The "Larry" portfolio with MOM instead of SCV?

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CULater
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The "Larry" portfolio with MOM instead of SCV?

Post by CULater » Mon Sep 23, 2019 12:04 pm

The portfolio discussed by Larry Swedroe with 30% in SCV and 70% in safe treasuries has done well over the years, posting returns that have matched 60/40 with less risk. Not so much lately though. The idea behind it is to have a smaller investment in higher risk stocks like SCV which is counterbalanced by a large allocation to stable investments such as intermediate treasuries. It could be called a "risk-parity" strategy, or a "barbell" strategy.

I got to wondering if there was another higher risk stock sector that would work as well as SCV has worked. One that occurs to me is MOM, or momentum. I used PV to look at an allocation of 30% MTUM, 70% Intermediate Treasuries and it seems to have done about as well as 50% TSM/50% ITT for the lifespan of MTUM since 2014 with lower risk. Not a long period of time, and it would be nice to have more data. What do you think? Would MOM + ITT be a workable "Larry" portfolio?
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Forester
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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Forester » Mon Sep 23, 2019 12:30 pm

Article on a low vol, momentum barbell strategy; https://www.fortunefinancialadvisors.co ... g-sectors/

Momentum may work better on broad indexes than individual stocks due to less trading costs.

fsh71
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Re: The "Larry" portfolio with MOM instead of SCV?

Post by fsh71 » Mon Sep 23, 2019 12:56 pm

Forester wrote:
Mon Sep 23, 2019 12:30 pm
Article on a low vol, momentum barbell strategy; https://www.fortunefinancialadvisors.co ... g-sectors/

Momentum may work better on broad indexes than individual stocks due to less trading costs.
Also worth noting the high turnover required to maintain a momentum strategy. I'm not aware of a way to implement that doesn't involve a lot of turnover, but I'd of course be willing to learn if such a strategy exists.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by rkhusky » Mon Sep 23, 2019 1:16 pm

How about using SCG? Behaves similarly to SCV.

1995-2019
30/70 SCV/Int Treas, SD=5.6% CAGR=7.5%
30/70 SCG/Int Treas, SD=6.0% CAGR=7.4%

2005-2019
30/70 SCV/Int Treas, SD= 5.4% CAGR=5.5%
30/70 SCG/Int Treas, SD=5.5% CAGR=6.2%

2015-2019
30/70 SCV/Int Treas, SD= 4.2% CAGR=3.7%
30/70 SCG/Int Treas, SD= 4.7% CAGR=4.9%


1995-2004
30/70 SCV/Int Treas, SD= 5.7% CAGR=10.5%
30/70 SCG/Int Treas, SD= 6.7% CAGR=9.1%


2005-2014
30/70 SCV/Int Treas, SD= 5.9% CAGR=6.4%
30/70 SCG/Int Treas, SD= 5.8% CAGR=6.9%

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Forester » Mon Sep 23, 2019 2:19 pm

fsh71 wrote:
Mon Sep 23, 2019 12:56 pm
Forester wrote:
Mon Sep 23, 2019 12:30 pm
Article on a low vol, momentum barbell strategy; https://www.fortunefinancialadvisors.co ... g-sectors/

Momentum may work better on broad indexes than individual stocks due to less trading costs.
Also worth noting the high turnover required to maintain a momentum strategy. I'm not aware of a way to implement that doesn't involve a lot of turnover, but I'd of course be willing to learn if such a strategy exists.
Momentum funds seem to be interchangeable with Growth funds, yet also run the risk of crashing harder; https://stockcharts.com/freecharts/perf.php?mtum,IWF

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by JBeck » Mon Sep 23, 2019 2:38 pm

What about doing it with a Pimco StockPlus fund for the 30%? PSLDX or PSPTX maybe

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Elysium » Mon Sep 23, 2019 2:50 pm

OP,

You may want to read this report from DFA that states Momentum doesn't work in practice. Link here: https://www.institutionalinvestor.com/a ... 0d3a378f36

The momentum factor exists, according to reams of academic literature — but fund managers can’t find a way to profit from it in the real world, according to new research available to clients of Dimensional Fund Advisors.

The momentum factor goes back to a 1993 paper that documented that investors could generate excess returns by buying U.S. stocks that performed well over the previous three to 12 months and selling those that had poor returns over the same period.

Dimensional — which excluded so-called mulitfactor funds, or funds that invest in momentum as well as other factors such as value — ultimately studied 11 funds since their start dates. (Factor funds, including momentum, are a fairly new category of fund, with most being live for less than three years; those funds were therefore excluded from the study.) The oldest dated back to 2003.

Most of the funds’ managers were able to actually capitalize on the momentum premium, but they incurred trading costs that wiped out the benefits, Dimensional found.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Day9 » Mon Sep 23, 2019 3:08 pm

I would not use this strategy because Momentum is solely behavioral, not a behavioral + risk like other factors. But I would look into International Developed and Emerging Markets momentum funds/ETFs. The "Larry Portfolio" has many definitions but I believe including international and emerging markets is part of it.

