Equity style rotation

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rich
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Post by rich »

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.
You have to be careful with Ben. Ben has excellent advice mixed in with truly horrible advice. This makes him dangerous.
Best regards, | Rich
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Post by Equity Style »

Ben Stein is a good comedian but not so great with investment advice.

REITS are in trouble and will continue going down. Some brokerage firms are still recommending these dogs.

Mr Larrimore

My "system" usually results in a contrarian movements. Getting out of REITS
and small value at the beginning of the year was against the majorities advice. I don't know of anyone who recommends the large overweighting in foreign funds as I do.

The "system" has worked over the past 20 years. Who knows about the future, but I believe that it is a good way to invest at least this year. No anyone else who has 20% returns YTD?
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Post by White Coat Investor »

Equity Style wrote: I don't know of anyone who recommends the large overweighting in foreign funds as I do.
You need to make some more friends then. I don't know anyone who doesn't recommend a huge helping of international these days.

Let's see where our REIT bet stands after 3.5 short months.

June 30-$23.54
Oct 23-$23.68+$0.24 distribution on 9/20.

Looks like I'm still winning on this one. Don't worry, there's plenty of time for a comeback.

I suspect with 8 different asset classes your method may be able to take advantage of the momentum phenomenon without getting slammed with the severe downturns you occasionally would see using a 1-2 asset class method. I wouldn't be surprised to see superb long-term returns IF YOU ARE SHIELDED FROM TAX AND TRANSACTION COSTS.

Although I'll confess I don't see a point to using actively managed funds to implement your strategy.
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Post by Equity Style »

Thanks for replying ER Doc!

Reits had already gone down about 15 % from there high when you "Bought in" I expect another 15-30% drop in the next year to 18 months. I'm not going to short anymore as the roller coaster ride was too much for me.

The best 3-4 managed funds in any class outperform the index by 3-5% sometimes more. Example: America Century Heritage Fund has dramatically outperformed the Mid-Cap Growth Vanguard Fund. The T Rowe Price Emerging Market fund has outperformed the Emerging Market Index Vanguard fund. These are just two examples. I can provide more if you would so wish.

Whatever Equity Style is doing the best, the managed funds will always outperform the indexes. The same is true vice versa.

Sentence deleted for political content.


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Post by White Coat Investor »

Equity Style wrote: These are just two examples. I can provide more if you would so wish.

Whatever Equity Style is doing the best, the managed funds will always outperform the indexes. The same is true vice versa.
Whoa tiger. Now you're talking craziness. Of course in retrospect you can identify a few funds that beat the indices. The tricky thing is identifying them in advance. It turns out that this is very difficult.

In my experience, when a particular asset class is booming, managed funds underperform the index and when a particular asset class is busting, managed funds tend to outperform the index more than usual (but not necessarily more than 1/2 the time.) The main reasons for this are the cash drag and style drift. I think Bogle documented this effect very well. You did read at least one of his books before joining the forum, right? (If not I highly recommend it, at least so you can understand another very good method of investing.)

Morningstar also publishes an annual report on what percentage of funds in each asset class outperform their respective indices and it isn't pretty for the managed funds. I'm sure if you PMed Taylor he could provide the link from this year's report.
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Post by Equity Style »

Emerg Doc

I have read all of Mr. Bogles books and on a few, though rare, items he is utterly incorrect. He could never espouse an equity cycle strategy in that it would cause outright havoc with Vanguard Funds. Everyone would have put there money in Growth last March and sold ALL their Value positions. Even though most, if not all, large broker funds use a form of equity style timing, they are not about to let their clients in on the secret. One of my friends at Merrill Lynch told me that about everyone in the office uses a form of equity style timing in their personal accounts secondary to the increased return. I know this goes against Mr. Bogles ideas, but this is one of the very rare areas where he is just wrong. I am certain that if I could hook up Mr. Bogles to a lie detector test, he would at least admit that a stragedy such as mine can work.

First, my returns over the past 20 years at an average of greater than 18% per year is strong evidence that the stragedy has worked in the past (who knows about the future? Maybe Hilliary gets elected and the market goes down the tubes so bad it never recovers.)

Now lets look at the current facts:

Mid-cap growth

American Century Heritage YTD 38.3%
Vanguard Mid cap growth ETF 16.90

Large cap growth

Marisico Columbia 2001 fund 20.6
Vanguard Large Cap Growth ETF 12.85

Emerging Market

T. Rowe Price Emer Market 38.1
Vanguard EME. Mark. ETF 34.10

International Growth

Thornberg Int Value 30.25 This is actually a Growth Fund
Vanguard Int Growth 16.47

LOOK AT THE SUBSTANTIAL DIFFERENCE IN RETURNS! These are from funds I own. This is why I earn more.

The problem with your rebuddle is simple. Morningstar and Mr. Bogle take an average of the Managed Fund returns in any Equity Style. I use only the best funds in the class. Such is easy to ascertain and leads to fabulous results. If you don't believe me, look at the data at FUNDX. They use a similar system with much higher expenses but have beaten the S and P over 20 years and 10 years respectively. Even Paul Merriman, a strong proponent of Buy and Hold, and Index funds has told me personally that he knows my system works, but it is not feasible for large investment firms as trading once a year is too often and the shifts among equity styles is too rapid.

As of today, I am up 20.7% for the year. Although I am up more than the traditional 3-4 % above the S and P, it is further proof that I am correct.

Read over what I said and a supremely inteligent person such as yourself will understand why you have been misled been misled by Mr. Bogle.

I am a Family Practice Doc. I make more money on my investments than I do from my work. Even though my initial investments were small, an annual return of 18% means my funds double every four years. X to the fifth power is a big number no matter what you start out with! I thought about retiring but love being a doctor too much!

I hope I am helping you earn more. That is my only intent.

Equity Style
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Post by Equity Style »

Emerg doc

One thing I forgot to mention. It is not hard to pick the funds that will perform better than the mean. Just check the last 6 month return and purchase that fund. The momentum will continue and that fund will constantly outperform. I check about once every two weeks to see if I need to change positions. I haven't changed now since May.

In a taxable account I try to hold on the a position for at least a year to make the advantage of long term capital gains. My taxable position is actually doing better than my 401K. I have made no changes since March. I sold my REITS then. I had held them actually for several years.

Maybe I should write a treatise and explain my system. I haven't done so since it would take up too much space. I love reading all of the great and well thought comments!

