Equity style rotation

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Equity Style
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Equity style rotation

Post by Equity Style »

I have enjoyed reading the posts for some time. To return the favor to the members I wish to share how I have consistently beat the S and P over the last 20 years.

My strategy is sometimes referred to as Equity Style Rotation or Equity Style timing in the academic literature. The strategy is based on the established fact of the varied returns based on equity style. For example, large growth generally does poorly when small value is doing well. Such cycles last from 2 even to 7 years. By investing in the best returning equity style and not in the relatively poor returning style returns can be improved an average of 3 %. Such a system beats the S and P 4 out of 5 years and beats it soundly over 5, 10, and 20 year time spans.

There are many variations on how to this, but I will share my method that has been consistently successful. I track the following equity styles- Large, Blend, and Value in Large, Mid, and Small caps. I also tract convertibles, REITS, and commodoties. In the international area I tract Large Growth, Blend, Value, Emerging Markets, small-mid cap value and growth. In addition I tract short and intermediate Vanguard Bond funds and rotate here when there are no positive equity classes.

I calculate the 3 and 6 month returns and purchase the best fund available in that asset. I usually hold 10-16 positions in mutual funds. Presently, I hold Janus Research and Columbia Marsico in Large Cap Growth, Janus Contrarian in mid to Large cap Blend, American Century Heritage in mid-cap growth, Black Rock Mid Cap Value, and T. Rowe Price New Era fund in commodoties. Foreign holdings include Dodge and Cox International in Large Value, Janus Overseas in Large Growth, Black Rock International Opportunity, Oakmark Small international, and Price Extended Markets. I have changed 3 positions so far this year. I try to keep a fund for at least 3 months and am slow to change as I have found that frequent changes result in decreased returns. On average I make 9 to 10 changes per year. Some years, as in 2004, I didn't change anything all year.

So far this year I am demolishing the S and P with returns of 12.5 % as of yesterday. So far this year my portfolio has been less volatile than the S and P although this is an exception.

The best years I have had compared to the S and P were 2001 and 2002 where I had single digit positive results and the S and P suffered significant downturns. In those years I was in small cap value, large cap value, REITS but mostly in bonds as there were no other positively performing asset classes. The worse years were during the tech boom where I either barely beat the S and P or the S and P beat me by 1-3 percentage points.

Try the system with a trial portfolio at first to understand the system better. It is easy to see trends that are not there and shift equity styles too soon. In real life I don't think you should check but once a month or better even every 3 months. I have done the best when I rarely change and when I only check every 3 months or so. The system has been down as much as 12% at least 4 times in the last 20 years-there is still a risk of short term loss and the strategy is based viewed as a long term (greater than 10 years) strategy.

I came upon this "system" through reading academic papers. Only in the last 10 years have I seen others use the system or something similar.

Let me know what you think. I hope the information will be helpful. I realize it goes against some of Mr. Bogles ideas, but a 20 year track record is difficult to argue against.

Equity Style
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nick22
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Well

Post by nick22 »

Hopefully people will be nice here. It is good to hear you like your system but...

The S&P 500 is by far an inappropriate benchmark to compare your returns if you are investing in real estate, small cap, int., EM, etc. In fact the S&P would probably be only about 25-30% of the available market cap in your investing world. So you are trying to beat an easy target based on the risk you are taking to increase returns. The risk of your portfolio is probably much higher than the S&P over the long-term.

This not only sounds complicated, but also like a deadly strategy when taxes are factored in with the short-term capital gains you must bank. Many investors who use "systems" ignore the fact that taxes and trading costs can shave 4-6% per annum off their returns and they just report gross returns. But you can only eat net returns.

Not to say momentum doesn't exist. But it is probably too labor intensive and frought with transaction and tax costs for most investors to use successfully.
Nick22
YDNAL
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Post by YDNAL »

The strategy is based on the established fact of the varied returns based on equity style....... By investing in the best returning equity style and not in the relatively poor returning style returns can be improved an average of 3 %....... I calculate the 3 and 6 month returns and purchase the best fund available in that asset.
ES,
The historical returns (3-6 months) :shock: of an asset class have the predictive value of a chimpanzee throwing darts at a board. Please let us in on your 'other' secret in determining how to choose the 'best returning equity style' going forward.
Regards,
YDNAL
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fundtalker123
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Post by fundtalker123 »

If you believe equity style (as opposed to stock picking) is what matters, why would you use actively managed funds that charge ridiculously high fees to cover these styles rather than available low-cost index funds?
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Equity Style
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Equity Style

Post by Equity Style »

Thanks so much for responding. I appreciate your kindness. To answer your questions.

