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Welcome to Anchor Trades!

 

I would like to personally welcome all our members, those who have come from SteadyOptions, Seeking Alpha, and those which have come from elsewhere. I would encourage everyone to read the Anchor Frequently Asked Questions and the Anchor Trade Strategy topics. Those two topics should provide answers to the majority of your questions, as well a detailed discussion on what the Anchor Strategy is all about. 

 

You can see the Anchor Trades performance here.

 

So What is an Anchor Trade?

 

To put it simply, an Anchor Trade should be one that forms the keystone of any investment portfolio -- that reliable corner that you know you can depend on, regardless of market conditions. The one that lets you sleep at night, knowing your money is at work, but not subject to large risks.

 

An Anchor trade's goal is to prevent loss of capital while still generating a positive net return in all market conditions. This strategy began with the premise that it must be possible to virtually fully hedge against market losses, without sacrificing all upside potential. Anchor trades are concerned for full year, full portfolio, protection, regardless of market conditions.

 

Many investors try to insure against losses after those losses have already been incurred, or as they are occurring in real time – this is a mistake. It’s easy to be an investor during a prolong bull market, but what happens when a severe, or even mild, market correction occurs? At that point many investors find themselves trapped in falling positions, have stop losses kicking in, and are at a loss as what to do – other than to watch their principle dissipate. In the modern era of flash crashes, swift market volatility changes, and world risk it simply makes no sense to be invested in anything without portfolio protection. It is impossible to routinely predict the next negative major market event, therefore 365 days of protection is a necessity. I have given up trying to predict the day to day movements of the market -- therefore I Anchor my portfolio with this strategy (which can easily then be paired with other strategies).

 

In the current market environment, such precautions are particularly warranted. It is my opinion that much of the recent market gains have been artificially propped up by low interest rates, the Federal Reserve, and the lack of alternative investment choices which can provide income to investors. At some point in the future the market is due, at the very least, for a correction, if not a significant down turn. With increasing turmoil in Syria, North Korea, and elsewhere in the Middle East, who knows what could tip the markets. Will this occur within two weeks, six months, one year, or even longer is something I've given up trying to predict. Rather I seek to protect against such events – whenever they may occur.

 

Some strategies try to partially hedge against market risk through long short strategies, through the straight purchase of puts (typically out of the money at a substantial cost to the portfolio), through default swaps, or through numerous other instruments. However, each of these strategies only offers partial portfolio protection which either comes at a cost or which just assumes a set loss in the portfolio (such as ten or fifteen percent) is acceptable. I refuse to accept that philosophy and have developed a strategy around annual portfolio protection.

 

Performance targets

 

Over the past few months I’ve been exposed to Swan Global Investment’s Defined Risk Strategy, which is remarkably similar to Anchor (except, as shown below, Anchor tends to perform better).  Swan solves the goal defining issue through a “Target Return Band” shown below:

Target-Return-Band-Overview-Swan-Blog-1.png

The theory being that their Defined Risk Strategy should fall within or above the blue range.  The red line represents the theoretical return of the S&P 500, the yellow line is the Swan’s Defined Risk Return target returns when contrasted with the S&P 500 return at the point.

Defining The Anchor Strategy describes the profits targets for the Anchor strategy.

 

The impact of not experiencing losses in down market years, while only slightly lagging (if lagging at all) in positive and neutral years, is astronomical over any extended period of time. Utilizing the Anchor strategy over a number of years, particularly if any of those years are bear markets, should lead to the strategy significantly outperforming the markets as a whole, as back-testing has demonstrated. Even in prolonged bull markets, the returns should still be positive and lag negligibly behind. The peace of mind which comes with being fully hedged more than compensates for the potential of slightly underperforming the market as a whole in prolonged bull scenarios.

 

Special thanks to Reel Ken, Kim Klaiman, and others who helped me evolve this strategy to its current form through their articles and discussions.

