The controversy, then, is between a group with considerable practical experience, but a vested interest in timing's success (financial professionals who want to sell their expertise), and a group with no practical experience, but also no particular vested interest (academicians). Obviously, the creator of Decision Moose, a financial professional, thinks timing may indeed work, or he wouldn't be wasting his time on a site devoted to benchmarking a timing mechanism to prove its validity.
WHAT IS BENCHMARKING?
The best way to tell if your investment program works is to set up a target, or benchmark, and try to hit it. The S&P 500 index is the basic benchmark for stocks, the one every stock fund manager tries to beat (most often to no avail). When picking a benchmark for an investment model (or mutual fund), it's best to compare the model with a benchmark having similar characteristics. That isn't always easy. Index Moose, for example, is a fund of funds that contains a cash fund, a long bond fund, and several domestic and foreign stock funds. It is more akin to a flexible global fund of funds than a 100% domestic equity model, as measured by the S&P. Nevertheless, it's compared to the S&P on this site? Why? One reason is just because-- because that's the industry's standard benchmark and it usually turns out to be the toughest one to beat. The other reason is the Moose's objective, which is to provide an active investment methodology that beats passive "buy and hold" investing.
ISN'T TIMING MORE EXPENSIVE THAN HOLDING?
It is. There can be capital gains taxes with every sale and brokerage commissions with every transaction. But expense is only half of the equation. Return must also be included in the calculation. The real issue is whether the gains derived from timing-- after taxes and commissions have been paid-- exceed the gains from simply holding-- after taxes and commissions are paid. Timers can minimize expenses by using deep discount brokers. Taxes, on the other hand, are a fact of life. If you hate paying taxes, your only recourse is to stop making money. The Moose program minimizes taxes to the extent that index funds generally have lower capital gains distributions due to less turnover, but Index Moose will clearly be more profitable in tax-deferred portfolios like IRA's, SEP's and so on.
ISN'T TIMING HIGH MAINTENANCE?
It is. Managing your assets takes more time than ignoring them, and you should include your time when you're considering the costs of your investment program. Obviously, if you'd rather be doing something else, managing money probably isn't for you. The Moose tries to minimize the effort required to implement it. It is an intermediate term model (6-9 months), not a daily timing model. It is run weekly, not daily, so you only have to check it once a week. And it's a long-only model that generates only three or four trades a year, so you're not constantly on the phone with your broker. (Yes, there is an extended version of the framework that generates 4 to 5 annual trades, working short and long, that is more profitable than Index Moose.)
WHAT IS DECISION MOOSE?
Decision Moose is a financial model framework; a mechanism for timing the buying and selling of investment assets-- like stocks, bonds, and cash. In fact, the Moose uses stock, bond and cash funds. Index Moose is one of several models within that framework.
HOW DOES DECISION MOOSE WORK?
The framework's structure is proprietary, but broadly speaking, it measures the relative attractiveness of each of the assets under study. Any number of assets can be plugged into it and compared. Technical indicators then select the one asset in the group having the highest probability of price appreciation. The framework is more growth than value oriented in that price momentum and trend-following technical indicators play a central role, but there are also Fed and overall market indicators. Unlike a diversified, buy-and-hold approach-- the strategy preferred by random-walk investors-- Index Moose invests the entire portfolio in one fund for as long as it is the most attractive among the group.
WHY INVEST 100% IN ONE ASSET AT A TIME?
Investing in one asset is logical. Diversification is for those who don't think markets can be timed. Targeting is for those who think they can. For "prudent man" traditionalists, that may sound a little scary, but our research shows unequivocally that in a long-only model like Index Moose, a 100% investment in the most attractive asset yields significantly higher profits than diversifying a portion of the portfolio into each asset according to its relative attractiveness.
WHAT'S A "LONG-ONLY" MODEL?
Unlike many market-timing models, Index Moose relies solely on long (or buy) positions for its profit. It does not require short selling. (Short selling is a process by which an investor borrows stock from his broker in order to sell it at today's price, in the hope of being able to buy it later at a lower price.) Shorting has two main disadvantages: it's more risky than going long, and it requires a margin account, which makes it unsuitable for tax-deferred investing. With the advent of ETFs that mimic index short-selling, however, that latter disadvantage is gone and the first one is lessened.
