DMI out-of-sample tests

As shown in the third part of the SMI analysis, the results of an investment strategy not only depend on the value of parameters, but also on the investment periods. To estimate the results of a strategy for the future, we introduced out-of-sample tests. In this chapter we will perform the same out-of-sample tests for the Double Momentum Investing strategy.

Out-of-sample tests DMI for one-year investment periods

In our first series of tests, we simulate 23 one-year investment periods (testperiods). For each of these testperiods, we determined the optimal interval for both the ‘Physical gold and silver Trust’ and the Nasdaq for the previous ten-year-period. We call this preceding ten-year period the training period (in analogy with the training set, used for AI-algorithms). Next, we apply these optimal intervals to the subsequent testperiod. In the table and the figures below we show the results for these tests.

CAGR DM, Gold/Silver Trust and Nasdaq for 23 1-year testperiods

We see that for one-year periods the strategy has an excellent average CAGR of 12%. The worst yearly return is -26%. This is better than the worst years for Nasdaq as well as for the Physical gold and silver trust. So we get excellent average returns, while avoiding the worst yearly results.

Out-of-sample tests DMI for three-year investment periods

CAGR DM, Gold/Silver Trust and Nasdaq for 23 3-year testperiods

The figures above show the results if we do the same calculations for 23 3-year periods, with the first one from december 1995 till december 1998. We take a shorter training period (8 years) to have a maximum of testperiods. Average CAGR again is excellent: 11.2%. But we still have 3-year periods with a negative return, the worst one having a CAGR of -16.5%.

Out-of-sample tests DMI for five-year investment periods

CAGR DM, Gold/Silver Trust and Nasdaq for 23 5-year periods

With 5-year investment periods, the average CAGR of the Double Momentum Investing strategy remains high. But here we see the worst negative CAGR for a 5-year period is a lot better than for 3-year periods: -3.4%.

Out-of-sample tests DMI for ten-year investment periods

CAGR DM, Gold/Silver and Nasdaq for 20 10-year periods

For ten-year investment periods the results are impressive. Average CAGR of 11.5%. And no ten-year period with a CAGR of less than 7.97%.

Double Momentum Investing: not finished yet

We’ll show other interesting results in the next section:

DMI analysis part 4