Also, I forgot to say that I highly esteem Mr. Bogle. Anyone who follows his advice and ideas is sure to beat the market return and do better than 90% of investors. I just want to be in the top 1%. Add my ideas to those of Mr. Bogle, and I believe just about anyone can outperform 99% of investors over a 5 year cycle.

Equity Style
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Post by White Coat Investor »

Equity Style wrote:I have read all of Mr. Bogles books and on a few, though rare, items he is utterly incorrect. He could never espouse an equity cycle strategy in that it would cause outright havoc with Vanguard Funds.... I know this goes against Mr. Bogles ideas, but this is one of the very rare areas where he is just wrong. I am certain that if I could hook up Mr. Bogles to a lie detector test, he would at least admit that a stragedy such as mine can work.
Gutsy thing to post on this forum. BTW, why would Bogle care if investors "wreck havoc" with Vanguard funds?
Equity Style wrote: First, my returns over the past 20 years at an average of greater than 18% per year is strong evidence that the stragedy has worked in the past .....LOOK AT THE SUBSTANTIAL DIFFERENCE IN RETURNS! These are from funds I own. This is why I earn more.....Morningstar and Mr. Bogle take an average of the Managed Fund returns in any Equity Style. I use only the best funds in the class. Such is easy to ascertain and leads to fabulous results....As of today, I am up 20.7% for the year. Although I am up more than the traditional 3-4 % above the S and P, it is further proof that I am correct.

The fact that you have had excellent returns over the last 20 years is not evidence that your system works, especially given the fact that you've only been using it for just over 10 years. It is impossible to tell #1 whether you were good or just lucky and #2 if you actually know how to calculate your returns accurately and whether you state them truthfully. Not to be offensive, but in an internet forum one can say anything they want. Regarding your current returns, I recall you said above that you are something like 62% International, I suspect with a fairly good percentage in emerging markets. Given that emerging market stocks are up 43%+ this year, I'm not surprised your portfolio is having a great year. This has little to do with your ability to pick winning funds and a great deal to do with your current asset allocation. It also does not provide evidence as to whether you are lucky or good. (Although I'll confess, it is better to be lucky than good.)
Equity Style wrote: If you don't believe me, look at the data at FUNDX. They use a similar system with much higher expenses but have beaten the S and P over 20 years and 10 years respectively.
I note on their website that they list 4 "classes" of mutual funds. The returns of two of the classes are no better than the S&P 500 over a very long time period. The other two seem to have done pretty well. I find it interesting that the "recommended" one is the one with the best past performance.

Looking at the data in Morningstar for "FundX Upgrader" a fund of funds that follows this strategy, apparently established in 2003, it shows returns of the fund for each year. I'll compare these below to two low-cost, broad index funds.

FundX "Upgrader"

2003 33.1
2004 13.2
2005 14.1
2006 20.8
2007 15.7

TSM

2003 31.5
2004 12.5
2005 6.0
2006 15.5
2007 9.1

TISM

2003 40.3
2004 20.8
2005 15.6
2006 26.6
2007 17.0

Hardly convincing data. And this is all pre-tax.

Let's look at last 5 years avg annual return for each of these three funds:

FundX Upgrader
Pre-tax 19.41
Post-tax 18.63

TSM
Pre-tax 16.31
Post-tax 15.97

TISM
Pre-tax 25.43
Post-tax 24.73

So it looks like the system is even worse in a taxable account, although surprisingly tax efficient in my opinion considering its methods. I also wonder how many FundX incubator funds there were in the beginning.

It sure seems to me that I could do about the same by buying 1/2 TSM and 1/2 TISM and forgettin' about it.
Equity Style wrote: I use only the best funds in the class. Such is easy to ascertain and leads to fabulous results.
I disagree and so does every investing expert I have ever heard of. Even Petrocelli, perhaps the greatest proponent of momentum investing on this forum, recognizes the difficulty of doing this, aside from screening for low costs. Your suggestion to just pick the best performing fund over the last 6 months seems foolhardy to me. Also I note that you have only been following your system for just over 10 years, yet you are quoting multi-decade track records to show success. That smacks of data-mining.
Equity Style wrote: Read over what I said and a supremely inteligent person such as yourself will understand why you have been misled been misled by Mr. Bogle....I hope I am helping you earn more. That is my only intent.
Thanks. I think. There are worse things in life than being "misled" by Mr. Bogle.
Equity Style wrote: Even though my initial investments were small, an annual return of 18% means my funds double every four years. X to the fifth power is a big number no matter what you start out with!
Perhaps you could enlighten me as to how an annual return of 18% is the equivalent of X^5. I was no math major, but this makes no sense to me. As near as I can tell, what you are trying to say is that you have had ~5 doubling periods for your first investments. $1000 doubled 5 times (X*2^5) is $32000. $1000^5=$1000000000000000 (give or take a few zeros)
Equity Style wrote: I am a Family Practice Doc....I thought about retiring but love being a doctor too much!
Enjoy your practice and congratulations on your investing success. Perhaps you better write that treatise after all, because I'm certainly not convinced that "equity style" market timing using actively managed mutual funds is superior over the long haul to holding a fixed asset allocation of indexed mutual funds.
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Post by Equity Style »

Emerg Doc

Thanks for your excellent post!

The only fund to consider at Fundx is their premier fund. They have data on this type of fund back for 20 years. Paul Merriman has done a good analysis of a similar (also better) momentum strategy and found better returns than the S and P. He also vouches for the fact that Fundx has outperformed the S and P over the past 20 years.

My system has not changed in 20 years. I just don't have good data as to when and how often I changed my positions from 1986 to 1990. The data I have from 1990 to 1993 is sporadic. From 1994 on I have pretty good data as to when and how often I changed positions. The greater than 18% returns is hard data; My original money in 1987 is now worth 32 X my initial position. This plus an unexpected return on some business Real Estate (invested $ 30,000 in 1993 cashed out last year for $ 620,000) has made it where I could retire if I wanted to.

I don't expect for anyone to believe me. However, if they will try the system over several years it becomes evident that it works. I would never expect that someone would invest based on my discussions without first thoroughly investigating the results on ongoing future data. Everyone who gives the system a trial will come away a believer.

Couple of things, a better site for a system that is surprisingly similar is that of the Eric Dany's Prospector's Newsletter with the "nugget system." The site has good data over the past 9 years. They will give you any further documentation that you might wish. Also my ideas came from some articles from investment journals. Some are posted already on the thread.