In actuality I use the MSCI AC World Index as my benchmark. Over the past 10 years my returns have been 1.8% higher. Not so much, but substantial over time. The S and P is a poor standard.

Using the last 3 or 6 months has been shown to be effective in predicting future returns. There are academic papers which have shown this. Also Fundx has 25 years of data showing such to be true. Eric Dany's web site has data since 1998.

I originally tried to use Index funds in the Equity Style, but I received better returns choosing the best performing fund in the class. Sometimes an index is the best as the leading performing Large Value fund now is the Value Fund at Vanguard. The difference in returns between index funds and managed funds seems to be small, about 0.8%.

My Strategy is for tax deferred accounts. It still might be useful in a taxable account given lower turnover long enough to have gains count as long term capital gains. I have few funds in taxable accounts - I use a buy and hold strategy but with a 350 day moving average to escape bear markets (worked well in 1990 and 2000 but it might have been luck). Of course I use index funds as they will always give better returns over long periods of time. I do try to keep a 50/50 domestic foreign ratio.

One of the most recent nobel prizes was awarded for proving that the market was not efficient as previously thought. My strategy, which I derived from academic papers, takes advantage of some of the inefficiencies in the market. In this matter it performs better than buy and hold in tax deferred accounts.

Thanks for not calling me names or rejecting me out of hand. The proof is in the pudding. Equity Style rotation is the superior manner to invest. Still the overall returns compared to a World Index are small as the inefficiencies in the market are also small. An extra 1 % is worth it.

Try my theory in a "dummy" portfolio. Use index funds if you are more comfortable. The present dominant styles are large cap blend, Large Cap growth, Mid-cap growth, International Large Value, International Large Growth, International small cap growth, Emerging Markets, and Natural Resources. Follow these for the next 3 months. They will outperform the S and P and the MSCI World index. After a year or so you too will be convinced! Also back track the strategy and study returns over the past 20 years. (the styles were not well defined until the 90's, so data beyond that is not readily available.)

Thanks again for responding and bringing up some very valid points.

Equity Style
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United
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Post by United »

Choosing the top performing actively managed fund may take advantage of momentum effects. Some papers haven't found evidence for a mutual fund momentum effect, but the most authoritative (and relatively recent) one I know of did find an exploitable momentum effect (Ibbotson).
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Post by matt »

You appear to have a fairly simple momentum strategy. Plenty of research supports it on paper, but using it in the real world is a bit more challenging. My own research has shown that over time, momentum strategies would have done very well before costs, but with very high volatility. I think I could handle the volatility, but I am a contrarian by nature so I just don't think I could stick with a strategy that often has me placing money into the hottest, most over-valued asset classes.

If you're going to do it, I agree that you should be using ETFs and not active funds. You should not be relying on Morningstar's often arbitrary categorizations to make your decisions. For example, Janus Contrarian has nothing to do with the Large Blend peer group. It is a global equity fund that I think had a hearty stake in Emerging Markets such as India. Using ETFs instead would get you pure plays on whatever is showing the most momentum. Then you pick the top 10 or 20 or whatever you feel is diversified enough for you.
robiu977
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reply

Post by robiu977 »

Welcome to the board, Equity Style. I for one appreciate your strategy and willingness to offer that to others. Sure, this is the "Bogleheads" forum, but there are many out there who are learning and like to hear of different strategies that work. Right now I could not try this, as my new 457 plan has maybe 15-20 options. But who knows down the road ...
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Post by rwwoods »

Speaking of momentum, check out this article.
http://www.marketwatch.com/News/Story/S ... iteid=yhoo
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Equity Style
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Post by Equity Style »

Thanks for the excellent responses!

It is correct that my Strategy is a simple momentum strategy. By eliminating tax costs and transaction cost (in changing mutual funds there is no cost unless one trades recklessly) the momentum factor allows for superior returns.

I actually divide the funds up into their combination of styles. For example, Am Century Heritage has 20% in International. Janus Contrafund is invested all over the place, but only in the present superior equity styles. Too get a pure equity play ETF's are great especially since transaction cost are now so low.

One other area I play momentum is in the domestic- foreign ratios. I am presently 62% in international has it is presently giving the best returns.

The risk of the strategy is actually lower than it appears. Several academic papers have noted this as it decreases downside volatility. However, I have not found a quantitative analysis as to how much risk is lowered. Using Excel and calculating returns over the last 10 years, the standard deviation is 2 points lower than the S and P.

The danger in the strategy is over trading. Such causes increased volatility and inferior returns. Checking every 3 months to see how the styles are performing appears to be ideal. Trading should be limited as much as possible.

Thanks again for the great posts!