 

Anchor Trade objective

 

The Anchor strategy's s primary objective is to have positive returns in all market conditions on an annual basis

 

Well how in the world does it do that?

 

Step 1 - Stock selection

Step 2 - Fully hedge

Step 3 - Earn back the cost of the hedge

 

Anchor Trades will be divided into two separate forums:

 

1. The Anchor Trades forum will post my actual trades from my individual account, including weekly rolls, and any adjustments I make, as well as the price I received when filled. It will also include a thread for "model" trades that will be launched monthly. Model trades will be for those members who join after the initial actual trades are established, so any member can set up their own Anchor Portfolio. This way any member, regardless of when they join, will have a thread to follow applicable from their initial membership date. If you want to get notifications about the trades, you should follow this forum (by clicking "Follow this forum" button). If you follow this forum, you will receive an email when a new topic (trade) is posted.

 

2. The Anchor Trades Discussions forum will discuss each trade that has been made, detail the calculations behind the decision, and provide a Q&A forum for members to ask about any one trade. The thread will also have columns about the theory behind the Anchor strategy, implementation discussions, and be open to members to ask general questions.

The Anchor objective is to produce equity like returns over a full market cycle, with reduced volatility and bear market drawdowns. Investors should expect a trade-off of reduced upside capture during extreme bull market gains. Given our belief that the long term is the only investment time frame that truly matters, we believe the strategy provides attractive mathematical and psychological benefits to investors seeking the long term growth potential of the US stock market.

 

If you have any questions about the threads, where information can be found, or just general questions, please feel free to send a message to either Kim or myself. I look forward to helping all member learn about this strategy and hopefully implement it themselves.

 

Past Performance and backtesting

 

To minimize the effect of stock selection (for better and worse), we switched to ETF model in 2014. Here are the results of the backtesing for 2007-20013:

 

etf_backtesting.PNG

 

As we can see, the strategy achieved its official goals in all years except for 2011. The strategy did lag the S&P by 2.5% in 2011, but outperformed by 2-4% in 2010 and 2013. In fact, when you remove 2008 and calculate the non-compounded return, you get 82.12% for the strategy vs. 82.77% for the S&P. 2008 performance was exactly as expected, and this made the whole difference.

January 2019 update - Leveraged Anchor

In January 2019 we started tracking the leverage version of the Anchor for performance purposes. The leveraged version has been extensively backtested to fine tune the system for optimal results. Here are the highlights of the new implementation:

 

  1. We now use deep in the money calls, as opposed to long stock positions, and we are able to gain leverage without having to utilize margin interest.  Given the rising interest rate environment we are in, and the high cost of margin interest rates generally, this can lead to significant savings;
     
  2. When we enter the trade, we look for a long call that has a delta of around 90.  As the market falls, delta will shrink.  For instance, if SPY were to decline ten percent, our long calls would have declined by less than nine percent.  The closer we get to our long strike, the slower this decline;
     
  3. In the event of very large crashes, we can actually make money.
     
  4. Losses are capped.  In the above example, the maximum loss is 9.5%.  This can increase if we keep rolling the short puts throughout the downturn, but in any one “crash,” losses are limited to the ten percentage point mark (in Traditional Anchor this 9.5% max loss in one period is better, coming in at 8.5%).  If we apply a momentum filter as well, then the risk of continuingly losing on the short puts declines;
     
  5. In larger bull markets, the Leveraged Anchor outperforms both Traditional Anchor and simply being long stock as there is actual leverage being used.  Some of this will depend on just how fast the market is rising and how often the long hedge is rolled, but in large bull markets, it should still regularly outperform.  In fact, in any one period where the market grows more than 3.5% to 4.0%, the Leveraged Anchor will outperform simply being long SPY.  The Leveraged version of Anchor will always outperform Traditional Anchor in any up markets.