WOULD A SHORT-AND-LONG MODEL DO EVEN BETTER?
Research on a short/long version of the framework is ongoing and preliminarily suggests three things relevant to Index Moose:
(1) Back-tests suggest that shorting can outperform the long-only version of Index Moose, but only under certain conditions. It also invariably increases risk and the number of transactions.
(2) Given inflation and economic growth, stock prices have a natural tendency to rise over time. This makes bull markets the rule and bear markets the exception. Thus, while going long is considered making an investment, going short is making a wager. This differing psychology promotes different cycles between bull and bear markets. Bull markets are longer in duration, and their slope is usually more gradual. Bear retreats most often are shorter and sharper. This is especially true since the end of the uptick rule. Since Index Moose has been optimized as a long-only model, its math follows a longer, less volatile cycle than is optimum for shorting. Entry into and exit from short positions is late and less profitable than a long strategy. The exception is multi-year or “Grand Bears” (1929, 2000) which happen every couple of generations, and take on the cyclical tendencies of bull markets: long in duration, gradual and persistent in decline.
(3) Short selling appears to provide less of an advantage as the number of long choices in the model increases. In other words, if the choice is merely cash or stocks (short or long), shorting does make a difference. But if we have nine long choices, and are picking the best one, we inevitably do as well or better than we would shorting. The money goes somewhere. If it goes out of stocks, we can either be general and short stocks, or be specific and follow it long to wherever it seems to go, as Index Moose does.
Avid, unreconstructed short-sellers can try the Moose for shorting, understanding that it was not designed for that purpose and that the reporting on the site does not support that usage. If the Fed indicator suggests tightening AND/OR the trend in short-term interest rates is up, AND a new ETF sinks into the last spot in the table, short it. When it leaves the last spot, buy back the short. Short signals are not supported with performance data, because Index Moose is designed to be simple, to maximize profit, and to reduce risk. Shorting runs counter to most of those objectives. It might make sense, however, if you (a) have time on your hands (b) have a large portfolio or (c) want to hedge your bets.
WHAT'S A MARGIN ACCOUNT?
A margin account allows the investor to borrow from his broker to buy more stock than otherwise would be possible. The loan amount is based on the size of the account, and the broker charges interest on the loan. Most taxable accounts are margin accounts, while tax-deferred (retirement) accounts are not.
WHY USE FUNDS INSTEAD OF INDIVIDUAL SECURITIES?
Funds generate fewer trades with less risk. Individual equity prices can be far more volatile than stock or bond indices and that makes individual securities far less predictable. Since the Moose invests in only one asset at a time, a fund provides some of the diversification needed to reduce risk. (Given the prices of individual securities these days, it is pretty tough for a traditional investor to buy a thoroughly diversified portfolio of individual stocks and bonds for less than $300,000, so chances are, if your portfolio is under $300,000 and well diversified, there are some funds in it already.) On the downside, all funds, even ETFs, carry embedded administrative fees that individual securities don't have. In the end, however, after commissions, funds, especially ETFs, provide diversity cheaper and quicker.
WHAT KIND OF FUNDS WORK BEST IN THE MOOSE?
Narrowly targeted ("compartmentalized") funds that are not highly correlated with one another work best. On the equity side, index funds and sector funds are most profitable. General or diversified equity funds reduce profitability. On the income side, very short money (cash) and very long zeros are sufficient. Intermediate income funds actually reduce profitability.
WHY NOT USE MORE FUNDS?
Moose can be structured to compare any number of assets. Using fewer assets results in fewer trades and lower costs, but using too few assets reduces profitability. Using more funds results in more switches, as does reduced "compartmentalization". The optimal number of assets minimizes trades and maximizes profit. Index Moose uses 8 index funds and a money market to maximize per trade profit.