Lastly, the system automatically drifts to the styles that are doing the best. That is why I have a large position in extended markets. That is where the momentum is. I also do not rebalance until I liquidate a position. Such allows for further momentum advantages.

I was going to start publishing an online investment letter. However, I didn't want people to follow part of the plan but not all and end up losing money through emotional positions. Also my system is so similar to Mr. Dany's that another news letter is not needed.

Your observations are astute and provide ample evidence for not only your superior intellect but considerable wisdom. I am sure you will be a successful investor whether you reject my ideas are not.

Equity Style
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Post by tc33 »

Equity Style, thanks for your candor. Would you mind recapping the math that drives your buy or sell decisions? Example: buy the asset class that has sustained outperformance for the past X months/years...sell the asset class that has sustained underperformance for the past X months/years...how to spot/follow a cycle, etc...

This is a timely post; I read a couple of interesting academic articles on momentum investing recently, but the math was way over my head. Thanks

Tom
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Post by Ariel »

Here's one strategy, widely trumpeted over the years, which Vanguard Institutional Investors researchers have tested and found wanting. Full report in PDF linked to this site.

Of course, other strategies will become favored, and there will always be big winners ... and big losers. Guess which ones are more likely to post (and boast!) about their past results? No insult intended to Equity Style, just pointing out what seems to me a fact of life ...

Good luck to all.

https://institutional.vanguard.com/VGAp ... Equity.jsp
Do what you will, the capital is at hazard ... - Justice Samuel Putnam (1830), as quoted by John Bogle (1994)
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Post by Equity Style »

Thanks for the good posts!

I took calculus in college and for the first time I used it when I was reading the articles in regards to Equity style timing.

Here's how I pick my funds.

First, I check which equity styles having been doing the best over the past 6 months. I use the same square that Morningstar does for the US positions. I make my own up for the International. There are not many funds in the small and mid cap areas in the International so I group mid and small cap together here. Next I add Convertibles, Global funds, REITs, and Commodity Mutual Funds. Finally I check to see what the earnings are over the past 3 months between gold, bonds, and stocks. I add bond funds to the mix when appropriate (2000-2003 for example.)

Now after calculating the returns of each class, I invest in the top 8 styles. I pick the funds by purchasing the best performing funds available in each style. The funds I pick do not have to be "pure" funds and can invest outside their box. For example, I own American Century Heritage. A good based Mid-Cap growth fund, but with 20% oversees. Presently I am invested as follows.

Large Growth
Mid-cap Growth
Mid-cap Blend
Commodities
Large International Growth
Small-Mid International Value
Small-Mid International Growth
Emerging Markets

Presently I haven't changed in several months. My last switch was from Large International Value to Mid-cap blend. I also switched from Mid-Cap Value to a Commodities fund.

I try not to change whenever possible. The more times you trade the more chances one has of getting caught in a seesaw or head-fake.

At the end of last year I was proportioned as followed.

Large Cap Value
Mid-Cap Value
Small Cap Value
REIT's
Large International Value
Small-Mid International Blend
Small-Mid International Value
Emerging Markets

I rotated from Value to Growth in the first 3 months of the year. Whenever the Value funds hadn't done as well as the Growth funds for 1,3, and 6 months it was time to shift. This year I traded more than usual. Sometimes, such as 2004, I didn't change at all.

In regards to the Vanguard article, I remember reading it some time ago. Most of the things in the article are correct. However, if one removes the timing aspect and chooses styles based on mechanical means, then my system is not actually addressed in the article. Market timing is a hoax.

What makes the program work is that it is not based on investment details nor expectations. It is based on the fact that style trends do not switch back and forth very often. It follows cycles that are 18 months to 5 years long. It follows cycles for many reasons. However, the data that takes out the uncertainty is the psychological information. Humans want to be with the winner and will always migrate to the best performing style. After a few years the movement loses its momentum as there are no more buyers. Then the style goes down and most jump ship to the new best performing style. I won't bore you with the details, but in the end my system is based on the predictibility of certain human behaviors in certain conditions. (Mr. Fisher gives a fairly good explanation in his recent book.)

Hope this helps.

Equity Style
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REITS vs. Large Cap Growth in last 6 months

Post by Equity Style »

Please compare the last 6 months charts of VNQ (Reits) and VUG (Large Cap Growth. Presently equity style "timing" is out of Reits but in Large Cap. This is inverse to this time last year.

One can see lower lows with lower highs in the REITS and higher highs and higher lows in the Large Cap Growth index. This is indicative of the present momentum; down for REITS and up for Large Cap Growth. (Once again this was opposite from last year.)

Such is another way to look at momentum and how such can be tapped in investment decisions.

After the debacle of returns since October 31, I am still up 10.5 % for the year. My returns continue to outpace commonly used indexes such as S and P and World MSCI. Such has been the case for almost all 6 month periods since 1994 (there were 3 periods where the S and P outperformed my holdings.)

My ideas are so contrary to current thought that it takes some time to digest. It can easily be back tested. However, the best proof is just to watch it for a few years to see how it works. Since it is based primarily on human behavior future results should correlate with past results. However, no one knows the future and if there might be a radical paradigm shift.

Please do not invest using my strategies until you have back-tested and "forward-tested" the relevant data. It is essential that mechanical methods are used free of human emotions.

I have made a change in my positions. I have sold my Mid-Cap Blend position and switched to Large Cap International Blend. Such places me with a substantial shift to Internationals.

Hope this helps understand my "system" better. I have no hidden agenda. I only want to share my ideas to hopefully help others in their investment decisions.

Equity Style
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Just a question if I may....

Post by CountryBoy »

As you know people here are always glad to engage in informed and courteous discourse. And I agree with you, Equity Style, I too am, as you say, a doubting Thomas and I am curious why you posted the thread?

1-Was it because as you say:
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.
2-Do you have doubts and wish to be tested re weakness in the strategy?

3-Or are there not enough yachts for the brokers sailing about and you are looking for more customers to come over to your way of thinking?

And finally, I do not know the name of the specific economic law that governs market behavior in this case, however, there is one ( not EMH) that says if everyone in the market comes to know or believe in something and to change their behavior accordingly then the market will in turn behave differently because of that and in so doing won't that neutralize your own strategy- if we all become stock rotation strategists?