 

One question that must be addressed is just how much leverage to use?  Luckily this is very easy to model on a thirty day period:

image.png

Above is a table showing the performance of SPY, then using 25% leverage, 50%, and 75% leverage after certain market moves over a thirty day period.  After reviewing the above, and similar tables over longer periods of time, we made a decision that utilizing 50% leverage was optimal.  You of course can adjust, taking on more leverage, or less, as you see fit.  Note the above table does not include any gains from BIL dividends.  That should add around 10 to 20 basis points more performance per month on the leveraged versions.

Overall, we should expect the leveraged to slightly outperform the market in strong bull markets, significantly outperform in strong bear markets, and slightly underperform in sideways or slightly up/down markets (+-10%).

More information:

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Please find below the Anchor Strategy historical performance.

 

The projected portfolio to use in back testing was developed using the exact same equities which were used over the past year in testing with live money. 

 

The strategy went "live" using real money, on March 30, 2012 -- here's the table of results:

 

Date               Strategy Return   S&P 500 Return    Difference

3/30/12           Inception        

4/30/12           2.0880%             -0.7500%                  2.838%

5/31/12           4.6525%               -6.2651%                10.918%         

6/30/12           1.8912%                 3.9563%                 -2.065%

7/31/12           3.7223%                 1.2590%                  2.463%

8/31/12          -0.1001%                1.9763%                 -2.076%

9/30/12          -1.0422%              2.4236%                 -3.466%

10/31/12        -0.4122%             -1.9789%                  1.567%

11/30/12          0.5026%              0.2847%                  0.218%

12/31/12        -0.3925%               0.7068%                -1.099%

1/31/13           2.6577%                 5.0428%               -2.385%

2/28/13           3.2056%               1.1061%                 2.100%

3/31/13           3.7856%               3.5988%                 0.187%

4/30/13           1.7852%               1.8086%                -0.023%

5/31/13          -3.8266%               2.0763%                -5.903%

6/30/13           2.2937%              -1.4999%                 3.794%

7/31/13          -0.0640%               4.8690%            -4.9340%

8/31/13          -4.0800%               -2..654%             -1.4300%

9/30/13           0.4259%                2.5479%             -2.1220%

10/31/13         5.2308%                4.8580%               0.3730%

11/30/13         -0.4673%               2.4143%               -2.882%

1/1/2014        0.6087%                  2.3563%              -1.748%

2/1/2014         -3.6542%              -3.5583%            -0.096%

3/1/2014         1.5753%                   4.3117%           -2.7364%

4/1/14           0.843%               0.6932%            0.150%

----------------------------------------------------------------------

Total:              22.510%        32.934%          -10.425%

2013 Total:       11.69%           29.60%            -17.94%

2014 YTD       -1.3115%         1.2974%         -2.609%

 

Currently hedged at March 2015 189

 

Backtested results for 2007-2012:

 

Year       Strategy return   S&P 500 Return      Difference

2012                13.527%            13.406%                  0.121%  

2011                18.368%             -0.003%                18.371%

2010                20.574%            12.783%                  7.791%

2009                23.717%            23.454%                 0.263%

2008                27.908%           -38.483%              66.391%

2007                  5.221%                3.530%                 1.691%

Total:       109.215%        14.687%          94.628%

 

As of 2014, I switched over to an ETF only model. Here are the backtesting results for the ETF model:

 

post-1-0-34512900-1396035530_thumb.png

 

Years 2008 and 2009 are displayed below to show how the strategy would have performed in recent bull and bear markets.  The first column shows what the results of simply holding the equities, without any hedging (e.g. 100% long), in order that you may evaluate returns outside of stock selecting skill and/or good fortune to see the full benefit of the Anchor strategy hedging techniques.  The below calculations include dividends paid, margin interest costs, and trading costs .