I am considering adding Emerging Europe (GUR), Emerging Asia Pacific (GMF), and Emerging Middle East & Africa (GAF) on the equity side. On the income side, I'm looking at High Yield Bonds (HYG), International Bonds (BWX), and Emerging Market Bonds (EMB). A commodity fund (GSG) is also a possibility.
That would fill in most of the holes in what is intended to be a model of the global financial system. My problem is two-fold. First, the funds to be added were new in 2007, and I need about five or six quarters of data to even run them in the model. Second, at a certain point in any model of this type, less is more. There is an optimum number of funds that maximizes profit based on the amount of correlation that exists between the component funds. I can't know that correlation or determine how many funds are optimal until I have a data history.
WHY USE THESE PARTICULAR FUNDS?
The criteria for selecting a fund are as follows:(1) An adequate data history is essential. The framework requires almost a year and a half of price data before it can generate a signal. (2) Funds should be exchange traded to allow intraday transparency. (3) Funds should be passive rather than actively managed. (4) Funds should track widely accepted and broadly traded indices.
Thus the funds are, with one exception, passive, exchange-traded index funds. The long zero-coupon bond fund (BTTRX) is the only non-ETF carry-over from the early days. It has not been replaced by an exchange-traded fund in the Moose because its replacement (TLT) does not reinvest dividends it pays each month. Since dividends are a major consideration in the total return for long bond investors, TLT's price tends to understate the relative attractiveness of bonds in the model. BTTRX is a passive, index fund that trades end of day. It provides a more accurate estimate of bonds' total relative worth by incorporating the coupon into the price. (From a practical standpoint, I actually invest in i-shares' long bond ETF (TLT), rather than BTTRX, which may or may not have a problem with "hot money".)
Finally, the model refers to three-month T-Bills as the standard proxy for cash. From a practical standpoint, I find it more convenient to use my broker's premium money fund, rather than actual T-bills or a short-term bond ETF when I go to cash. Premium money funds often pay more than T-bills and there is no commission to get in or out. The downside is that they trade end of day, so that switching out of cash and into something else takes a couple of days. If your account is too small to qualify for a premium fund, the regular sweep money market fund at your broker works too.
DO I HAVE TO USE THE FUNDS IN THE MODEL?
No. Index Moose was originally developed in 1989 using indexes. It's purpose was to provide a comprehensive overview of the global investment scene for a newsletter. When it began to show significant promise as a forecasting tool, the search for a way to invest on its signals began. The first tradable version incorporated standard, no load, open-end mutual funds, since they were the only option available at the time. They were not particularly suited to the task. Mutual fund managers have always had an aversion to "hot money", which they define as money that moves out of their fund within six months of moving in. Since Index Moose's positions averaged three to four months, the switch to ETFs and closed-end funds inevitably made sense. It was 1999, however, before there was adequate ETF coverage to revise the model. The ETFs selected were essentially those with the longest price histories at the time. Since then, there has been a proliferation of exchange-traded funds (ETFs), increasing the available choices. For an up-to-date listing try ishares.com or amex.com.
SOME OF THESE FUNDS ARE THINLY TRADED; IS THAT A PROBLEM?
Not really. The index ETFs in the Moose are rebalanced against their index end of day, so there is no premium or discount carried over into the next trading session. Moreover, their associated index is recalculated and published every 15 seconds throughout the day. So if a disparity between the ETF price and the index value arises, it presents an arbitrage opportunity for the specialists who deal in these securities.
WHERE CAN I FIND OUT MORE ABOUT THE FUNDS YOU USE?