Many thanks for the informed discussion on the part of everyone.
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Post by Equity Style »

Thanks for the post.

Back in the late 1980's I studied the history of Vanguard and was impressed with Mr. Bogle's writing. I took some of his ideas and tried to have them make sense. The only conclusion I could draw is that investments had a great deal in common with "herd mentality." I then started studying psychologically theories (I am a physician who also has a degree in Philosophy) to see if they might be applied to investments and investment behavior. From such I made the first precursor of my present system. I placed the system in effect in the fall of 1987. Based on the same plan I presently used, I actually could only buy bonds and stay in cash. Soon after there was a significant correction afterwhich I purchased stock mutual funds. At first I only used Index funds until I learned that the best performing fund in any particular equity style with momentum would perform better than the corresponding index fund.

Over the past 20 years (probably before also) research articles began to appear with further substantiation to my "system." Besides, of course, that the system was bringing in better returns than any of the indexes. I must credit Mr. Bogle with most of what I understand about markets. Hence I enjoy reading the threads-lots of good ideas that are well thought out.

If everyone started using equity style rotation it would, or course, lose its investment advantage. However, this is unlikely because-

1) People can't stick to an automatic system when the market suddenly goes down 10 % as it has done this month. The fear becomes too great.

2) Companies such as Vanguard would suffer substantially as most of their investors switched from one style to another. For example, if everyone switched to Large Cap Growth from Small Cap Value. The constant "run" on the funds would cripple the industry. (or at least change the way they do business.)

3) Too many institutions and investors will stick to a tried and true buy and hold strategy. With so many trillions just trudging along there will always be an advantage in equity style rotation. True , the percentage improvement might be less.

I have no ulterior motives, nor financial motivation. I am a simple Family Practice Doctor who forced with a lowering salary every year, had to come up with some way to supplement my income. I make the same as I did 15 years ago. Correcting for inflation I only make 1/2 what I did in the 80's and early 90's. Now I am actually making less every year with the same work plus losing to inflation. I could become a financial consultant and make much more money that being a physician. (I actually have found more than 20 occupations where I could make more money than being a physician within one year.) But, I like helping people and love being a doctor. My system has allowed me to maintain my standard of living in spite of constantly dropping earnings. Now I just want to share with others my investment ideas. If everyone thinks I'm nuts, that's OK. I know my system works and probably will continue to do so for the foreseeable future.

Thanks for the great questions!!!
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ES

Post by CountryBoy »

Thank you for your very comprehensive response and congratulations on developing a system that beats the market.

While I am sure it works for you, I do not believe that personally I have the time to manage a portfolio that can be characterized as having durations or holding times typically in a range of:
I try to keep a fund for at least 3 months
For my part, I have set my AA; I review it once a year; and hold on for the long term.

Wishing you continued good luck.
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Post by Equity Style »

Thanks for the response. Following a system with sufficient diversificaton and changing it once a year or every 18 months has brought substantial returns over the past 25 years. Can't go wrong sticking to your strategy.

Paul Merriman actually has a system similar to mind where you trade every year only. He has some data back about 25 years with the system and it outperforms the S and P. He has a good web page at Fund Advice. com. He occasionally has Mr. Bogle as a guest on his weekly talk show.

With my system one does need to check at least once a month. If no changes are necessary, then it only takes a few minutes. Sometimes it is time consuming. When I switched out of Value and REITS, it took some time to find the best alternative funds to rotate them into. It never takes more than 2 hours a month. If my system is constantly watched, then the emotions of losing 3 % in a day, or losing 10% in 2 weeks might be overwhelming. Once a month is a good compromise.

Equity Style
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Year end results

Post by Equity Style »

The year is over and the results are in:

Equity Style: 18.45%

S and P: 3.5%

2007 was the first year I beat the S and P by so much in a year where the S and P was not negative. Part of this was my system, but part was luck as my commodity fund was up over 40% and my Mid-cap Growth was up 50%.

Changes for the new year:

Sell both mid cap international value and growth

Sell Mid-cap blend.

Buy International Blend/Growth
Buy Large Cap Blend
Buy Global Fund (such as Vanguard global)

Of course beating the S and P for one year is probably no big accomplishment. However, beating it 20 of the past 21 years is no accident.

Looking forward to trouncing the S and P yet again in 2008!


Equity Style
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Post by ken250 »

I've studied 2 style rotation approaches. I found both to make sense; however, I found the implementation to be virtually impossible...for me at least.

Where do you find the time to do this, how many sources do you use to track the business cycle, and how do you decide which source to act on?
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Post by Dead Man Walking »

I’ve read the posts to this point and want to throw my two cents in the fray. I am an asset allocator who is conservative to a fault. I do not have a system of investing other than allocating assets to equities, bonds, and cash. I will admit that my equities have a slight value tilt and my bond allocation is short to intermediate term. Therefore, the system I am proposing is not supported by academic research, back testing, or any form of scientific investigation. The fact that it is not supported by any form of investment porn may make it a viable system.

My proposal is simple to execute if one can determine which equity style is hot. (This is much more difficult than determining which members of the opposite sex are hot at the beach!) However, an investor may try to determine the hot equity style by examining the performance of Vanguard’s index funds for the domestic market at M*. For the purposes of my system, I chose to use the growth and value indices for large, mid, and small. I selected the following time periods: 3 mo., YTD, 2007, 3 yr., 5 yr., 10 yr., and 15 yr. So far, so good. The tough task is determining which time periods to use to determine which styles are hot. Since the mid-caps only have a history of about 17 months, I decided to use the 3 mo. and 2007 returns to make my decision. Upon examination, the mid-cap growth index seems to be the sweet spot with a TR of +17.30% for 2007 and only down 5.34% for the past 3 mo. On the other hand, large growth had a TR of +12.56% for 2007 and is only down 4.93% for the past 3 mo. Large value and small growth are in a dead heat for third place on the 3 mo. performance chart. What the hell is up with that! How can large value and small growth be in lock step with one another?

The weakness of my proposed system is that it can only be executed properly with domestic equities because the idiots at Vanguard do not provide index funds by capitalization for international equities. Furthermore, the only choices offered for growth and value are actively managed. Maybe the powers that be at Vanguard will read about this system and get with the program. Maybe a .5% purchase fee would motivate them.