 

Date             Equities only     Strategy Return  Return on S&P 500   Difference

12/31/07          Inception

1/31/08            0.298%                   0.298%            -6.116%                   6.414%

2/28/08           -2.407%                  -2.407%            -3.476%                  0.069%

3/31/08            3.961%                   3.961%             -0.596%                 4.557%

4/30/08            3.746%                   3.746%              4.755%                -1.009%

5/31/08            1.971%                   2.923%              1.067%                 1.855%

6/30/08           -8.064%                   5.927%             -8.596%                 2.669%

7/31/08            1.822%                   4.866%              -0.986%                 5.852%

8/31/08            5.065%                   2.712%               1.219%                 1.493%

9/30/08           -0.955%                   2.076%             -9.079%               11.155%

10/31/08         -8.960%                 10.975%             -9.079%               27.917%

11/30/08         -6.139%                   4.778%              -7.485%              12.263%

12/31/08          5.836%                  -2.120%               0.782%               -2.902%      

Total:           -5.159%          27.908%        -38.486%         66.394%

 

During one of the largest bear markets in the last two decades the Anchor Strategy would not have only outperformed the S&P 500 by a significant amount (over 66%), but would have had outside returns due to the value of the hedge itself (which occurred due to increasing volatility).  Please note these results are not typical in small bear markets.  In smaller bear markets, a member should still expect a positive return, just one much smaller in nature.  As can be seen, some of the returns were certainly due to the equities selected, as the model portfolio would have only lost five percent, as compared to the general loss of the market.  That aside, the strategy still outperformed a one hundred percent long position by almost thirty three percent.

 

Date             Equities only     Strategy Return    Return on S&P 500     Difference

12/31/08          Inception

1/31/09            0.076%                  1.852%              -8.566%               10.418%

2/28/09           -9.605%                 -5.847%           -10.993%                 5.146%

3/31/09            7.927%                10.692%               8.540%                  2.151%

4/30/09            3.687%                  4.882%               9.393%                -4.510%

5/31/09            3.362%                 -3.757%               5.308%                 -9.095%

6/30/09            1.327%                 -3.288%               0.020%                -3.307%

7/31/09            6.679%                  2.547%               7.414%                 -4.867%

8/31/09            4.690%                  1.992%               3.356%                 -1.364%

9/30/09            3.442%                13.187%               3.572%                  9.615%

10/31/09          0.026%                 -4.321%              -1.976%               -2.345%

11/30/09          5.306%                  2.629%                5.736%                -3.107%

12/31/09          3.327%                  2.703%               1.777%                  0.926%        

Total:         33.315%           23.717%        23.454%            0.263%

 

In a full bull market, where the S&P 500 returned over twenty percent, the strategy returned virtually identical performance to the market as a whole.  Some of the gain can be attributed to the stock selection as simply taking a one hundred percent long position on the same equities held by would have returned ten percent more than the hedged position.  Even taking stock selection skill and/or fortitude out of the equation, the strategy still would have had significant positive returns, meeting The Anchor strategy's stated objectives.

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Below are the updated results from March 31, 2013 through the end of June in my actual account, as well as in the Model Portfolios:

 

June Model Portfolios:

 

Date               ETF Portfolio          Stock Portfolio            SPY/SPY %           ETF Difference               Stock Difference

5/31/13           start date                                                 165.6

7/1/13             2.095%                   3.328%                    160.01/ -3.376%     5.471%                           6.704%

YTD                2.095%                   3.328%                    -3.376%                  5.471%                           6.704%

 

 

Actual Results (my portfolio)

Date               Strategy Return   S&P 500 Return    Difference

3/30/12           Inception        

4/30/12           2.0880%             -0.7500%                  2.838%

5/31/12           4.6525%             -6.2651%                10.918%         

6/30/12           1.8912%              3.9563%                 -2.065%

7/31/12           3.7223%              1.2590%                  2.463%

8/31/12          -0.1001%              1.9763%                 -2.076%

9/30/12          -1.0422%              2.4236%                 -3.466%

10/31/12        -0.4122%             -1.9789%                  1.567%

11/30/12          0.5026%              0.2847%                  0.218%

12/31/12        -0.3925%               0.7068%                -1.099%

1/31/13           2.6577%               5.0428%                -2.385%

2/28/13           3.2056%               1.1061%                 2.100%

3/31/13           3.7856%               3.5988%                 0.187%

4/30/13           1.7852%               1.8086%                 -0.023%

5/31/13           -3.8266%              2.0763%                 -5.903%

6/30/13           2.2937%               -1.4999%                3.794%

 