You can (and should) get a prospectus from your broker before investing in any security. Unfortunately, the Invesco Funds referenced pre-2000 are defunct, and no data readily exists on the web that I can find. The same applies to Scudder Asia Fund, ticker SAF (since reassigned to Safeco). Otherwise, you can check out the current funds on the internet. A Google search can help you find the latest information about most of them. Meanwhile, try the following sites:
finance.yahoo.com and etfconnect.com-- good starting points
americancentury.com-- long zeros fund (BTTRX)
streettracksgoldshares.com-- gold bullion (GLD)
amex.com.-- the US large cap stocks (SPY)
ishares.com-- ishares (IEV, IWM, ILF, EWJ, EPP)
WHAT IS THE "FED CHECK"
The Fed Check reveals what the market thinks the Fed should do-- not to be confused with what it WILL do. The indicator is a ratio between Treasury bond prices and commodity prices, examined over the medium term. Divide a weekly weighted Aggregate T-Bond Index by the weekly CRB Index. Then divide this week's result by the average result over the last, say, 40-weeks. (The model uses a different period and smooths it, but you get the drift.) You'll have an oscillator. Results between 0.95 and 1.05 are not usually significant. Outside that range-- at the extremes-- they often are.
Below 0.95 suggests commodity prices are headed up considerably faster than normal and that the Fed ought to hike short rates to keep up and to cool inflation. (Higher interest rates are bearish for stocks and bonds.)
Above 1.05 means bond prices are headed up (and yields are falling) faster than normal and that the Fed needs to cut short rates. That is bullish.
In either case, if the Fed fails to do what it ought to do, the markets will take up the slack.
Generally, when the Fed Check is bearish, paper assets (stocks and bonds) are less popular than hard assets (commodities). That trend usually continues until the yields on paper rise, or the prices of commodities fall. The opposite is true when the indicator is bullish.
The Fed Check is an alert. Whether it actually "works" as a predictor of stock, bond, or metals market direction in a given instance, depends on the underlying conditions that gave rise to the signal. For example, a bearish signal can result from a surge in commodity prices, or from a collapse in bond prices, or from a little bit of both. Which it is will influence outcomes among the various asset classes in the model.
It is a Dollar indicator, but no paper, domestic or foreign, is completely immune to its signals, although some occasionally escape. Usually, the assets that have seen the largest gains leading up to a bearish signal are the most vulnerable to a retracement. Bullish signals tend to have less of an immediate positive impact. Bearish signals usually have a more immediate negative impact.
In 1999, the Fed Check gave a "sell" signal in mid-August, which persisted (seemingly incorrectly) all the way to the February 2000 collapse. A similar, long lead-time "sell" occurred in 1987 prior to that year's October crash. Generally, however, the lead time is much shorter and the correction is far less dramatic. To avoid missing out on potentially large gains at the end of a cycle after a Fed Check "sell" signal, however, the model does not react until the price of the asset has fallen below its short-term moving average.
WHAT'S WITH THE TABLE ON THE MOOSECALLS PAGE?
The Moose quantitatively ranks assets according to their relative and technical strength over the intermediate term.
CI is the model’s proprietary (i.e., don't ask how it's calculated) “Confidence Index”. It measures the confidence the Moose has, on a 0-100% scale, in taking a long position in each non-cash asset. CI is a weighted average of the model’s three components-- the tape (technicals), the market (relative strength), and the Fed (Fed Check)-- into a summary snapshot of each asset's perceived attractiveness. It is a weekly measure that is more unstable than the rankings, which are smoothed and take precedence. Thus CI may not always match up with the rankings, and should be taken with a grain of salt. Look to the rankings first.
TS is the overall technical strength of the asset according to the model's proprietary measuring system, which incorporates very short, short, sub-intermediate, intermediate, and longer term technical indicators. It is calculated on a scale of -100 (very bearish) to +100 (very bullish). It is a daily measure that is more unstable than the rankings, which are smoothed and take precedence. Thus TS may not always match up with the rankings, and should be taken with a grain of salt. As with CI, look to the rankings first.
The over-arching Fed, Domestic, and Offshore Equity Indicators are applied as a second screen to finalize the rankings. The Fed Check is "tighten" when that reading is below .95, "ease" when it is above 1.05, and neutral all other times.
IS THE MODEL EVER WRONG?
Certainly, but accuracy and profitability are not the same thing. Based on the theory that most people would rather be rich than feel smart, the Moose framework puts profitability ahead of accuracy. By focusing on being really right, when it is right, and only slightly wrong, when it is wrong, the framework tries to maximize return while reducing risk-- and it seems to work. That said, over the years considerable research has gone into improving accuracy and reducing false signals. (False signals are those that only last a week or two before switching back at a loss.)