A system similar to the one used for domestic equities could be used for bonds by utilizing Vanguard’s indices for short, intermediate, and long bonds. REITs are a different situation. You just have to decide when to be in and when to be out based on performance. According to M*, REIT index is down 22.68% for the last 3 mo. REITs ain’t in the sweet spot!

DMW
dougpnca
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Post by dougpnca »

Equity Style:

I'm fairly new to this site so I missed all the fun of the earlier discussions, but was intrigued by the thread & have read all the posts. Whew!

Comparing a system such as yours to the S&P 500, MSCI, or any single index is the proverbial apples & oranges comparison. Since the idea of any mechanical system is to beat the market, can you compare your portfolio's returns to those of a portfolio of index funds of the various markets, held in the same proportions as your various positions? For example, the performance of your US equity holdings compared to Vanguard TSM. Similarly, all you int'ls vs Van TISM.

Somewhere above you mention 62% foreign (a few months back) & I'm guessing you don't hold fixed income, so that implies 38% US. Assuming this mix was held for the entire year, you just compare your portfolio return to a return of 62% of TISM + 38% of TSM to see if you truly beat the market. Of course if your weightings changed during the year you need to rationalize the weightings & time periods to come up with a valid comparison.

Your system may very well beat the markets but I suggest that this may be a more valid performance comparison. For what it's worth, I'd be willing to bet most of the folks on this website beat the S&P last year. There was a thread a week or so ago asking about 07 returns.

Your thoughts on this type of comparison?

dougP
no matter where you go, there you are
dagogo
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Post by dagogo »

Equity Style, how do you calculate a 6 month return for the various asset classes (large blend, large growth, etc)?

For example, all of the financial sites I go use (yahoo, msn, etc) only give you 3-month, YTD and 1-year returns for a fund or etf, so how do you get a 6 month? Do you use an average of the last 2 sets of 3 month returns?

Even more importantly, how do you choose which fund from each class you're going to calculate the 6-month return for...or do you use index returns?

Take Large Growth for example...you want to calculate a 6 month return to see if you need to buy or sell, where do you start?
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Equity Style
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Post by Equity Style »

Thanks for the good posts!

I have compared my results against the total stock market funds via back testing and have found I actually do better against the total stock market funds. The times the S and P beat me were when Large Growth was dominant. The small and mid caps of the total stock market weighed down this index during those times so my portfolio is up every year over the last 10 in such a comparison. As to comparing index funds in equal proportions, my system always has had significant gains over index funds. For example, my mid-cap growth fund earned almost 50% last year, far above the Mid-cap growth index.

I obtain my 6 month data by calculating it myself. Such is difficult during times of capital gains and dividends. I also use the Fundx newsletter which has 6 months results for many funds.

Now is an interesting time for Equity Style management. There are only 4 styles that are above the return of Bonds over the past 6 months. As of today (before closing), these are Mid-cap Growth, Large International Growth, Commodities Index, and Natural resources funds. Over the past 3 weeks I have been moving into Bonds for the remainder of the portfolio. Such has sheltered me significantly from the recent downturn. I am now 50 % in bonds. If there is much more of a drop, Mid-cap Growth and Large Cap Growth International will need to be sold.

Here's how I did it. BREAX gained almost 30 % for me in 2007. However, its past 6 months gains dropped below that of some of the bond funds (Oibax, Pttax). Hence, I sold BREAX and moved into the best performing bond funds. If BREAX moves above the best bond funds over a future 6 month period, then I will buy it back. So far, most times I have done such I have boughten in on the upswing below where I originally sold.

I don't think (for what its worth) that we are in a Bear market. I expect to be back 100 % in stocks before the year's in.

As to the gentlemen who has proposed a system similar to mine, I will need to study it to see how it would fair compared to mine.

Thanks again for the excellent posts.

Equity style
dagogo
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Post by dagogo »

ES, if you are comparing returns between managed mutual funds, how do you know whether it's the asset class or the manager who's responsible for the better return?

There is usually a large range of returns for managed funds within each asset class...are you using category average returns like morning star gives?

Do you always use the same funds? If not, how can there be any consistency to this approach (of choosing the top performing 8 classes) if you are always evaluating the returns of different funds. Isn't there a problem in that any fund you own can outperform it's own class to the point that comparing returns between classes becomes meaningless?

The only accurate way to determine which asset classes are truly outperforming the others is to compare the index returns (ala russell, msci) No?
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Equity Style
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Post by Equity Style »

Answer to most recent post:

In earlier posts I mentioned that I use a Morningstar boxes for the US part of the polio. For the international I use a 6 box arrangement. I then include Convertibles, Commodities, REITS, Gold, Utilities. Next, I pick the 8 dominate styles. Then I find the best performing funds in each "box"

Sometimes, such as the present, bonds or cash actually are performing better than stocks. I divide bond funds into Emerging Market, International,
global, GNMA, Corporate Intermediate, Corporate short, Corporate long. I divide the International up by credit risk using the morningstar boxes.

Presently, I am invested in Commodities, Emerging Markets, Natural Resources, International bond, Intermediate Corporate bond, Global bond, and cash. I am in two types of Commodities, an index style and a managed fund. Both Emerging Markets and Natural Resources are near the brink of being beaten by bond funds and will soon be sold if the downturn continues.

I will move back into stock funds as they begin to outperform bonds on a 6 month basis. In the past I have always bought back in at a lower price than I sold resulting in significant protection from downturns. Such was especially true during the BEAR market of 2000 to 2003 where I was able to have small positive returns while the stock markets were consistently negative.

The system is fairly easy to use. However, it must be completely mechanical and emotions are not allowed. One of the reason the system works is that it takes advantage of the "I can't stand it anymore" market timers. They buy when everyone else has already made profits and sell when they can't stand the pain of losing anymore. Because of the latter reason, I expect the market to continue down and then JUMP back in a few months. However, I follow the system and do not introduce my expectations or charts, nor commentaries to interfere with my investment decisions.

I am happy to answer questions. I have no alternative motive other than to be helpful.

Emerg Doc: Sorry I won the bet. Hope you are already out of REITS - they still have a ways to go on the down side.

Equity Style
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Post by Equity Style »

EmergDoc

It may be almost time to buy REITS again. They seem to have formed a bottom. Only time will tell.

The present downtrend in the market is probably close to being over. Most of the downturn was based on unrealistic fears. It might still go further south for awhile, but it will be moving up soon, probably moving up quickly.

