In a comment on an earlier post, Otto asked if I have experienced the kind of drawdowns I am seeing now in the past. He specifically asks about backtesting, but I can offer up a similar experience both in backtesting and in real life (yes, that’s with real money).
The time is October of 2008, and I, along the the rest of the investment community, thought the world was coming to an end. While the SPX dropped from well over 1500 to a low around 670 during a broader time frame, my big drawdown happened during a short span starting at the tail end of September, 2008 and ending in early October (the Lehman days). During that time, composed of about 10 trading days ending about 10/10, the SPX lost about 1/4 of it’s value, dropping from 1207 to about 885.
Simultaneously, my portfolio, and you can see here the backtested results, lost about 30% of it’s value from the recent high. The recent decline has a rather strong correlation to the moves of 2008. I have suffered a drawdown of about the same size, and the market has dropped just a little less than the 2008 decline, albeit much faster.
There have been other drawdowns of substance, but this is the only other one I’ve experienced of this magnitude. The real question before us is what happens next. Of course I have no idea, but you can see in the picture above that equity recovery came rather fast. Now, be assured that REAL equity recovery never comes quite as fast as back-tests, and it didn’t for me in 2008, but it did come and I ended the year with a decent gain.
Will that happen this time. Only time will tell. Part of the reason it worked in 2008 was that volatility remained high. If you’ve read any of my posts in the past you will know that my system does well during times of high volatility. At this point I still believe in my strategy and will continue to trade the best way I know how and with the approach that has worked for me in the past.
Good Trading…
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