Equity Styles
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Post by rwwoods »

Equity Styles, I would like to read the papers you have mentioned. Would you please post the citations and web locations if known?
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Post by Random Musings »

I have found that picking last year's winning passive equity asset class (looking at large/small, value/growth, int'l domestic and REIT's as choices) provides one with strong market-beating annualized returns (with some higher volatility as well).

However, as with the majority of systems - I would believe the the strong majority of investors wouldn't have the discipline to follow a simple trend strategy - and it would probably be even more difficult to stick with a more complex one.

RM
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Re: Equity Style

Post by White Coat Investor »

Equity Style wrote:
In actuality I use the MSCI AC World Index as my benchmark. Over the past 10 years my returns have been 1.8% higher. Not so much, but substantial over time. The S and P is a poor standard.

My strategy, which I derived from academic papers, takes advantage of some of the inefficiencies in the market. In this matter it performs better than buy and hold in tax deferred accounts.

Thanks for not calling me names or rejecting me out of hand. The proof is in the pudding.

Still the overall returns compared to a World Index are small as the inefficiencies in the market are also small. An extra 1 % is worth it.


Equity Style
Ahhhh...the age old question. Were you lucky or were you good? The question is always not how did Warren Buffett do it, but why aren't there more Warren Buffets?

Congratulations on your success. I sincerely hope it continues. I haven't seen sufficiently convincing data on momentum investing or on sector rotation to justify changing my investing style at this time. I certainly doubt this strategy would work well if the investor had to deal with significant transaction costs or if the investments were done in a taxable account.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Equity Style
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Post by Equity Style »

Sorry, but the Forum will not allow me to post links yet. As soon as they do will post links (I haven't done enough posts)

The simple annual momentum strategy is well studied. Merriman Capital has data from 20 years showing that buying last years best equity styles gives higher results than the S and P or a Diversified Buy and Hold Strategy. However, the academic research shows a 3 month or 6 month time table is more profitable. For example, REITS were the highest returning equity style last year. However, early in 2007 they started to tank. I sold my REIT position on March 1. Checking every 3 months saved me from the subsequent downturn.

All strategies depend on discipline. My system is in most ways mechanical thereby divorcing the emotional component. Also, one must have the discipline to stay the course- it was not easy to maintain the strategy during the tech boom. However, by staying the course I received good returns in the late 90's without suffering the subsequent BEAR market of 2000-2002.

I'll post some links as soon as possible. Thanks for the good posts!
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Post by YDNAL »

I sold my REIT position on March 1. Checking every 3 months saved me from the subsequent downturn.
Equity Style,
I don't mean to sound too suspicious, :wink:
- Did you just so happen to 'check' on December 1st and then on March 1st?
- Or is it because REIT's total return is -19% from February 7 to June 21 (last time I checked)?

Regards,
YDNAL
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Zapped
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Post by Zapped »

Mr.Style wrote: Posted: Thu Jun 21, 2007 9:30 am
I came upon this "system" through reading academic papers. Only in the last 10 years have I seen others use the system or something similar.

Posted: Fri Jun 22, 2007 7:49 pm
There are academic papers which have shown this.
:
My strategy, which I derived from academic papers, takes advantage of some of the inefficiencies in the market.

Posted: Sat Jun 23, 2007 6:54 am
The risk of the strategy is actually lower than it appears. Several academic papers have noted this as it decreases downside volatility.

Posted: Mon Jun 25, 2007 12:36 pm
However, the academic research shows a 3 month or 6 month time table is more profitable.
Mr. Style wrote:Sorry, but the Forum will not allow me to post links yet. As soon as they do will post links (I haven't done enough posts)
Perhaps you can't post a link, but you can simply make the citation in plain English, e.g. "Mr. Smith's paper entitled 'Unicorns Spotted at Fidelity' in the June 2005 issue (Volume 60: Issue 3) of the Journal of Finance".
- Jim in Austin, TX
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Equity Style
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Post by Equity Style »

I actually check every month and measure the 3 and 6 month returns compared to other styles. Actually REITS had moved down compared to other options in January. However, I try to avoid trading when possible so I waited another month. By then, REITS had completely fallen out of the top performing styles so I sold it.

If one followed the "buy last years winners" strategy, one couldn't sell the REITS until the end of the year. Of course they could rebound, but it looks as if they are starting a downward cycle trend and returns will be negative.

I will soon have enough posts to be able to send links soon. Until then, Eric Dany's web site has a 9 year history of equity style timing. Also, Fundx has used a momentum strategy for more than 20 years with good results. It's hard to argue with their outstanding results. I will post links and more info soon.

