DMI analysis part 2

In the previous section we introduced the ‘Double Momentum Investing’ strategy with the combination of the Nasdaq and the Physical gold and silver Trust.

In this second part of our DMI analysis, we calculate the days invested in the Nasdaq and in the gold-and-silver Trust; and the days we are in cahs. We will also calculate the number of transactions over time and estimate the impact of transaction costs. Finally we will answer the question whether it is necessary to check investments every marketday if one uses the DMI strategy.

Days invested

% Market days in cash, in the Gold and Silver Trust and in the Nasdaq

As shown in the barchart, 78.5% of the time we’re in the Nasdaq, 11.6% of the time we’re in the Gold and Silver Trust and only in 9.8% of the market days we’re in cash.

In the figure below we see the most important periods the DMI strategy pushes us into the Gold and Silver Trust are at the end of the bear market starting in 2000 and during the financial crisis. So using the Gold and Silver Trust in this DMI strategy strongly improves results in bad bear markets.

Figure showing the days invested in the Gold/Silver Trust and the Nasdaq and the days in cash.

Transaction costs

As we noted in the analysis of SMI strategy, transaction costs differ, depending on the broker and the taxes in the investor’s country. For the calculations shown in the figures above we set the cost per transaction at $5 and we use a startvalue of $5000. Of course, the return of the strategy, is a little lower when taking transaction costs into account. The CAGR of this DMI strategy still is 13.58%.

We have transactions in 2.1% of market days. As with SMI most of the days, we will not do any transactions; only in about 1 out of 50 market days, this strategy would make us buy or sell stock

Control Periods

So far we calculated the results of the Double Momentum strategy  using daily controls and, if necessary, daily selling or buying. Our readers, being active professionals, might not be able to check their investments or take action every day. Therefore, we need to evaluate whether the results are different, if we only check our investmens with regular intervals. We will call these regular intervals ‘controlperiods‘. For example, an invester who checks his investments (and buys or sells if necessary), once a week, uses a controlperiod of 5 marketdays. If you check your investments once a month (every 4 weeks), the controlperiod is 20 marketdays.

The figures below show the CAGR (%) and maximum breakdown (%) for the Double Momentum strategy applied on the combination of the Nasdaq and the Physical Gold and Silver Trust. As before we use data for the 33-year period from 1987 until october 2020 and the same intervals as in the previous section (295 for the Nasdaq and 110 for the Physical Gold and Silver Trust).

CAGR% different control periods
Max breakdown% different control periods

For the Double Momentum Investing strategy, we see that, in general, the shorter the control period, the better. But as long as the control period is not longer than 14 days, the CAGR of the strategy is better than the CAGR of the Nasdaq. To limit the maximum breakdown control periods below 20 market days are best. So for optimal results we suggest control periods no longer than 14 days.

DMI analysis part 3