I am already getting signals that the Emerging Market and Small-Mid Cap Foreign funds are stable or moving up. Commodities continue to perform fairly well. Large mid-caps with a large amount of financials have been improving.

Since the New Year I have spent more time with moving funds than usual. It appears I might have done just as well by waiting. We'll have to see over the coming months.

Equity Style
Peppe
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Post by Peppe »

Would doing the same thing as this style, but looking for the biggest losers provide better results?

Seems to me if you are looking for the recent high performers you have already missed a significant gain from their rebound from the low. If you are selling positions as they fall out of your top eight you are selling after they have begun the decline. Buying on the way up and selling on the way down.

If you picked the biggest losers, you might tend to buy toward the low and then sell when another big loser comes up.
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Post by White Coat Investor »

Equity Style wrote:EmergDoc

It may be almost time to buy REITS again. They seem to have formed a bottom. Only time will tell
I bought REITs at this price 4 weeks ago with my annual Roth IRA contribution. I can't remember the bet, but if my bet involved REITs performing well the last few months I'm pretty sure I lost it. I think weeks like last one demonstrate just how tough it is to time the market. If you were waiting for REITs to start improving before buying, you would have missed a 12.1% run-up in 3 days.
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 NoMoreInvestingExcitement »

Clutch Cargo wrote: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
EmergDoc wrote:Whoa tiger. Now you're talking craziness. Of course in retrospect you can identify a few funds that beat the indices. The tricky thing is identifying them in advance. It turns out that this is very difficult.

Wish I had gotten in on this sooner ... most of my potentially good responses have been used already (two examples above).

I wish you the best Equity Style.

As for me, however, a significant part of the reason I'm a Diehard is that, while I do want reasonable investment returns given the risks I take, I also want a life outside of my finances.

Even if your system provides the benchmark-beating returns which you describe (a question others on this forum have done quite a fine job of putting at serious issue), it seems to me that the time involved in implementing and perpetuating your system would overly complicate my financial life to the point of excessively intruding on my real life.

Slicing/Dicing/Tilting and other various "minor tweaks" that are often discussed by Diehards as attempts to add a tad more return to their hard won investment dollars are interesting enough (and risky enough) for me, I'm afraid.

I neither want nor need to bear the added risk your system presents as compared to a by-the-book Diehard portfolio. Nor would I ever seriously consider going back to an investment life that focuses so heavily on the actively-managed funds in which I used to (unsuccessfully) invest.

All the best to you. NMIE
Unlimited online financial info's great, but I'd rather my compass just kept working.
dagogo
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Post by dagogo »

Equity style, you kind of danced around my last couple of questions as to your method of selecting the 8 "best performing" asset classes.

You stated that you find the best performing funds for each "box"...but you still haven't told us what data your using to arrive at your rankings.
You mention that you calculate and compare 6 month returns...but returns from what?

-Returns of some type of category average for each class? If so how do you define the categories or are they from a newsletter?

-Returns of a single best performing fund from each asset class?

I tried ranking the indices and found the difference in returns was less than 1% in a couple cases. With this scenario, you could easily have actively managed fund from asset class #10 outperforming an index that was ranked #8 . At that point you are not ranking the asset classes, so much as you are the active management.
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Backtest failed; SR needs to SHOW ME THE MONEY!

Post by Eric White »

Bogleheads,

I'm a numbers guy. I find these hypothetical discussions and returns bragging about as exciting as my college humanities classes. So, I ran a backtest to...SHOW ME THE MONEY!

Given that TrevH & Simba are our uber-asset allocation backtesting gurus, I "borrowed" the asset subclass data from the most recent asset allocation spreadsheet (Backtest-Portfolio-returns-rev7d.xls) as the foundation.

Caveats/Limitations:
1.) This data is ANNUAL. This backtest cannot determine sensitivity to FREQUENCY (e.g. 1 year vs. 3 month vs. 1 mo).
2.) This data uses index fund actual returns and limits returns from hypothetical indexes. It excludes hot active management fund returns and therefore excludes management excess returns / "alpha."

Please download and review the backtest I created for the proposed Style Rotation strategy:
http://groups.google.com/group/vanguard ... %2C+v1.xls

Style Rotation (SR) generally fails in the backtest:
1.) Most simple portfolios defeat SR when 12 or less asset subclasses/styles are used. SR defeats simple portfolios when 13 or greater subclasses/styles are used (~50% of available asset subclasses/styles in the backtest).
2.) Reasonable Slice & Dice portfolios ALWAYS defeat SR regardless of the number of asset subclasses/styles used. They defeat it by a healthy annualized margin of between 1% and 3.3%, depending on the number of asset subclasses/styles used.

I respectfully ask Equity Style and my oh-so-friendly Bogleheads to review the backtest, find gaps/improvement areas, and SHOW ME THE MONEY! If you think that SR FREQUENCY or ACTIVE MANAGEMENT is the dominant variable, please provide the supporting data with backtest spreadsheet(s) OR at a minimum links to the academic research. Without this, I find the assertion that Style Rotation will result in any meaningful improvement over reasonable Slice & Dice Buy & Hold portfolios unfounded.

In the meantime, I suggest Bogleheads properly diversify across asset classes to manage your time horizon, Slice & Dice to reduce equity subasset class risk, and STAY THE COURSE. Until SR is realistically proven, enjoy your free time; I think I may have invested too much investigating SR this evening. :wink: I gave one for the team!

EmergDoc: Hang in there. The numbers don't lie. Your portfolio is what matters, not the bet for a single subasset class in a single year. 8)

Note: Style Rotation (SR) seems to be suffering the same fate as Buying on Dips (BoD). Both momentum and anti-momentum folks are both being defeated by simplicitiy.

Cheers,
-Eric White


"...as Oscar Wilde so shrewdly remarked, a map of the world that does not include Utopia is not even worth glancing at."
- John Bogle, Common Sense on Mutual Funds, p.433
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Equity Style

Post by kcyahoo »

Hey guys, don't get sucked in any further by Equity Style. I've seen this writing style before but can't remember who, maybe on the other forum some time ago. IMO you are being baited by a smart but misguided soul.
Retired @ 57, now 75 | was 50/45/5, then 42/54/04, now 35/60/5 | KC
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Equity Style
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Answers to Questions

Post by Equity Style »

Thanks for all the good comments. After reading the many questions I think I have not been successful in communicating my "system"

First, I pick the styles based on the last 6 months returns. For example, Emerging Market funds have done better than other choices so it is one of the 8 funds. Presently, I am 25% (or two spots) in Commodities which have done very well over the past 6 months. I also have one of the spots in International bonds as they have outperformed several of the stock equity styles over the past 6 months.

