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  • Is It Possible To Beat The Market With Two Trades A Year? 7 comments
    Jan 3, 2013 11:30 AM | about stocks: SPY

    This result is quite astounding.

    On the first trading day of the year invest in the equally weighted portfolio of the two assets among SPY, FGMNX, FGOVX, FTHRX, FNMIX, and PTTDX whose performance was the best during the prior quarter (Sept. 30 thru Dec. 31 of the prior year).

    CAGR (1994-2012) 11.9%

    Sharpe Ratio 0.82 (Annualized based on monthly returns)

    Beta .38 (R-Square is only .42 though.)

    Maximum monthly Drawdown 15%

    Number of years with losses 2 (1994 -.2%, 2002 -4.3%)

    2012 Return 17.4%

    Three Year CAGR 11%

    Five Year CAGR 9.4%

    Ten Year CAGR 11.1%

    The portfolio growth curve and the asset allocations in various years are shown in the following plots.

    The safe withdrawal rate for this strategy is 6.1% (i.e. if you withdraw 6.1% of the portfolio at the beginning of the first year, and increase your withdrawal by 3% annually thereafter, the probability that your portfolio will last at least for thirty years is 95%).

    That the strategy dictates that one invest in an equally weighted portfolio of FNMIX and FTHRX in 2013 immediately underscores the problem with it: who would have wanted to buy fixed income assets at the close of the day yesterday without cringing and closing his eyes? In any case it does seem to provide a nice benchmark to see how your portfolio stacks up against a strategy that is very easily implemented if emotions are completely set aside and has worked quite well in the past.

    (click to enlarge)Portfolio Growth Curve

    (click to enlarge)Asset Allocation Diagram

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPY
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Comments (7)
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  • MrBobDobalina
    , contributor
    Comments (70) | Send Message
     
    Wow. I am surprised there are no comments yet. Very fascinating data. I am curious if you have looked at robustness of this strategy, though? So, would it work with say, the typical TIAA-CREF offerings at your local university? Or maybe the lineup of American Funds. Specifically, will no emerging markets bonds hurt that much? Also, if the lookback period is 6 months instead of one quarter? What if you rebalanced on Jan1 and July1 - any benefit?

     

    Surprised at the amazing results for a simple annual rebalance. I's be really impressed if we knew the results weren't that reliant on your specific selection of mutual funds.

     

    As always, very unique and thought provoking work, Varan!
    5 Jan 2013, 03:13 PM Reply Like
  • varan
    , contributor
    Comments (5686) | Send Message
     
    Author’s reply » Thanks.

     

    Without FNMIX, you do beat SPY during 1994-2012 with considerably lower volatility, but the CAGR is not as good (8.3% vs. 8.0% SPY, but with only two years of losses: 1994 -0.2%, 2001 -5.2%). Even without FNMIX, the CAGR is close to that of the 60-40 SPY/VUSTX portfolio (which returned 8.7%) but the volatility is lower.

     

    Replacing FNMIX by PREMX the CAGR drops to 10.8% but still with equally low volatility.

     

    With AWF in place of FNMIX, the CAGR is 13% (two years of losses, 1994 -16%, 2001 -3.9%) but higher volatility (still better than SPY) . The performance is improved if you use risk parity to allocate the weights (CAGR 14%, 1994 -10%, 2001 -4.1%).

     

    There are many variations possible, but my purpose was mainly to convey that there may be very simple ways to get decent returns with low volatility that do not require you to be an expert stock picker and to constantly monitor your portfolio. I might post some further results at a later date.
    5 Jan 2013, 04:03 PM Reply Like
  • MrBobDobalina
    , contributor
    Comments (70) | Send Message
     
    Thanks for this, Varan. While not perfect methodology, it seems to be showing some robustness. I look forward to additional posts on this if you choose to do so.

     

    I think alluded in earlier comments on other blog posts (maybe yours, maybe not) about perhaps making your testing tools available someday. Not sure if that's still an option, but I haven't been able to find much that is user friendly, flexible, and a reasonable cost. Seems everything is for institutions or those with superb math skills. I can try to do some thing in excel, but it is slow. Anyway, count me as one who would be very interested if you ever decide to go this route.
    8 Jan 2013, 04:44 PM Reply Like
  • littletiger101
    , contributor
    Comments (10) | Send Message
     
    thanks. indeed, it is hard to convince to buy into fixed income at this stage.
    6 Jan 2013, 04:17 PM Reply Like
  • ct1
    , contributor
    Comments (8) | Send Message
     
    Nice article.

     

    I used similar strategy for my long term portfolio. However, I prefer to buy at the last trading day of the year as the market typically rally on the first trading day.
    10 Jan 2013, 05:27 PM Reply Like
  • George Spritzer, CFA
    , contributor
    Comments (1229) | Send Message
     
    This strategy had an off year in 2013. Perhaps a more frequent re-balancing instead of annual would give better results.
    4 Jan 2014, 11:46 PM Reply Like
  • varan
    , contributor
    Comments (5686) | Send Message
     
    Author’s reply » Agree. I was surprised by the result when I obtained it, and as the post might suggest was quite skeptical.

     

    Bimonthly updating gives the following:

     

    1994-2013

     

    CAGR 10.9% (SPY 9.1% 60/40 SPY/VUSTX 9%).
    Number of years of losses 2: 1994 -2.2% 2001 -1.7%
    Sharpe 0.79 Sortino 1.42
    Maximum Drawdown 7.7% (based on monthly data)
    2013 Return 7.65%

     

    Seems to be a simple robust alternative though not very lucrative. (Does handily beat a 'real' DGI portfolio that is being maintained by some one since 6/1/2008 though [96% vs. 55% total return].)

     

    Thanks a lot for your interest.
    5 Jan 2014, 12:37 AM Reply Like
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