Author Topic: thoughts on my investment plan  (Read 6355 times)

rusty

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: North Carolina
    • My Medigap Consultant
thoughts on my investment plan
« on: March 14, 2014, 08:00:58 AM »
Background - in a previous career I worked for an investment company as a financial advisor.  The investment strategy my mentor/close friend had basically a this:
 - purchase sector focused funds
              small cap growth fund and small cap value
              mid cap
              large cap
, same for mid and large cap sectors, intl, and bonds)
 - set % of each fund/sector depending on how aggressive client wanted to be
 - rebalance back to original %'s each year. 

The idea was based on a study of how different sectors of the market outperform the other.  Mid cap value may be the highest performer this year, then be ra

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: thoughts on my investment plan
« Reply #1 on: March 14, 2014, 10:51:17 AM »
It seems like it's a

Iron Mike Sharpe

  • Bristles
  • ***
  • Posts: 397
Re: thoughts on my investment plan
« Reply #2 on: March 14, 2014, 11:12:33 AM »
The only problem I see with this is that the

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1089
Re: thoughts on my investment plan
« Reply #3 on: March 14, 2014, 11:31:24 AM »
The original post and the responses seem to be

soccerluvof4

  • Walrus Stache
  • *******
  • Posts: 6034
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: thoughts on my investment plan
« Reply #4 on: March 14, 2014, 11:37:36 AM »
And then to add on to that th

KingCoin

  • Pencil Stache
  • ****
  • Posts: 783
  • Location: Manhattan
  • Achieved FI @ 30
Re: thoughts on my investment plan
« Reply #5 on: March 14, 2014, 11:47:16 AM »
Let's see the study!

I don't have a problem with it in theory. It's just a question of whether the additional layer of complication is justified by the alleged improvement of the risk/return profile.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 36
  • Location: Missouri
Re: thoughts on my investment plan
« Reply #6 on: March 14, 2014, 06:40:10 PM »
Looks like KingCoin was the first one to miss the

TomTX

  • Magnum Stache
  • ******
  • Posts: 4196
  • Location: Texas
Re: thoughts on my investment plan
« Reply #7 on: March 15, 2014, 02:21:08 PM »
Anyone could miss something like

rusty

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: North Carolina
    • My Medigap Consultant
Re: thoughts on my investment plan
« Reply #8 on: March 17, 2014, 08:28:36 PM »
Sorry guys, that was not at all how it was typed up originally.  It was great, you should have seen it.  Funny replies though.  I will try to recap.  I don't feel like retyping the whole thing right now....

Basically you have certain %'s spread over the different sectors of the market (Small cap value, small cap growth, mid cap value, mid cap growth, large cap, etc...)  As the market sectors rotate, you are rebalancing your positions at set time frames (qtrly, semi, annually, etc).  When your small cap does well you are selling it and buying your poorest performer.  Knowing that the poor sector will eventually be a leader in some future year. 

We used some software (Weisenberger software) to back test it and it did very well compared to the S&P.  I would like to test it again if I can find software that does this.  The theory sounds good, but I have no idea what software I could use to test it.  Any thoughts on software or strategy?

chucklesmcgee

  • Pencil Stache
  • ****
  • Posts: 613
Re: thoughts on my investment plan
« Reply #9 on: March 17, 2014, 11:14:44 PM »
Sorry guys, that was not at all how it was typed up originally.  It was great, you should have seen it.  Funny replies though.  I will try to recap.  I don't feel like retyping the whole thing right now....

Basically you have certain %'s spread over the different sectors of the market (Small cap value, small cap growth, mid cap value, mid cap growth, large cap, etc...)  As the market sectors rotate, you are rebalancing your positions at set time frames (qtrly, semi, annually, etc).  When your small cap does well you are selling it and buying your poorest performer.  Knowing that the poor sector will eventually be a leader in some future year. 

We used some software (Weisenberger software) to back test it and it did very well compared to the S&P.  I would like to test it again if I can find software that does this.  The theory sounds good, but I have no idea what software I could use to test it.  Any thoughts on software or strategy?

The mutual fund costs for each sector are going to be higher than a total passive index fund. Plus re-balancing will often involve making more trades, which could incur additional fees. And you've also got the value of your time and hassle factor of having to hash out how to re-balance.

Not sure of a good software, but I guess you could do it manually.

Overall I'm very skeptical that this would reliably beat an index fund once fees are factored in. Past performance is no guarantee of future results either. Even if your strategy would have a ROI a few percentage points greater than an index fund over the last 30 years, it doesn't really prove it'll be the superior strategy going forward.

rusty

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: North Carolina
    • My Medigap Consultant
Re: thoughts on my investment plan
« Reply #10 on: May 06, 2014, 04:16:14 PM »
https://ipro.americancentury.com/content/dam/americancentury/ipro/pdfs/flyer/Periodic_Table.pdf

Here is a link to a chart which may help explain the strategy.  Basically you invest in large, mid, small cap growth and value classes in equal percentages.  As the market rotates, the you sell those classes that are doing well (those listed at the top of each column year) and rebalance to those that are doing poorly (at the bottom of each column).  Knowing that eventually the market rotates and your rebalancing has allowed you to buy more of the poorer performing classes while they were low and selling the higher performing classes when they were doing well. 