2013 Totals    10.11%                 12.63%                   -2.519%

Overall:            22.530%               14.044%                8.486%

 

So far this year, my actual portfolio is lagging a little behind, but with the large growth in the S&P 500, that is to be expected, particularly until the hedge is paid for.  The beating dividend stocks too in May did not help (and led to a stock reallocation and re-balancing).  Note also that the totals are no longer just "added" month to month results, rather actual compounded/compounding results tracked from a real portfolio.

 

If you notice the difference in the S&P 500 results between the two -- good eye, it has to do when the trades were opened.  The model portfolio for June was opened on May 31 when SPY was at 165.6 (I use the value as of when I made the post).  However, the actual portfolio results uses EOD values, which had SPY at 163.0.  That and the one day closing difference (last day of the month as opposed to first day reporting), makes up for the rest.  

 

 

 

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Here's my opinion:

 

By and large the big dividend paying stocks have significantly underperformed the market, really starting in May.  This has a little to do with raising interest rates and the fact that you now can get bonds on par with what the dividend payers are paying.  A year ago, you could get a 2x yield on a dividend stock / treasury.  You cannot anymore, so the market has sold off and some of those funds have transferred to higher beta stocks or to bonds.  Given the fact that I predicted the interest rate rise remarkably well, I guess I should have seen this repercussion, but I did not.

 

The re-weighting of the ETFs in August was a direct result of the above described change.  I felt that, with the sell off in dividend payers, they were due for a rebound, so weighting a little higher in the dividend paying etfs (as opposed to the equal weight RSP), would catch that rebound.  It obviously did not in August, so I switched back for September.  We'll see if it pans out over time.

 

I'll do a full quarterly review of all of the stocks in October, I try not to rush in and out of stocks, unless there's been some sort of major market news on a specific equity, and stick with my long term analysis of my holdings -- that's the whole point of the strategy after all. 

 

And let's not forget that this is a year-to-year strategy, so there will be a full 2%+ in dividends received, as well as higher returns as the hedge gets more and more paid off. 

 

The good news is that my actual fund, as well as all of the model portfolios are still completely on track to pay for the hedge on the year, which is our primary objective. 

 

As always, thoughts, questions, and criticisms are appreciated. 

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Let me add my two cents.

 

While 3 months since the strategy started as a public service is too short to jump to any conclusions, but lets take a look at June model portfolio since it has the longest history (3 months of data).

 

This was one of the worst possible periods for dividend stocks - and yet the stock portfolio performance was almost identical to S&P.

 

Chris mentioned few times that the worst case for the Anchor strategy is being whipsawed around your long put strike. This is exactly what happened several times during the last 3 months. Despite those not favorable market conditions, the ETF portfolio (which eliminates the impact of stock selection) outperformed the S&P by 3%.

 

To me, the performance during those 3 months just proves how powerful this strategy is.

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Below are the updated results through October 1, 2013 through the my actual account and the model portfolios.  On the model portfolios, I used as of market opening data.  On the actual fund, I used end of day yesterday (September 30, 2013).