IMTM - iShares International Momentum
EEMO - Invesco S&P Emerging Markets Momentum

I do not know anything about these ETFs nor would I invest in them. But if I were interested in this idea I would research these funds: their AUM, daily volume, read the prospectus, etc. And I would run similar backtests with these funds against a portfolio with total market international and/or developed & emerging ETFs funds included, not just VTI and bonds.
I'm just a fan of the person I got my user name from

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by CULater » Mon Sep 23, 2019 3:43 pm

Elysium wrote:
Mon Sep 23, 2019 2:50 pm
OP,

You may want to read this report from DFA that states Momentum doesn't work in practice. Link here: https://www.institutionalinvestor.com/a ... 0d3a378f36

The momentum factor exists, according to reams of academic literature — but fund managers can’t find a way to profit from it in the real world, according to new research available to clients of Dimensional Fund Advisors.

The momentum factor goes back to a 1993 paper that documented that investors could generate excess returns by buying U.S. stocks that performed well over the previous three to 12 months and selling those that had poor returns over the same period.

Dimensional — which excluded so-called mulitfactor funds, or funds that invest in momentum as well as other factors such as value — ultimately studied 11 funds since their start dates. (Factor funds, including momentum, are a fairly new category of fund, with most being live for less than three years; those funds were therefore excluded from the study.) The oldest dated back to 2003.

Most of the funds’ managers were able to actually capitalize on the momentum premium, but they incurred trading costs that wiped out the benefits, Dimensional found.
Wow. Hadn't seen that before. I wonder what Swedroe would have to say about MOM funds?
On the internet, nobody knows you're a dog.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Elysium » Mon Sep 23, 2019 4:55 pm

CULater wrote:
Mon Sep 23, 2019 3:43 pm
Wow. Hadn't seen that before. I wonder what Swedroe would have to say about MOM funds?
I don't know what he would say, but if past is of any indicator he will switch positions.

Focusing on some of the key points from the article, on lack of support for reasons premiums should persist and high transaction costs eroding that premium, would tell us this is true upon inspection of funds.

For instance, MTUM turnover rate is reported as 104%, that means they are turning over all the stocks in the portfolio in less than a year time frame. Compare this to most SCV funds that have turnover in the 25%-30% range, meaning they hold a security on average 3-4 years, and finally the TSM index that has 3% turnover which means barely any trading goes on.

The short nature of momentum and the fact trading costs of turning over the portfolio eroding any gains, means that this may not be a viable standalone strategy. Perhaps this is why DFA does screening for it in their funds while trading (not selling those with positive and not buying those with negative), but do not offer a standalone fund. IMO, this is a good thing since it limits trading, and anything that limits trading is saving additional costs that may erode the gains.

As long term investors we are expected to hold our funds for 20-30 years, or even more, why are we then fine with selecting the funds turning over the securities 100% once every year, and even once every 3-4 years sounds too much.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by rkhusky » Mon Sep 23, 2019 6:22 pm

Day9 wrote:
Mon Sep 23, 2019 3:08 pm
I would not use this strategy because Momentum is solely behavioral, not a behavioral + risk like other factors.
I thought the Value factor was solely behavioral.

Vanguard's Multifactor fund has a current turnover rate in excess of 100%.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by Day9 » Mon Sep 23, 2019 6:24 pm

rkhusky wrote:
Mon Sep 23, 2019 6:22 pm
Day9 wrote:
Mon Sep 23, 2019 3:08 pm
I would not use this strategy because Momentum is solely behavioral, not a behavioral + risk like other factors.
I thought the Value factor was solely behavioral.
There are many reasons to believe value stocks are higher risk than growth stocks, and therefore in a reasonably efficient market they will have higher expected returns. Higher cost of capital, more leveraged, distressed, more variable earnings, etc.
I'm just a fan of the person I got my user name from

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by rkhusky » Mon Sep 23, 2019 8:35 pm

Day9 wrote:
Mon Sep 23, 2019 6:24 pm
rkhusky wrote:
Mon Sep 23, 2019 6:22 pm
Day9 wrote:
Mon Sep 23, 2019 3:08 pm
I would not use this strategy because Momentum is solely behavioral, not a behavioral + risk like other factors.
I thought the Value factor was solely behavioral.
There are many reasons to believe value stocks are higher risk than growth stocks, and therefore in a reasonably efficient market they will have higher expected returns. Higher cost of capital, more leveraged, distressed, more variable earnings, etc.
But none of those are directly included in the Value factor. The Value factor is based on the assumption that the market has mispriced stocks- too pessimistic on value stocks and too optimistic on growth stocks. That is a behavioral factor, just like momentum.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by whodidntante » Mon Sep 23, 2019 8:58 pm

CULater wrote:
Mon Sep 23, 2019 3:43 pm

Wow. Hadn't seen that before. I wonder what Swedroe would have to say about MOM funds?
I don't see a point in asking Bogleheads what Larry thinks. Ask Larry what Larry thinks. Meaning write to him off forum. He's invited questions and is reportedly responsive.