Extensive back-testing on earlier versions of Index Moose between 1984 and 1999, put accuracy right around 75%. In less positive terms, about one in four signals turned out to be false. The revised version of the model on this site has given a false signal fewer than one in ten times-- a little better than 90% accurate. The improvement could be due to any number of factors, including the switch to ETFs, and minor tweaking of the signal calculations. My suspicion, however, is that the markets were less choppy and more predictable for this type of model during the 2000-2004 period. Whatever the reason, I am skeptical that a 90%+ accuracy rate is sustainable.
CAN THE MOOSE BEAT BUY-AND-HOLD AFTER EXPENSES?
Index Moose theoretically beats buy-and-hold after expenses handily, so it probably CAN. Of course, that's not the same as claiming it WILL. An impressive past is never a guarantee of massive, immediate and automatic future wealth. There are several reasons for this, most of which are related to the problem of translating a theory into reality. Implementing is not the same as theorizing.
SHOULD I EXPECT RETURNS SIMILAR TO THOSE ON THIS SITE?
Please don't. That way, you won't be disappointed if your effort falls short, and you can be pleasantly surprised if your effort does better. The returns on this site are theoretical. There is no real account out there backing up the numbers. Moreover, to simplify the calculations, several shortcuts have been employed. For example, calculations do not include potential margin, taxes, transaction costs, or dividends earned. In addition, model switches are treated differently from reality. (See next question.)
Apart from all that, I also make occasional errors. The Moose is a complex mathematical construct. As a result, I don't worry about hidden errors, as much as I have come to expect them. The site is useful in that regard, as there is usually someone out there who cares enough and is bright enough to catch my mistakes. Moreover, ongoing independent assessment of the model's performance is available at CXO Advisors.
I not only appreciate, but rely on having a few thousand free editors checking my math, my spelling, my grammar, and even my methodology. I welcome the critique. The better the site, the more likely we can all expect returns similar to those on it.
HOW DOES THE MODEL TREAT SWITCH SIGNALS?
Index Moose is a weekly model, and for simplicity only contains Friday COB ("close of business") data. The instruction to switch is usually published over the weekend. Signals are based on the closing prices from the previous Friday. The model is calculated as if it changed automatically at the Friday close. It is done that way to maintain data consistency. Of course, that is a synthetic construct. In reality, investors' first opportunity to act is Monday, and they must make the best short-term calculation they can in the following week(s). The goal is to get in at or below the Friday closing price. Sometimes that is possible and sometimes not. For more information on this topic, see "The Art of the Switch" on the MooSignal page.
COULD MOOSE SIGNALS MOVE THE MARKET?
No, unless maybe Warren Buffett and George Soros both became Moose fans simultaneously. Even then it would be unlikely. It would mean cornering the world gold market, or European stocks, or US stocks, or Asian stocks. Now the Moose is good, but we're small potatoes in the overall scheme of things. This is not a commercial site; we don't advertise; or proselytize, and don't care to. We get about 4.600 unique visitors a week (as of December 2008). While that's up 500% in two years, it isn't sufficient to cause even a ripple in the global financial indices-- even if most visitors were to act on the signal, which they probably don't.
WHAT OTHER FACTORS MAY HAVE AN IMPACT ON MY RETURNS?
Theoretically, Index Moose (unmargined), not only outperforms diversified buy-and-hold, but also beats the S&P500 (a tougher bogey). Moreover, its reward to risk ratio appears stellar. HOWEVER: as a do-it-yourself program, the level of success you actually enjoy will depend on you-- how well you keep to it, the type of account you have, your tax situation (state and federal), where you trade, and how aggressive you are.
IS THE MOOSE RISKIER THAN BUY AND HOLD?
Depends. Using the standard deviation of weekly returns as a measure of risk (a common method), the time period one selects has a significant impact. As a general rule, the better Index Moose is performing versus the S&P, the riskier the Moose may appear, using the standard deviation method of comparison. That's reasonable, because greater risk is necessary for greater return. Fact is, investors willingly overlook risk when their portfolios are getting fatter, so a more appropriate measure of overall risk considers return as well. We use the Sharpe ratio to measure risk-adjusted return.