I have found a website that may do the backtesting.  I plan to use Vanguard funds to test with.  Once I get around to it, I will sign up for the software for a month to run my tests.  Will post when I get results.
R

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: thoughts on my investment plan
« Reply #11 on: May 06, 2014, 04:47:18 PM »
Have you done any backtesting comparing this with a total stock market index? Comparing to the S&P 500 tells you nothing, all you did was compare a diversified large/mid/low portfolio to a large cap blend. Of course adding diversification, especially to riskier assets like small cap, will outperform over time.

The only advantage this would get over VTSAX is the ability to tailor your level of risk by overweighting/underweighting different sectors.

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1188
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: thoughts on my investment plan
« Reply #12 on: May 06, 2014, 04:51:21 PM »
If such a basic strategy as that beat the market,  dont worry the quants found it years ago.

Its an illusion.

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: thoughts on my investment plan
« Reply #13 on: May 06, 2014, 06:31:31 PM »
I took away that a financial company would suggest this, lots of fees from reselling each year... and that it's market timing.
besides if it rotates back, why bother selling it for another one? Just keep buying the same one and then when it rotates back, you have all your money plus the shares you bought when it was low.

its like you have 10 shares of $X but next year it's 10 shares of $X/2, still have 10 shares so when X becomes high again, you get more money. No need to chase the next "big" sector

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1172
Re: thoughts on my investment plan
« Reply #14 on: May 06, 2014, 08:11:56 PM »
The basic idea of having a balanced portfolio and periodically rebalancing back to your target percentages (selling the high to buy the low) is perfectly sound.  You're just talking about basic passive asset allocation principles. 

Where I question the value is doing this only with stocks.  Large, mid, and small-cap stocks may vary in amplitude but generally move together (especially in market swoons).  I doubt you'd get much benefit from trading between them over simply buying a total market index and not touching it.

If you like this idea, the way to make the most of it is to mix in uncorrelated assets.  Bogleheads add bonds to the mix and follow the same recipe.  The Permanent Portfolio adds bonds, gold, and cash.  The All Weather Portfolio mixes in several other commodities and debt instruments to the same effect.  You should perhaps read up on these and others and see what works best for you.

EDIT: If you're looking to backtest a portfolio, ETFreplay is a nice site.  But with all simulations, beware chasing returns based solely on past performance.  You may feel like you've stumbled on something big when in reality you already missed out. 

 
« Last Edit: May 06, 2014, 08:23:53 PM by Tyler »

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1382
  • Age: 40
  • Location: Texas
Re: thoughts on my investment plan
« Reply #15 on: May 07, 2014, 08:13:40 AM »
The basic idea of having a balanced portfolio and periodically rebalancing back to your target percentages (selling the high to buy the low) is perfectly sound.  You're just talking about basic passive asset allocation principles. 

Where I question the value is doing this only with stocks.  Large, mid, and small-cap stocks may vary in amplitude but generally move together (especially in market swoons).  I doubt you'd get much benefit from trading between them over simply buying a total market index and not touching it.

If you like this idea, the way to make the most of it is to mix in uncorrelated assets.  Bogleheads add bonds to the mix and follow the same recipe.  The Permanent Portfolio adds bonds, gold, and cash.  The All Weather Portfolio mixes in several other commodities and debt instruments to the same effect.  You should perhaps read up on these and others and see what works best for you.

EDIT: If you're looking to backtest a portfolio, ETFreplay is a nice site.  But with all simulations, beware chasing returns based solely on past performance.  You may feel like you've stumbled on something big when in reality you already missed out. 

 

Agreed ETFReplay is very good for the price. I wish it had more years of data though (ETFs just don't have enough history). Portfoliovisualizer.com does not have as much to slice and dice but it does have all the major asset classes and goes back to the early '70s. And it's free.

rusty

  • 5 O'Clock Shadow
  • *
  • Posts: 76
  • Location: North Carolina
    • My Medigap Consultant
Re: thoughts on my investment plan
« Reply #16 on: May 17, 2014, 07:46:58 AM »
Thanks guys.  My search found EFTreplay.  When I get some time to play around, I will run some tests.

When I was with the brokerage house, we used a chart like this (see attached) to explain rebalancing and Wisenberger software to show the results over time. 

Many people talk about the stat that 85% of all mutual funds don't beat the S&P.  This is really comparing apples to oranges.  You have to realize that many mutual funds can be sector or market cap based.  Meaning the prospectus is written in such a way that these managers cannot "chase" returns.  If large cap is where the gains are this year, then the small cap managers cannot start buying Coke, IBM, MSFT, etc.  The small cap manager has to stay in his area. 

Either way, it will be fun to test and compare.  Will let you know once I have time.  Thanks to all who have commented so far.
R