Thanks again for all the excellent posts!
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Post by Random Musings »

Equity Style said:
I will soon have enough posts to be able to send links soon. Until then, Eric Dany's web site has a 9 year history of equity style timing. Also, Fundx has used a momentum strategy for more than 20 years with good results. It's hard to argue with their outstanding results. I will post links and more info soon.
Of course we can argue. The fact is there are far, far, many other momentum strategy players that have failed over the past - cherry picking two (or even some more) winners from investment newsletters (and so on) is not helpful in determining what will work in the future, ya know, when it really counts. Let alone the fact that some of these winning strategies are far less winning if in taxable accounts and so on. FundX also has mutual funds, but it appears that any alpha that they have created goes into the managers pocket (high expense ratios) - so I wouldn't touch those funds with a ten-foot pole.

However, I wish you continued success in your trading strategy. The reality is, however, that you are in the minority - convincing others to follow your path will most likely be harmful to the majority.

Regards,

RM
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Equity Style
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Post by Equity Style »

I agree with the ten foot pole analogy for FUNDX funds. There cost are extremely high. However, even with such high cost their funds have outperformed the S and P over the last 7 years. Yeah I know the S and P has been a whimp compared to other indices.

I also agree if you pick here and there from newsletters you are doomed. My suggestions are based on academic studies not on newsletters. I mentioned the newsletters only as a source for data.

The literature also notes that momentum does not seem to exist for individual stocks. However, looking at the data or the Callahan periodic chart it is readily apparent that styles go through 2-7 year cycles. It is by using this fact that extra returns can be made. Still, broad diversication is necessary as is adherence to a benchmark. Moving to far from the bench mark results in increased volitility and decreased return.

Once again, seeing is believing. Make up a dummy portfolio with the 8 most dominant styles and watch it outperform the S and P and the MSCI AC World!

Equity style
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Post by tetractys »

...looking at the data or the Callahan periodic chart it is readily apparent that styles go through 2-7 year cycles.
L O L
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Post by RiskAverse »

Equity Style wrote:I agree with the ten foot pole analogy for FUNDX funds. There cost are extremely high. However, even with such high cost their funds have outperformed the S and P over the last 7 years. Yeah I know the S and P has been a whimp compared to other indices.

Once again, seeing is believing. Make up a dummy portfolio with the 8 most dominant styles and watch it outperform the S and P and the MSCI AC World!

Equity style
This is just the wrong forum to be posting about market timing. Goto elitetrader .com where they tend to love hearing about such things.
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Post by Valuethinker »

Random Musings wrote:I have found that picking last year's winning passive equity asset class (looking at large/small, value/growth, int'l domestic and REIT's as choices) provides one with strong market-beating annualized returns (with some higher volatility as well).

However, as with the majority of systems - I would believe the the strong majority of investors wouldn't have the discipline to follow a simple trend strategy - and it would probably be even more difficult to stick with a more complex one.

RM
The wind sort of went out of me when I read that....

What you are saying is that there are momentum effects in style investing?

I think what tends to happen, though, is you pay a real penalty when a style goes 'out of favour'. It's a bit like momentum investing in stocks: it surely works (at a high transactions cost) but when a stock loses momentum, you can give up all the performance you gained (and the rest).

Growth worked like a charm, 1992-2000, but then gave up most of that charm in 2000-03.

I think you have to have an underlying model of what constitutes 'cheap' and 'expensive' between asset classes and take your views on that, with a momentum filter.

When I came into markets professionally, a number of papers had just been published showing the 'small cap effect'. As David Dreman so amply documents in his books, the small cap effect promptly disappeared, and didn't reappear until after 2000. That was 12 years to wait.

FWIW on momentum effects, as I understand it, stock returns weak form revert to mean, so there are significant momentum effects. Bond returns *don't*, AFAIK: a bear or bull market in bonds is just as likely to stay that way, as not.
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Post by Clutch Cargo »

Equity Style,

Thanks for your participation on the forum. Another member on this forum (livesoft) kindly pointed me to the informative Callan Periodic Table of Investment Returns on this forum (here's the link: http://www.diehards.org/forum/viewtopic.php?t=144), and studying it closely has been eye-opening.

Using your method, I would like to know how you would have known before the fact, in 1992 when the MSCI EAFE index was the poorest performer of all (-12.18%), to buy overseas funds in order to reap the rewards of that index being the best performer in 1993 (32.57%); and then to again know before the fact only two years later in 1994, to dump those funds before the MSCI EAFE index once again moved to the bottom of the charts for two of the next three years?