Using indexes will not give you much more return than the S and P. A majority of the excess gains compared to the S and P are from picking the best performing fund in a particular index. For example, last year my mid-cap growth fund, American Century Heritage, returned more than 50%. This was considerable more than the Mid-Cap Growth Index. Also there is not really a Index for Commodities or Natural Resources funds. Through the years there have been cycles when these funds had the best returns.

In the excellent testing that one poster has done, certain investment classes that I use were not included. Gold, Convertibles, Commodities, bond funds, etc. Mid and small cap Internationals appear to be also excluded. Choosing between a numerous amount of styles is one other way for excess returns as the testing appears to show.

One poster stated that I may be the same person who posted before. The first time I ever posted to this or other forum was the date of the first post for this thread.

The latest data published by French and Fama uses a Momentum type strategy. It has excellent data in regards to a monthly rotation. Of course, they don't break into styles, but it shows that once a month changes are probably all that is necessary.
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Post by Equity Style »

Here is a link to a synopsis of French and Fama work on Momentum strategies. Dr. French's website has tons of data from 1929 demonstrating momentum and equity style variation on his web site. (Too much data for me)

http://www.cxoadvisory.com/blog/external/blog1-14-08/

The fast and easy way to obtain back tested data for Equity Style rotation is at Eric Dany's website. His system is very similar to my own. He has data over the past 8 years showing how Equity Style Rotation has provided superior returns.

Tomorrow is the first day of a new month. I will check which Equity styles have the best return over the past 6 months. I will then make changes according to the data. The vast majority of months no changes are required.

For March I will be in Large Cap Growth, Emerging Markets, Small and Mid Cap Growth, Mid-Cap Growth, Commodity funds (two separate styles of funds), International Bonds (two separate styles based on average duration of bonds)

Not counting today, my portfolio is down 4.5%. Better than the S and P, but trailing the DOW. I think this year will be another positive year and that a premium of at least 4 % over the S and P will be found using Equity Style Rotation (my predictions are only 50% correct. That is why I use a mechanical system.)

I hope the last two posts will clear up some of the questions. Once again, use the system for a couple of years so you will see how it works before investing in this fashion. Also back-test using the data that is posted on this site, but add Bonds, Gold, Commodities, and Convertibles to the mixture. (For example, for 2001 to 2003 I was almost completely in bonds which outperformed stocks. Such resulted in positive returns where a total stock strategy would have lost a considerable amount)


Equity Style
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Post by Equity Style »

After reading the posts again I believe I have left out an important item. I use the data from Fundx. It includes most of the index funds and also has data on bonds. It also includes commodity funds, Real Estate, Utilities etc. Data from the last 3, 6. 9, and one year results are easily and quickly obtained. I dont, of course, use their strategies. You could also use Eric Dany's "Nugget" system to obtain most of the style data.

The volatility of Equity Style Rotation can be severe. I would not recommend it to anyone with a less than 15 year horizon.

Equity Style
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Note to Mr. White

Post by Equity Style »

Although I don't have time to calculate the alpha, most of the excess returns from Equity Style Rotation occur from two aspects of the "system." First, choosing the best performing fund in the particular style leads to significant improvement over using Index fund. Second, by including bonds, Real Estate, etc, sharp downturns as has occurred in the 2000-2003 Bear market are partially avoided. Also, I earned more in REITS from 2001 to 2007 than my styles in the equity markets, leading to higher returns.

If it is not too much trouble could you run your data by adding these other asset classes.

Thanks so very much for your analysis. I didn't realize that so much of the improved return was from choosing the best (actually one of the best) funds in the leading equity styles. Although it has never happened to me before, it is possible that some type of "scandal" might topple a "best fund" such as the problems with Putnam. Such does add additional risk to the system.

Hopefully, this "shows you the money" Also, I am down only 4 % now for the year with a significantly positive February. Once again I am ahead of the indices-a pattern that will continue. My excess return came from investing in commodities and shifting to bonds for a short time.

Once again, thank so very much for your excellent comments and detailed analysis. I am sure you are a successful investor.

Equity Style
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Post by knhifin »

Equity Style wrote:...
I use the data from Fundx. It includes most of the index funds and also has data on bonds. It also includes commodity funds, Real Estate, Utilities etc. Data from the last 3, 6. 9, and one year results are easily and quickly obtained. I dont, of course, use their strategies.
...Equity Style
Two questions for ES:

(1) Why do you keep insisting that your "system" is not like that of FUNDX while both strategies, yours and FUNDX, boils down to selling the laggards and buying the leaders?

(2) And since you're using FUNDX data, how could you outperform FUNDX which is currently down -9.31% YTD?

[/img]
Last edited by knhifin on Tue Mar 04, 2008 1:03 am, edited 1 time in total.
Gregory
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Re: Equity style rotation

Post by Gregory »

Equity Style wrote: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
-------------------------------------
Perhaps you should apply for a position as a portfolio manager, as your results certainly best many of the actively managed funds.
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texasAUtiger
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Post by texasAUtiger »

EmergDoc wrote:
Equity Style wrote: These are just two examples. I can provide more if you would so wish.

Whatever Equity Style is doing the best, the managed funds will always outperform the indexes. The same is true vice versa.
Whoa tiger. Now you're talking craziness. Of course in retrospect you can identify a few funds that beat the indices. The tricky thing is identifying them in advance. It turns out that this is very difficult.
Hey Equity Style,

How about you make a post every time you move in and out of equity styles and what funds you are selling/buying. Then we can "watch" how it works going forward instead of backward...

This should be fun. :lol:
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Post by Equity Style »

Thanks as always for the posts.

I use the data only from Fundx. I do not follow their recommendations. If you view the Fundx positions, they never include bonds. They also will have more than one, sometimes 3 funds that are in the same Equity Style category. Although they include Real Estate and Commodities, it is never more than a small portion.

The reason I have done better YTD than Fundx is that I have had 25 % in Commodities plus 25% in Bonds. These have performed better than the stock portfolio that Fundx holds. I also view the past 6 months where Fundx uses a one year strategy. Finally some of the funds I use are not listed on Fundx data sheet.