 

June Model Portfolios:

 

Date               ETF Portfolio          Stock Portfolio            SPY/SPY %           ETF Difference               Stock Difference

5/31/13           start date                                                 165.6

7/1/13             2.87%                      4.88%                      160.01/ -3.376%     6.246%                           8.256%

8/1/13             0.94%                      -2.79%                  170.66/6.656%       -5.716%                          -9.466%

9/1/13             -2.19%                     -3.88%                     163.29/-4.31%      2.19%                              0.43%

10/1/13            0.61%                       -1.35%                    168/2.88%            -2.27%                            - 4.23% 

YTD                2.58%                       -2.53%                     1.45%                   1.13%                            -3.98%

 

July Model Portfolios

 

Date               ETF Portfolio          Stock Portfolio            SPY/SPY %           ETF Difference               Stock Difference

7/1/13            start date                                                 160.01

8/1/13             4.11%                      0.62%                     170.66/ 6.66%       -2.55%                           -6.04%

9/1/13             -1.56%                    -2.81%                     163.29/-4.31%        2.75%                             1.5%          

10/1/13           1.06%                       -1.18%                   168/2.88%             -1.82%                             -4.06% 

YTD                1.06%                      -3.29%                    4.76%                      -3.70%                           -8.05%

 

August Model Portfolio

 

Date               ETF Portfolio          Stock Portfolio            SPY/SPY %           ETF Difference               Stock Difference

8/1/13            start date                                                    170.66

9/1/13             -3.86%                      -5.26%                     163.29/-4.31%       0.45%                           -0.95%         

10/1/13           0.84%                         -0.44%                   168/2.88%             2.04%                            -3.32%  

YTD                -2.59%                      -5.67%                      -1.56%                  -1.03%                          -4.11%

 

September Model Portfolio

 

Date               ETF Portfolio          Stock Portfolio            SPY/SPY %           ETF Difference               Stock Difference

9/1/13            start date                                                    163.29

10/1/13           2.48%                     1.05%                          168/2.88%          -0.40%                             -1.83%             

YTD                 2.48%                     1.05%                          2.88%                 -0.40%                            -1.83%

                     

Actual Results (my portfolio, note the one day difference in reporting, which is due to how my statements are generated).  Please note that the YTD returns are now compounded as well.

 

Date               Strategy Return   S&P 500 Return    Difference

3/30/12           Inception        

4/30/12           2.0880%             -0.7500%                  2.838%

5/31/12           4.6525%             -6.2651%                10.918%         

6/30/12           1.8912%              3.9563%                 -2.065%

7/31/12           3.7223%              1.2590%                  2.463%

8/31/12          -0.1001%              1.9763%                 -2.076%

9/30/12          -1.0422%              2.4236%                 -3.466%

10/31/12        -0.4122%             -1.9789%                  1.567%

11/30/12          0.5026%              0.2847%                  0.218%

12/31/12        -0.3925%               0.7068%                -1.099%

1/31/13           2.6577%               5.0428%                -2.385%

2/28/13           3.2056%               1.1061%                 2.100%

3/31/13           3.7856%               3.5988%                 0.187%

4/30/13           1.7852%               1.8086%                 -0.023%

5/31/13           -3.8266%              2.0763%                 -5.903%

6/30/13           2.2937%               -1.4999%                3.794%

7/31/13            -0.064%                 6.66%                      -6.724

9/03/13            -4.140%                -4.31%                      0.17%

9/30/13             0.4259%             2.5479%                   -2.122% 

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January 2014 Model Portfolio (started 1/3/2014 not 1/1/2014)

 

Date               ETF Portfolio                SPY%                   ETF Difference

1/3/2014         inception                                        

2/1/14              -0.18%                         -2.79%           

3/1/14              1.45%                           4.462%         

4/1/14               0.10%                          0.47%                           

5/1/14               0.07%                          0.695%

6/1/14               1.49%                          2.32%

7/1/14               2.95%                          1.58%______________________

Totals                4.01%                          6.78%           -2.77%           

 

Hedged at June 2015 198

 

 

2Q 2014 Model Portfolio (started 1/3/2014 not 1/1/2014)

 

Date               ETF Portfolio                SPY%                   ETF Difference

4/4/2014         inception                                        

5/1/14                -0.14%                        0.695%          

6/1/14                2.06%                          2.32%      

7/1/14                -0.02%                        1.58%__________________

Totals                1.90%                         4.66%                 -2.76%

 

Hedged at March 2015 188

 

As always, please email or PM me with any questions.

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