I am suspect, only because I know of no way reliable way to predict with any certainty whatsoever what the market is going to do tomorrow, let alone next year. My personal attempts at beating the market over the years by being consistently accurate with such predictions have only resulted in disappointment and monetary loss. The needle in the haystack is truly a moving target, and we investors are, in effect, hunting without weapons. I'm convinced that Jack Bogle, however, is truly hitting the target, when he said, "Don't look for the needle in the haystack. Just by the haystack!" (in his Little Book of Common Sense Investing [pg. 86]). In other words, index investing is the only certain way to ensure that you'll consistently hit the target over time.

Clutch Cargo
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Post by Random Musings »

Valuethinker said:
The wind sort of went out of me when I read that....

What you are saying is that there are momentum effects in style investing?
No. But I have looked back at utilizing the "hot hands" approach to equity asset classes (1975-2006) - just choosing the best one from the prior year - for example LCG, LCV, SCG, SCV, Microcap, EAFE Int'l LC, MSCI Small, NAREIT (using S&P for LC, Russell 2000 for small cap, Ibbotson for microcap).

Basically, versus a "diversified portfolio" of all asset classes- taking last years "winner" provided one with higher returns - but also higher volatility. Still, the problem is there are certain years where that strategy would really test one's discipline (for example, if 1995 when in int'l small cap when a diversified portfolio did very well and in 2000 when the Russell 2000G got hit hard).

Another simple example of "chasing" asset class returns. From 1926 to present, choose winner of S&P 500 or Ibbotson microcap and invest fully for next year. Talk about a wild ride - who would have the ability to stomach the volatility (on the downside, of course)!

If anything, "chasing" asset classes (not style investing) suggests that investor sentiment and RTM (which intertwine, IMHO, over longer periods of time) may be exploitable.

However, for me, diversifying and staying the course is more easy to handle. But for people who have some play money (<5% of portfolio) and have the ability to do this in a tax-deferred account utilizing low-cost passive funds (or ETF's) - perhaps it would be worthy of consideration before other "active" investment strategies - it's not "tactical" asset class allocation - or is it?

RM
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Equity Style
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Post by Equity Style »

Some great posts!

To answer some of the questions: Style changes do not occur abruptly. They tend to roll-over fairly slowly. Look how REITS went down the first of the year. They were up 37% last year and when I sold them In March they were down 6 % from the high. Similar occurences happened with Large and Small VAlue started performing inferior to Large Growth and especially Mid-Cap. I shifted my positions before the downtrend (at least in small cap) even started. The problem is with the end of a BEAR market. Stocks have risen so fast and furious when the Bear to Bull switch occurs that part of the upturn is missed.

Remember I check the returns over the last 3 to 6 months. I then invest in the 8 highest returning styles (I include convertibles, natural resources, International bonds, and intermediate US bonds as styles). In 1999 Large Value started moving up along with both small value in both domestic and international. During the time after the first drop Large Growth and Large Blend had poor returns for several months, although still positive. I thereby rotated into the Value stocks, Convertibles, and Bonds when the Bear downturn started. As a result of this rotation I had small gains in 2000-2002 instead of losses. The system is mechanical and does not involve any attempts to read the tea leaves. In my opinion, any system that is not mechanical will perform less well than simply buying the market and holding.

Thanks for all the fantastic posts!

Equity Style
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Post by livesoft »

FWIW, here is an article in the J Financial Planning on the hot hands phenomena:
http://www.fpanet.org/journal/articles/ ... 6-art7.cfm
Winners in one year tend to remain winners in the following year and losers have an even stronger tendency to remain losers.
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Post by matt »

"Winners in one year tend to remain winners in the following year and losers have an even stronger tendency to remain losers."

In other words, stay the hell away from REITs and homebuilders for another year.
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Post by White Coat Investor »

matt wrote:"Winners in one year tend to remain winners in the following year and losers have an even stronger tendency to remain losers."

In other words, stay the hell away from REITs and homebuilders for another year.
Will you let me know when to get back in?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Post by bdpb »

This doesn't seem like it would very effective in a taxable account.
Wouldn't one have to pay at least 15% tax on some portion of their gains
nearly every year? Probably not a lot of opportunity for tax-loss harvesting,
either. Given that, how would one manage the taxable portion of
a portfolio if they were following this method in their tax advantaged
accounts?


How do you handle the situation where all of your rules can't be followed?
For example, you mentioned a 50/50 US/INTL equity split.
What if US equities outperform INTL for a while and that causes your
top eight asset classes to be all US equities. Which rule do you follow?
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Equity Style
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Post by Equity Style »

The article link was fantastic. A great summary article!!!!

Doc, REITS will stay down from 2 to 7 years as they are in the negative part of the cycle. Get out now or continue losing!