WHAT IS THE SHARPE RATIO?
It's a ratio developed by William Sharpe to measure risk-adjusted performance. It is calculated by subtracting the risk free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. It tells us whether the returns of a portfolio are because of smart investment decisions or a result of excess risk. Generally, a positive value indicates that the portfolio's risk-adjusted return is greater than it would have been had the funds been invested in three-month Treasury bills over the same period. Sharpe ratios above 2 are considered good, and above 3 are considered excellent. As with standard deviation, the time period selected has an impact on results. The longer the time period, the less risky an investment appears.
We use a three-year Sharpe to be comparable with Morningstar, although there are other differences in our calculation methodologies, most importantly with respect to dividends and calculation frequency. We don't include dividends in our weekly calculation of the Model's and SPY's Sharpe. This tends to understate the Sharpe ratio for the Model and for SPY as presented on our home page. Morningstar correctly includes dividends in calculating the Sharpe for the Vanguard Balanced Fund (our proxy for diversified buy and hold investing), but it only recalculates monthly. This means that the Sharpe ratio for the Vanguard Balanced Fund presented on our home page can lag actual data, at times by up to four weeks. That and the inclusion of dividends mean that the Sharpe for Vanguard Balanced on the home page is not strictly comparable to that of the Model and SPY. (To learn more about how Morningstar calculates its Sharpe ratio, and to compare our Sharpe for SPY and theirs to see how dividends and update frequency impact the numbers, go to morningstar.com.)
WHAT IS PASSIVE BUY-AND-HOLD INVESTING?
"Passive" means investing in a stock index or indices, like the S&P. Buy-and-hold means holding it until they plant you in the churchyard. In reality, there are two types of passive, buy-and-hold investing-- the stuff dreams are made of, and the stuff everyone ends up doing. When your basic financial sage intones something like, "If you'd bought the S&P in 1962 and held it since, you'd be a gazillionaire," that person is benchmarking to the S&P, but firmly snoozing in the dreamer column. Why? Because virtually no one has ever had the stomach to be 100% long stocks for forty years ("risk aversion" is the jargon). Savvy buy-and-hold investors end up diversifying their portfolios, putting part in stocks and part in bonds and cash. That dampens the portfolio's overall volatility and lets them sleep at night, but it isn't nearly as profitable as buying and holding the S&P. In the real world, it seems people do willingly forego a few bucks to reduce their risk by taking a diversified buy-and-hold approach.
WHO SHOULD CONSIDER USING THE MOOSE?
Those who would invest part of their liquid assets in the Moose should meet ALL of the following criteria: (1) Have a better than rudimentary understanding of the investment process. (2) Have a medium to aggressive risk tolerance. (3) Be willing to accept personal responsibility for the risk implicit in one's actions. (4) Be willing to commit to an intermediate term market-timing program. (5) Have at least a medium term time horizon (3-5 years), preferably longer. (6) Be willing to invest in funds rather than individual stocks and bonds. (7) Have a tax-deferred account at a discount broker, or(8) be willing to incur short term gains in a taxable account.
Just remember all quantitative models are the product of fallible human beings. Invest in the models like we do-- at your own risk. Very conservative investors will probably be uncomfortable with the Moose and should avoid it. Very active traders may become impatient at times, but could be rewarded if they overcome their impatience.
AM I TOO WILD OR TOO UPTIGHT FOR THE MOOSE?
There are a number of interactive sites that can help you figure out your risk profile. Even if you don't use the Moose, knowing yourself is one of the first steps to solid investing. Figure you'll need at least a moderate tolerance for risk for the moose. Since May 2000, the ETF model's largest one week drawdown is 10.9%. The largest uninterrupted drawdown is 13.2% over three weeks. Though that isn't frequent behavior, it's clearly possible. When it occurs, it takes considerable "coolness under fire" to watch 10-15% of your assets evaporate in less than a month and still stick with the program. Comparatively, model drawdowns are smaller-- at least during this particular period-- than drawdowns for those who bought and held the S&P. Sharp short term declines should be expected as a matter of course in any equity investment program, but especially in one that is designed to provide outsized returns through high-beta investments. If volatility makes you crazy, the Moose is not for you. If it merely makes you uncomfortable, then it could be right for at least a portion of your assets.
