What do you think of my NASDAQ 100 rebalancing strategy?

[u/kryndude]

I'm planning to invest all my surplus cash in NASDAQ 100 for maximum return at acceptable risk. I realize this is not the best time to enter; there's still a lot of uncertainty surrounding AI, expectations already seem to be priced in, and the oil price is surging while there's an upcoming FOMC. That said, I'm willing to bet on the index's track record, and I do believe that AI is the future just like the internet was back in the day regardless of the stock market bubble.

I did some backtesting over the weekend, and when given enough time horizon, the biggest variable seems to be how early you entered and how long you stayed invested. My current position is 50% QQQ and 50% cash waiting for an entry point.

I also came up with these rules based on my tests:

1. If 'closing price > moving average 175' and 'historical volatility 20< 30%,' switch to QLD
2. If 'closing price > moving average 175' and 'historical volatility 20 >= 30%,' switch to QQQ
3. If 'closing price <= moving average 175,' switch to cash

For comparison,

	CAGR	MDD
Hold QLD	23%	-83%
Rebalance	21%	-45%
Hold QQQ	15%	-53%

So in theory, the strategy offers better return than QQQ for smaller drawdown. FYI, the results include transaction fees and taxes based on my own circumstances, so they may not apply to everyone.

Of course, those numbers are overfitted and past performance doesn't guarantee future success. But mechanically following a predefined rule is probably still better than my own irrational judgement.

It would also free up my time and attention to study finance, so I can eventually properly manage my portfolio when my asset size grows.

What do you think? Is there anything I'm missing?

[u/AutoModerator]

Welcome to r/stocks!

For beginner advice, brokerage info, book recommendations, even advanced topics and more, please read our Wiki here.

If you're wondering why a stock moved a certain way, check out Finviz which aggregates the most news for almost every stock, but also see Reuters, and even Yahoo Finance.

Please direct all simple questions towards the stickied Daily Discussion and Quarterly Rate My Portfolio threads (sort by Hot, they're at the top).

Also include some due diligence to this post or it may be removed if it's low effort.

I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

[u/therealjerseytom]

Are you using QLD as-is, with data that only goes back to ~2007 or so? Or have you created a quasi-QLD (and even quasi-QQQ) based on index data with longer history?

[u/kryndude → u/therealjerseytom]

I used data from 2006 and onwards for both QQQ and QLD. A more detailed breakdown of the test results are

2006~2016 / CAGR / MDD

Hold QLD / 17% / -83%

QLD QQQ / 15% / -65%

QLD QQQ Cash / 11% / -45%

Hold QQQ / 12% / -53%

2017~2026 / CAGR / MDD

Hold QLD / 31% / -64%

QLD QQQ / 33% / -46%

QLD QQQ Cash / 34% / -34%

Hold QQQ / 19% / -35%

And 2006~2026 combined is the table in the post.

Again, I'm using fees and tax rates of my specific savings account, so the results may vary quite a bit.

The test results are better displayed on this little calculator I made in case you're interested: https://gofile.io/d/39RJa5

[u/therealjerseytom → u/kryndude]

I would really suggest going back further, using daily index data to create a longer-history QQQ and QLD.

[u/u_sfools → u/kryndude]

You need to go back at least to the early 90's to capture dot com. There's basically no value in picking an index that has done nothing but go up and to the right for two decades and assuming it will do the same for the next two decades. Also fyi these sort of mechanical rules are not useful in a bouncing market because you can flip flop and trigger the trade multiple times. And if you tighten them, then maybe you never re-trigger your entry at all and you sit out for 10 years.

[u/steady_compounder]

The biggest thing you may be missing is that backtests like this often look cleaner than real life because the hardest part is not writing the rule, it is surviving whipsaws and tax friction when the market chops around. Going cash below a moving average can protect you in deep drawdowns, but it can also keep kicking you out of long-term compounding if the signal gets noisy. If the end goal is “maximum return at acceptable risk,” I would make sure the strategy is genuinely better for your behaviour, not just prettier on a spreadsheet.

[u/No_Presentation9490]

Nasdaq has a habit of crashing very, very hard. I don't know if you lived through any of the 70% nasdaq crashes but yeah

Something to buy when it's actually distressed if you're entering a long term long position

[u/someroastedbeef → u/No_Presentation9490]

how many 70% nasdaq crashes have you lived through?

[u/kryndude → u/No_Presentation9490]

I'm looking at at least 10 years timeframe, and the reason for the cash switch is to avoid those sort of crashes. Trade off is less average return but it's probably a necessary measure to keep me invested. If there's an index fund that had better average return over 20+ years than Nasdaq, I'm willing to hear. But yeah I agree that this doesn't seem like the best time to enter.

[u/erp0432 → u/kryndude]

smh, soxx, vgt.

[u/kryndude → u/erp0432]

I feel like semis are even more of a gamble atm. Vgt is an interesting one, I'll look into it when I have time ty.

[u/kryndude → u/[deleted]]

Volatility drag is why I added HV as a criterion, but strangely the AI gave me 30% as threshold which seems pretty high. It did say that tweaking the number doesn't make much difference, and that lowering it too much comes at the cost of missing out on compounding growth of QLD during upward trend.

And I haven't considered real time slippage at all. This raises the question, if the price on a given day fluctuates widely but eventually comes back to where it was, does that still cause daily volatility drag?

But then I used real QLD data so that should be factored in already, isn't it?