Equity style investing can be used in a taxable account, but it is not as productive. What happens is one adds tax efficiency into the equation on which funds to pick. Also trading should be avoided unless there is a very clear signal. Finally, I have had two funds in portfolio since 2002 - it is not uncommon for performance to continue over several years. For example, from mid- 2003 to 2005 I made no changes.

I use a buy and hold type strategy for tax accounts with 50 % in both Foreign and Domestic. In my equity style portfolio I limit the foreign to domestic to a maximum of 80/20

Year to date my portfolio is up 10.9 %. Compared to MSCI AC World 8.7 and S and P 500 6.9
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Post by White Coat Investor »

Equity Style wrote: Doc, REITS will stay down from 2 to 7 years as they are in the negative part of the cycle. Get out now or continue losing!
Can you be a little more specific? :) 2-7 years? Come on. Why don't you just say the next 1 month-20 years, it is about as helpful.

You may be right, but I'm not going to change my plan. They could lose 50% this year and it wouldn't be an investment catastrophe for me. In fact, it would be less than one day's income that I lost with my piddly little portfolio. I think I'll go ahead and keep them for now, and add to them next month when I rebalance.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Trev H
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Fun to look at....

Post by Trev H »

.
1970-2006

500 index & Small Value

100% 500 index
506,373.64 = 10K Growth
StDev = 16.80
CAGR = 11.19

100% Small Value
1,530,284.28 = 10K Growth
StDev = 19.59
CAGR = 14.56

50% Each Rebalanced Yearly
966,450.48 = 10K Growth
StDev = 16.51
CAGR = 13.15

If you were invested 50/50 in 1970 and then moved 100% to the best performer the next year and did that same move at each year end until 2006.

2,320,156.59 = 10K Growth
StDev = 18.50
CAGR = 15.86



Trev H
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Post by LiveSoftMike »

Marvin Appel's new book "Investing with exchange-traded funds made easy : higher returns with lower costs--do it yourself strategies without paying fund managers" basically touts same concept of playing hot style sector rotation.....I don't recall him using 3 month return to do it though....bascially touts one year holding for tax reasons as I recall....I also recall that an investment newsletter aa freiend used to get "No Load fund Investor" I believe it was called touted using hot no load mutual fund rotation.....I'm more a value tilt guy myself but do wonder about value/growth rotations like Bogle has shown in his books....Trev H simple rotation seems to work very well....lower SD with higher return than SV only strategy....but beware as usual historical returns and if it was this easy wouldn't all hedge funds and investment banks do this thereby eliminating the effect? The efficient market in me....hope I'm not crazy enough though to leave a $100 bill on the ground saying it can't really be there!
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Post by Equity Style »

As always some great posts.

First, to the person who wants to know what is going to happen to REITS. I will give you a more distinct answer. REITS will go down for at least 18 months. You will continue to see lower highs and lower lows as it moves down. Putting money in REITS now is just throwing your money away. Remember everything returns to the mean and REITS are much higher still than their 4 year average. Lots of downside potiential and no foreseeable movement upward.

To my friend who can't see the $ 100 dollar bill- you have raised some good questions. First, many large companies already use the Equity Style strategy. Some of the initial work was done by Bernstein (not the neurologist) who is a strategist for Merrill Lynch. I know my advisor at Merrill Lynch for my 401k does almost the same thing that I do with my money. Two of my European friends use a similar system for their clients at their private banks. Still almost no one recommends such a system to their clients. Merriman Capital has a plan based on one year momentum they offer to clients. Since there are still not very many people who "know about this strategy" it will continue to be beneficial until more people start using it. As more people use the strategy volitility will go up as there will be higher highs as every one flocks to the winners, and lower lows has everyone bails out fairly quickly. The increased volitility might actually enhance returns at first, but eventually a large portion of the Buy and Holders will switch to a rotation strategy and the advantages will be lost. However, buy and hold is so ingrained into investors that I think it will be years for the tide to shift to Equity and/or Style rotation.

Make up a list of 8 funds from the classes I have indicated will outperform in the next 3 months (see earlier post) and make a "dummy" portfolio. Start tracking it and you will see it consistently outperforms the indexes. Seeing is believing!