HOW MUCH MONEY DO I NEED?
To start you only need enough to open a brokerage account at the discount broker of your choice. Most discount brokers do have a minimum account size for both taxable and tax-deferred (IRA) accounts, which you can access through their websites.
From a practical standpoint, however, you should consider trading costs as a percentage of your portfolio before committing to the Moose. For example, in an average year, the model gives four signals-- requiring four round-trip trades. Say your broker charges $10 per trade ($20 per round-trip). You're looking at $80 per year in expense. If your total portfolio is only $1000, that's an 8% expense ratio. A decent no-load mutual fund charges 1-2% in expenses.
Obviously, from an expense standpoint, that makes buying and holding funds (until you have more money) a competitive option. Strictly considering expense-- without factoring in fund/Moose performance differentials or the personal satisfaction you might derive from being a player as opposed to a spectator-- a $5000-$6000 portfolio is a reasonable minimum to go Moose.
Factoring in past performance differentials between the Moose and a buy-and-hold mutual fund strategy, however, lowers the minimum to about $2,500 -$3000. Of course, past performance does not guarantee future results-- for Moose or mutual funds.
In the end, we all have to pay to play. Minimum account size is a personal decision-- a function of broker's fees, your risk tolerance, and of how badly you want to play.
WHEN IS THE BEST TIME TO CHECK THE MOOSE?
There is no email notification service for signal switches. You have to check the site yourself. My self-imposed deadline for each weekend update is Monday 8AM (unless it's a holiday). So, although I don't recommend trading Monday's open, you can check before the open on the first day of trading each week. (Occasionally, the site is updated by Sunday evening, but less frequently as the amount of information has increased.)
SHOULD I ACT IMMEDIATELY ON A SWITCH SIGNAL?
Maybe. Index Moose is not effective as a short-term indicator, so waiting for an "up day" to sell and a "down day" to buy can improve performance... or not. The author uses short-term trading rules and a commercial charting and technical analysis program (TC-2000) to assist in the buy/sell decision. The fact is, a perfect switch is rarely possible. Short term, you are likely to be dissatisfied with what you got for the one you sold and what you paid for the one you bought. Moreover, delaying the switch could evolve into total inaction-- ignoring the signal altogether. Not a good idea. Even so, some delay is probably better than putting in a blind "switch" order with your broker over the weekend. Acting prior to a close provides better information than acting prior to an open. For more information on this topic, see "The Art of the Switch" on the MooSignal page.
SHOULD I BUY AN ASSET WHEN THE SIGNAL IS "HOLD"
There are two types of signal at the Moose: HOLD and SWITCH. They mean what they sound like they mean. Holding for more than a week or two after a "switch" signal is not recommended. Similarly, switching into a position in the middle of its 'hold" signal is not recommended-- particularly if there has been an appreciable price increase in the designated asset since the signal was first given. (Switching out of an old position late, however, and going to cash between signals, may stem further losses.)
A HOLD signal means hold. It does not mean "buy", but neither does it mean "do not buy". In fact, it means it is the best asset out there right now. The reason switching during a hold signal is not recommended has more to do with probabilities and with the way the model works than with the relative quality of the assets.
The average duration of signal is about three months. The average gain per signal is about 8%. The deeper you get into the signal period, and/or the greater the current signal's gain to date, the less likely it is that switching mid-signal will yield a positive outcome. Moreover, mid-or-late-signal corrections are common. They are easier to weather with a substantial gain already in your pocket.
WHAT DO "BULLISH" AND "BEARISH" MEAN?
Bullish investors are those who think the value of an investment is going to rise. Bearish investors think the value will fall. (This was an actual reader question. If you did not already know the answer, you might read a couple of books on investing and return to this site later.)