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Momentum and "The Mutual Fund Forecaster"

Post by Taylor Larimore » Mon Sep 23, 2019 9:13 pm

Bogleheads:

Thirty years ago I was a market-timer and subscribed to "The Mutual Fund Forecaster." This was the most popular market-timing newsletters with a monthly circulation over 170,000 (according to Google). Each month the Forecaster would list the top performing mutual funds with a recommendation for purchase. It was a pure "momentum" strategy.

I lost money and the newsletter eventually failed.

Lesson learned: "Momentum" is a dangerous strategy."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "We have this performance-chasing bias in this business, which just kills us."
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by stlutz » Mon Sep 23, 2019 10:55 pm

MTUM roughly tends to trail its benchmark by about 30 bps. It has an ER of 15 bps. That means it loses about 15 bps through other means. That's pretty small.

All of the warnings about how it's impossible to executive a MOM strategy are all pre-ETF. An ETF can acquire and dispose of shares in a more cost effective way than can a regular mutual fund.

If you're going to do something like the "Larry Portfolio" (which I don't recommend), I'd make multiple different factor bets--do Momentum and SCV. Maybe throw in a low vol fund or something like that too. Counting on one corner of the market to deliver market beating returns for you is rather risky. I know some people believe SCV is a slam dunk, but betting one's retirement on someone's opinion of a sure bet is a problem.

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Re: The "Larry" portfolio with MOM instead of SCV?

Post by wolf359 » Tue Sep 24, 2019 8:08 am

Elysium wrote:
Mon Sep 23, 2019 4:55 pm
CULater wrote:
Mon Sep 23, 2019 3:43 pm
Wow. Hadn't seen that before. I wonder what Swedroe would have to say about MOM funds?
I don't know what he would say, but if past is of any indicator he will switch positions.

Focusing on some of the key points from the article, on lack of support for reasons premiums should persist and high transaction costs eroding that premium, would tell us this is true upon inspection of funds.

For instance, MTUM turnover rate is reported as 104%, that means they are turning over all the stocks in the portfolio in less than a year time frame. Compare this to most SCV funds that have turnover in the 25%-30% range, meaning they hold a security on average 3-4 years, and finally the TSM index that has 3% turnover which means barely any trading goes on.

The short nature of momentum and the fact trading costs of turning over the portfolio eroding any gains, means that this may not be a viable standalone strategy. Perhaps this is why DFA does screening for it in their funds while trading (not selling those with positive and not buying those with negative), but do not offer a standalone fund. IMO, this is a good thing since it limits trading, and anything that limits trading is saving additional costs that may erode the gains.

As long term investors we are expected to hold our funds for 20-30 years, or even more, why are we then fine with selecting the funds turning over the securities 100% once every year, and even once every 3-4 years sounds too much.
I monitor turnover because:

1) It's a leading indicator of tax efficiency. If the fund generates and distributes capital gains, then I have to pay taxes on those gains. If the fund turns over frequently, then it can potentially generate capital gains.

2) It's a direct indicator of trading costs. Commissions paid by the fund when trading are not counted in the expense ratio, and are not reported separately. However, it does reduce your returns. Traditional market weighted index funds like VTSAX (Vanguard Total Stock Market Index) barely have any turnover, and therefore pay very little commissions. (VTSAX turnover is 3%. VFIAX (Vanguard 500 Admiral Index) turnover is 4%. MTUM (IShares Momentum Index ETF) turnover is 104%.)

Turnover by itself isn't bad, but it is an indicator of what may be going on behind the scenes.

In an ETF structure, turnover doesn't necessarily result in capital gains. In fact, MTUM has not had any capital gains distributions in the life of the fund. According to Investopedia:
Holding ETFs in a taxable account typically generates less capital gains when compared to mutual funds because ETFs do not necessarily have to sell the underlying securities to finance investment inflows and outflows. Through authorized participants, ETFs can create or redeem "creation units," which are blocks of assets that represent an ETF's securities exposure on a smaller scale. By doing so, ETFs typically do not expose their shareholders to capital gains.

Occasionally, an ETF may incur a capital gain due to some special circumstances, where it has to drastically rebalance its portfolio due to substantial changes in the underlying benchmark.
Disclosure: I own VTSAX, VFIAX, and MTUM, all of which I mention here. I'm happy with all three. MTUM's trading costs are part of the strategy that I bought into. I'm also happy with its performance so far. However, VTSAX and VFIAX are core components of my investment strategy, while MTUM is limited to the play part of my portfolio. MTUM is the closest that I'm getting to buying individual stocks these days.

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Re: Momentum and "The Mutual Fund Forecaster"

Post by abuss368 » Tue Sep 24, 2019 8:54 am

Taylor Larimore wrote:
Mon Sep 23, 2019 9:13 pm
Bogleheads:

Thirty years ago I was a market-timer and subscribed to "The Mutual Fund Forecaster." This was the most popular market-timing newsletters with a monthly circulation over 170,000 (according to Google). Each month the Forecaster would list the top performing mutual funds with a recommendation for purchase. It was a pure "momentum" strategy.

I lost money and the newsletter eventually failed.

Lesson learned: "Momentum" is a dangerous strategy."

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "We have this performance-chasing bias in this business, which just kills us."
Thank you Taylor for reminding us of one of the many dangers of investing.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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