Equity Style
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Post by Equity Style »

Since I can't post links yet, I am going to post some abstracts of articles:

Paper
Journal of Asset Management (2007) 8, 9–23. doi:10.1057/palgrave.jam.2250056

Equity-style timing: A multi-style rotation model for the Russell large-cap and small-cap growth and value style indexes
Bala G Arshanapalli1, Lorne N Switzer2 and Karim Panju3


Top of pageAbstract
Researchers and practitioners have devoted considerable attention to devising market-timing strategies as potential value-enhancement tools. The success of such active or tactical asset allocation strategies is dependent on their ability to capture either inefficiencies, to the extent that they exist, or disequilibria associated with changes in the investor opportunity set. Much of the equity-style timing literature focuses on the shifting between pairs of risky assets or between one risky and one riskless asset class, using a binomial approach. This paper develops a multinomial timing model based on macroeconomic and fundamental public information using Frank Russell large-cap and small-cap style indexes. We model four different market segments simultaneously. Out-of-sample tests demonstrate that active multi-style rotation strategies can be devised that outperform the best performing buy-and-hold portfolio. The profitability of such strategies is robust to reasonable levels of transaction costs.
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Post by White Coat Investor »

Equity Style wrote:
First, to the person who wants to know what is going to happen to REITS. I will give you a more distinct answer. REITS will go down for at least 18 months. You will continue to see lower highs and lower lows as it moves down. Putting money in REITS now is just throwing your money away.
Now we're talking. 18 months. See you December 2008. As Billy Joel said, "You may be right, I may be crazy."

Just to keep things easy, we'll use the Vanguard REIT Index fund's total return from June 30 2007 to December 31 2008.

The price of the REIT Index fund on 30 June 2007 was $23.54.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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why mention price of fund?

Post by tibbitts »

As with many of these discussions, I don't see why the price of the fund has any importance. It seems like the challenge is to find total return data between arbitrary dates, without manually calculating reinvested dividends.

Paul
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Post by Equity Style »

EmergDoc

I hope you are not going to lose your hard earned money "betting" on REITS. However, you did give my a good idea. If I am certain that REITS are going down, then I should sell the Vanguard Index short. Also one of my friends who is an investment advisor is placing a put option on Reits. I will have to investigate this too.

With the pain of fighting with the hospital, insurance companies, and lawyers, you have truly earned your money. Please don't waste your money in REITS!

Equity Style
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Post by White Coat Investor »

Equity Style wrote:EmergDoc

I hope you are not going to lose your hard earned money "betting" on REITS. However, you did give my a good idea. If I am certain that REITS are going down, then I should sell the Vanguard Index short. Also one of my friends who is an investment advisor is placing a put option on Reits. I will have to investigate this too.

With the pain of fighting with the hospital, insurance companies, and lawyers, you have truly earned your money. Please don't waste your money in REITS!

Equity Style
Don't worry about my money, I'm not risking much on this bet. Perhaps a drink if we're ever at a diehards reunion together. BTW, I just ran VNQ through Google and it's up another 1.5% today. Looks like I'm winning so far.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Post by zhiwiller »

Equity Style wrote:Putting money in REITS now is just throwing your money away. Remember everything returns to the mean and REITS are much higher still than their 4 year average. Lots of downside potiential and no foreseeable movement upward
Sorry if this has been touched on, but isn't everything right now above it's four year average?
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Post by bdpb »

Equity Style wrote:EmergDoc

I hope you are not going to lose your hard earned money "betting" on REITS. However, you did give my a good idea. If I am certain that REITS are going down, then I should sell the Vanguard Index short. Also one of my friends who is an investment advisor is placing a put option on Reits. I will have to investigate this too.

With the pain of fighting with the hospital, insurance companies, and lawyers, you have truly earned your money. Please don't waste your money in REITS!

Equity Style
I haven't read the articles from above yet, but I think other
literature suggests the momentum for losers may be stronger than for
winners. Sounds like shorting might be the better play.
I'm a little surprised this seems like a new idea.
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Post by Equity Style »

Emerg Doc

I called 3 different people last night from different realms of investment. One is an AG Edwards Agent, One is a fee only advisor, and one is a European banker. They were all unanonymous that Reits in the U.S. are heading down in the next 18 months. Afterwards the outlook is thought to be better. Rare to get people from such different fields to agree.

Reits are above their 10 year average moving average and the present momentum is down. All the other indices are still moving up at this time. However Large Growth is below the 10 year average. Looking at the 10 year averages of Equity styles large value and small cap are significantly above. Other styles are not far from their 10 year moving average possibly indicating additional upside potential. Personally I don't think one should make investment decisions based on these categories, but information is provided to answer a question.
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Post by 660ky612 »

Equity Style wrote:
Paper
Journal of Asset Management (2007) 8, 9–23. doi:10.1057/palgrave.jam.2250056

Equity-style timing: A multi-style rotation model for the Russell large-cap and small-cap growth and value style indexes
Bala G Arshanapalli1, Lorne N Switzer2 and Karim Panju3