By using Equity Styles, fewer trades are made than Fundx. Spreading out investments over 8 Equity Styles decreases overall volatility. My system is much more similar to Eric Dany's. His results are usually better than mine except for 2001-2003. I am ahead of him now, but this is not the rule.

Soon I will try to post all my changes in position since January. Hereafter I will post when I move in and out of positions.
knhifin
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Post by knhifin »

ES:

Fundx's method is pretty much mechanical--they buy and sell "blind", strictly based on ranking calculation (in this aspect, being unemotional and mechanical, oddly enough, they are akin to Bogleheads more than Bogleheads would believe, lol).

Your method, however, is not that clear-cut mechanical (at least to me). It may take special knowledges, individual experience and personal judgement to pull it off. As such, it won't be of much use to the everday investors.
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Post by Alex Frakt »

Equity Style wrote:Soon I will try to post all my changes in position since January. Hereafter I will post when I move in and out of positions.
This will be interesting. If I can ask a favor - Could you post your position changes in one thread so it's easier to follow over time?
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Post by Random Musings »

It would also be nice to know what are the various "asset classes" used and the relative rankings that lead you to those buy/sell decisions.

RM
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Post by Equity Style »

I will list all the asset classes below:

Large Cap Value, Growth, Blend
Mid-Cap Value, Growth, Blend
Small Cap Value, Growth, blend
Micro Cap

International Large Cap Value, Growth, Blend
International Small, Medium Value and Growth
Emerging Market

REITs
Convertibles
Short and Intermediate Corporate Bonds
Short and Intermediate International Bonds
Emerging Market Bonds
Gold
Commodities

I sometimes breakdown a class into subsets as I am presently doing with Commodities whenever one class is drastically outperforming other classes. I don't recommend this to others as it can be very confusing.

The "system" I use may be too complex for some. However, it can be used in a more simple form. For example, you could divide the styles into Large Growth and Value plus Small Growth and Value. The money is then placed in the 3 groups that are performing the best and changed on a 3 month basis. Some of the articles about Equity Style Rotation use this method.

I use two separate portfolios, one taxable and one in tax deferred. The taxable account includes funds that are available as no-load. They are also generally available. My tax deferred account has many load funds that are not generally available (I don't have to pay the loads in the 401K plan.) I will make the taxable portfolio data available at present as it is much easier to follow.

Equity Style
knhifin
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Post by knhifin »

What you're doing doesn't look like 100% equity-style rotation to me. It looks like you're also mixing in sector rotation as well. Maybe you're more like a go-anywhere-anytime investor after all? This could mean lots of work and high risk!
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Equity Style
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Post by Equity Style »

I actually tried using a sector strategy in the past. However, the cycles were shorter and had to be watched closely for changes.

An investment consultant told me that I have simply added the cycles of Bonds, Stocks, and Commodities on top of my Equity Style Rotation. I have always considered the other investments simple as another Style category and not part of a sector strategy.

Also, in the past I have rarely been in anything other than stocks. However, in 1987 and 2000-2003 shifts into other investments gave me small positive returns instead of negative returns. At present my position in Commodities and International Bonds have resulted in less loss than any of the major indices.

In conclusion I do not think the system is as risky as it might appear. However, from a pure mathematical model that does not factor in cycles, much of my increased return is from managing higher risk. Using cycles actually decreases the risk. (The math for this is far beyond my basic knowledge of Calculus. I saw the basis of a formula in an article, have to find the reference again.)

Equity Style
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Equity Style
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Post by Equity Style »

At the beginning of the year, I held the following Mutual Funds in my taxable account.

Janus 20 Large Growth
Janus Research Mid-Cap Growth
Janus Overseas Large Cap International Blend
Janus Contra Mid-Large Cap Blend
Dodge-Cox Int. Large Cap International Value
Price Emer Mar. Emerging Markets
Price New Era Natural resources
Price Int. Dis Small and Mid cap Internationals Blend


On January 9 I sold Dodge and Cox + Price Int. Discovery
On January 10 I bought Price International Bond and Inflation Pro. Bond

On January 16 I sold Janus Overseas
On January 17 I bought Vanguard Intermediate. Bond fund

On February 10 I sold Price Inf. Pro Bond
On February 11 I re-purchased Pridx

Comment:

I re-purchased Pridx as it flipped and started performing better than the Bond funds (per 6 month basis). I always wait a month between trades to avoid over-trading.

In hindsight, I should have kept a few shares of Janus Overseas as the fund was subsequently closed.

It is hard to beat Vanguard for Bond funds. The low expense ratio compared to other Bond funds almost always results in the superior Vanguard returns. Whoever started that company must be pretty smart?


Equity Style
knhifin
Posts: 49
Joined: Wed Feb 13, 2008 11:14 am

Post by knhifin »

ES: I can see why you're moving toward bond presently. But I couldn't see the logic behind your current holding, that is, some of your funds sure don't look like any of the top flyers in their categories as per momentum trading.
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Equity Style
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Post by Equity Style »

Bonds are probably maxed out. International bonds have done well lately. Bonds do best for me during a Bear market. We are not in a Bear market. Cash might be a better place than Bonds, but I have never kept cash positions in the past.

I just follow what the system tells me. If I went by what I thought, I would probably be all in cash. Trying to adapt any strategy to a present situation is a recipe for disaster. One has to stay with a workable system, or instead pick a good asset allocation and come back in 10 years to find that you did well.

Actually the present downtrend is atypical and the present is probably not the best time to demonstrate how Equity Style Rotation works. It will still do better than the indices, but will still probably be negative.

One "fault" in Equity Style Rotation is that the first part of the Recovery from a Bear market is missed. However, the rotation allows one to role into stocks at a level below that they were sold. The move in and out of PRIDX demonstrates this well.

Equity Style
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Equity Style
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Post by Equity Style »

Dear knhifin


The equity styles that are represented are doing the best over the past 6 months. The one "high flyer" is commodities. I have Commodities funds in my tax exempt portfolio, and they are up for the ytd. These funds have a load (which I don't pay in my tax deferred account) and is not suitable for the taxable fund. There are some ETF's that might work, but I haven't used these yet.

If the stock market doesn't turn around soon, the positive returns from 6 months ago will be wiped out and I might be all in bonds and Commodities. Have to wait and see. I never try to predict as I am wrong more than I am right.

Equity Style
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