DMI analysis part 4

In the previous section, we performed out-of-sample tests with the Double Momentum Investing (DMI) strategy to estimate its value. For these out-of-sample tests we determined the optimal value of the interval-parameters in a preceding period, and next calculated the results with these optimal values in testperiods of different lengths.

For a beginning investor it is important that even in his/her first short investmentperiods, the results of the investments are good enough. If the results in these first investmentperiods are really bad, chances are high the novice investor will give up before he will be able to harvest the fruits of investing. Therefore, in the last part of our DMI analysis, we ‘ll be looking for the value of the interval-parameters, resulting in the best minimal CAGR for different short investment periods.

DMI for one-year investment periods, optimised for best minimum results

CAGR DM, Gold/Silver Trust and Nasdaq for 25 1-year testperiods

If we would have used the DMI strategy with the parameters shown in the table, the worst return for 25 consecutive one-year investment periods, would have been -3.11%. The average return is also higher than the average return shown with the out-of-sample tests.

We have to admit, though, the predictive value of the tests shown here, is lower than the predictive value of the out-of-sample tests. This is because we use the investment periods under examination themselves, to determine the optimal value of the interval-parameters. That’s something we cannot do in real-life investments. In the out-of-sample tests, we simulate real-life situations by determining the value of the parameters in the period before the investments start.

DMI for two-year investment periods, optimised for best minimum results

CAGR DM, Gold/Silver Trust and Nasdaq for 25 2-year testperiods

With the same strategy, the minimum return for 25 consecutive two-year investment periods, would have been -0.97%. The average CAGR for these 25 two-year investment periods, is still higher than 12%.

DMI for three-year investment periods, optimised for best minimum results

CAGR DM, Gold/Silver Trust and Nasdaq for 25 3-year testperiods

Same strategy for 25 three-year investment periods results in minimum CAGR of 4%. As we see in the table the minimum returns for the underlying assets (Physical gold and silver Trust and the Nasdaq) is still lower than -20%.

Conclusion: optimisation for best minimum results

If we use our Double Momentum Investing strategy and optimise for best minimum results in relatively short investment periods, we see losses can be minimised. The downside risk is much lower than the downside risk of the underlying assets. Still, as we explained above, the predictive value of the calculations in this section is lower than the predictive value of out-of-sample tests. Therefore, in the conclusions of the DMI strategy and in comparison with other strategies, we will use the out-of-sample tests.

Double Momentum Investing: conclusions.