Top of pageAbstract
Researchers and practitioners have devoted considerable attention to devising market-timing strategies as potential value-enhancement tools. The success of such active or tactical asset allocation strategies is dependent on their ability to capture either inefficiencies, to the extent that they exist, or disequilibria associated with changes in the investor opportunity set. Much of the equity-style timing literature focuses on the shifting between pairs of risky assets or between one risky and one riskless asset class, using a binomial approach. This paper develops a multinomial timing model based on macroeconomic and fundamental public information using Frank Russell large-cap and small-cap style indexes. We model four different market segments simultaneously. Out-of-sample tests demonstrate that active multi-style rotation strategies can be devised that outperform the best performing buy-and-hold portfolio. The profitability of such strategies is robust to reasonable levels of transaction costs.
To download the paper, click
http://search.yahoo.com/search?p=%2BArs ... s&ei=UTF-8

Don't blame me!
Shall we discuss this thread in another forum? If yes, please suggest.

660ky612
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Emerging Doc -- Reits

Post by Taylor Larimore »

I called 3 different people last night from different realms of investment. One is an AG Edwards Agent, One is a fee only advisor, and one is a European banker. They were all unanonymous that Reits in the U.S. are heading down in the next 18 months
.

I have learned that when most investors are bearish (including 'experts'), it is usually time to buy.

We will stay-the-course.

Thank you and best wishes.
Taylor
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Re: Emerging Doc -- Reits

Post by White Coat Investor »

Taylor Larimore wrote:
I called 3 different people last night from different realms of investment. One is an AG Edwards Agent, One is a fee only advisor, and one is a European banker. They were all unanonymous that Reits in the U.S. are heading down in the next 18 months
.

I have learned that when most investors are bearish (including 'experts'), it is usually time to buy.

We will stay-the-course.

Thank you and best wishes.
Taylor
Ha ha. I was just about to say the same thing. Well put Taylor.
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Post by Equity Style »

Hey guys, all the people I talked to have one thing in common. They are contrarians. The majority of brokerage houses still recommend REITS. Overall, the market thinks REITS are going through a small correction.

To keep putting money in Reits is to follow the herd. The vast majority are still holding on. If you wish to go against the consensus sell your Reits now and short them or purchase a short REIT fund such as ProFunds. Don't follow the lemmings off the cliff!

For what its worth Ben Stein is Bullish on Reits, except for the next 18 months. Ben Stein is not a herd follower.

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Post by White Coat Investor »

Equity Style wrote:
For what its worth Ben Stein is Bullish on Reits, except for the next 18 months. Ben Stein is not a herd follower.

Equity Style
No, but we've established that his recommended portfolio changes every month or so. Will yours?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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Post by Equity Style »

My strategy does not involve frequent change in positions, usually 8-10 changes in the overall style selections per year. However, I have made no changes in my system in more than 10 years. Before that I used the same system but with Index funds (my returns have been better using the best fund in the style)

I have been running numbers as to how the strategy would perform in a taxable account. By keeping each fund for a minimum of 9 months I think it would be profitable above the taxes incurred. By doing this the average fund holding time would be close to two years. Most earnings would then be long term capital gains which are taxed at a lower rate. However, it would be necessary to pick funds that were tax efficient to decrease taxes while holding the fund. I think this can be done, but I doubt you would get much more return than buying the index or ETF of the style. As all Bogleheads know, index funds and some ETF are tax efficient.

If anyone wants I will make a portfolio of ETF's and/or index funds for taxable accounts to use in dummy portfolios. Only after it has a positive tract record would I invest. I am a doubting Thomas. I must see to believe. I see only with a jaundiced eye and always from angles others don't bother to look.

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Post by Equity Style »

Although I don't use charts for investments sometimes they are good to use for predicting how far a style will drop. (Doesn't seem to work the other way around.) Seeing that REITS have dropped below the 200 MVA with a substantially negative trend line it appears a drop between 15 and 20 % for the year is the most probable.

EmergDoc, maybe after seeing that I am correct with this call you might come to believe in my investment strategy. It is not so difficult, just question everything and remember cycles exist.

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Post by Equity Style »

Emerg Doc

Thanks so very much for bringing the declining REITS to my attention. I decided to short at 78 and covered about 71 for a hefty positive return on my investment.

I also purchased a fund that shorts the REIT and have had a 30 % gain over the last 3 months.

At the present, friends don't let their friends invest in REITS. Hope you have already sold your REIT interest. It will fall some more over the next 6-12 months.

Also, my returns over the past year as of today are 18.3%. Of course this is a greater than 5 % of any of the indices. Equity Style Timing works as well today as it has over the last 20 years!

Equity Style
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