Investing Research Articles

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Preliminary Value Strategy Update

The home page and “Value Strategy” now show preliminary asset class ETF value strategy positions for December 2015. There may be small shifts in allocations based on final data. The difference between the two best values is small, so the “Best Value” selection could change.

Turn of the Year and Size in U.S. Equities

The turn of the year (December-January) for the U.S. stock market includes the Santa Claus rally and the January effect. How does the stock market behave around the turn of the year for a recent sample? To check, we construct cumulative return profiles from 20 trading days before through 20 trading days after the end of the calendar year for the Russell 2000 Index, the S&P 500 Index and the Dow Jones Industrial Average (DJIA) since the inception of the Russell 2000 Index. Using daily and monthly levels of all three indexes from December 1987 through January 2015 (28 December and 28 January observations), we find that: Keep Reading

Momentum Strategy and Trading Calendar Updates

We have updated the the monthly asset class ETF momentum winners and associated performance data at Momentum Strategy.

We have updated the Trading Calendar to incorporate data for November 2015.

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class ETF momentum strategy positions for December 2015. Differences in past returns among the top places are large enough that changes by the close are unlikely.

Reverse Mortgage as Retirement Strategy Component

Which is worse with respect to sustaining retirement income: sacrificing potential investment portfolio growth early, or exposing mortgage debt to interest rates later? In his November 2015 paper entitled “Incorporating Home Equity into a Retirement Income Strategy”, Wade Pfau simulates different strategies for incorporating home equity into a retirement plan (both income assurance and legacy) via a Home Equity Conversion Mortgage (reverse mortgage). A reverse mortgage is a non-recourse loan that enables many U.S. homeowners to tap (untaxed) up to $625,000 of home value. The different strategies are:

  1. Ignore Home Equity: A baseline not comparable to the other strategies.
  2. Home Equity as Last Resort: Delay opening a reverse mortgage line of credit until the investment portfolio is exhausted.
  3. Use Home Equity First: Open a reverse mortgage line of credit at the start of retirement and draw upon it first, letting the investment portfolio grow.
  4. Sacks and Sacks Coordination Strategy: Open a reverse mortgage line of credit at the start of retirement. Draw upon it (until exhausted, with no repayments) only after years when the investment portfolio loses money.
  5. Texas Tech Coordination Strategy: Open a reverse mortgage line of credit at the start of retirement. Draws upon it (until exhausted) when investment portfolio balance falls below an estimated 80% of a required wealth glidepath. Pay it down when investment portfolio balance rises above an estimated 80% of required wealth glidepath.
  6. Use Home Equity Last: Open a reverse mortgage line of credit at the start of retirement. Use it only after the investment portfolio is exhausted.
  7. Use Tenure Payment: At the start of retirement, implement a reverse mortgage tenure payment (life annuity) option, with the balance of annual spending drawn from the investment portfolio.

For each strategy, he runs 10,000 Monte Carlo simulations of a 40-year retirement based on historical annual distributions of 10-year bond yield, equity premium, home appreciation, short-term interest rate and inflation rate. Annual withdrawals and investment portfolio rebalancings (to 50% stocks and 50% bonds) occur at the start of each year. Assuming initial home value $500,000, initial tax-deferred investment portfolio value $1 million, annual withdrawal 4% of initial investment portfolio value ($40,000, subsequently adjusted for inflation) and marginal tax rate 25% for investment portfolio withdrawals, he finds that: Keep Reading

Weekly Summary of Research Findings: 11/23/15 – 11/27/15

Below is a weekly summary of our research findings for 11/23/15 through 11/27/15. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Commercial and Industrial Credit as a Stock Market Driver

Does commercial and industrial (C&I) credit fuel business growth and thereby drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. Presumably, loosening (tightening) of credit standards is good (bad) for stocks. The Federal Reserve publishes survey results about the end of the first month of each quarter (January, April, July and October). Using the “Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2015 (104 surveys), and contemporaneous S&P 500 Index quarterly returns, we find that: Keep Reading

Abnormally Low Searching Equals Undervalued?

Does lack of search activity point to stocks that are out of favor and therefore undervalued? In their November 2015 paper entitled “In Search of Alpha-Trading on Limited Investor Attention”, Konstantin Storms, Julia Kapraun and Markus Rudolf develop and test three trading strategies that employ Google search volumes to take long positions in S&P 500 stocks receiving abnormally low investor attention over the past week (Sunday through Saturday). For each stock, search criteria consist of the firm name and the word “stock.” Abnormally low means below the median search volume of the preceding eight weeks. The baseline strategies are:

  1. Main – Buy any stock with abnormally low prior-week search volume at the Monday open and hold until the Friday close.
  2. Loser – Buy any stock with abnormally low prior-week search volume and a negative prior-week return at the Monday open and hold until the Friday close.
  3. Fear – If VIX rises from two weeks ago to the prior week, buy any stock with abnormally low prior-week search volume at the Monday open and hold until the Friday close.

In robustness tests, they consider sample subperiods, different holding intervals (monthly and daily), searching on ticker rather than firm name and trading frictions. Using weekly Google search volumes for 122 S&P 500 stocks and daily search volumes 66 S&P 500 stocks during January 2004 through October 2014, they find that: Keep Reading

Kaeppel’s Sector Seasonality Strategy

A reader suggested looking at the strategy described in “Kaeppel’s Corner: Sector Seasonality” (from November 2005) and updated in “Kaeppel’s Corner: Get Me Back, Clarence” (from October 2007). The steps of this calendar-based sector strategy are:

  1. Buy Fidelity Select Technology (FSPTX) at the October close.
  2. Switch from FSPTX to Fidelity Select Energy (FSENX) at the January close.
  3. Switch from FSENX to cash at the May close.
  4. Switch from cash to Fidelity Select Gold (FSAGX) at the August close.
  5. Switch from FSAGX to cash at the September close.
  6. Repeat by switching from cash to FSPTX at the October close.

Does this strategy materially and persistently outperform? To investigate, we compare results for three alternative strategies: (1) Kaeppel’s Sector Seasonality strategy (Sector Seasonality); (2) buy and hold Vanguard 500 Index Investor (VFINX) as an investable broad index benchmark (VFINX); and, (3) a simplified seasonal strategy using only VFINX from the October close through the May close and cash otherwise (VFINX/Cash). Using monthly dividend-adjusted closing levels for FSPTX, FSENX, FSAGX, the 13-week Treasury bill (T-bill) yield as the return on cash and VFINX over the period December 1985 through Octember 2015 (almost 30 years), we find that: Keep Reading

Twisting Buffett’s Preferred Stocks-bonds Allocation

What is Warren Buffett’s preferred fixed asset allocation, and how does it perform? In his October 2015 paper entitled “Buffett’s Asset Allocation Advice: Take It … With a Twist”, Javier Estrada examines Warren Buffett’s 2013 implied endorsement of a fixed allocation of 90% stocks and 10% short‐term bonds (90/10). Specifically, he tests the performance of eight fixed asset allocations ranging from 100/0 to 30/70. Testing assumes a $1,000 nest egg at retirement, a withdrawal rate of 4% of the initial amount adjusted annually for inflation and a 30‐year retirement. At the beginning of each year, the retiree makes the annual withdrawal and rebalances to the target allocation. The first 30‐year retirement interval is 1900‐1929 and the last 1985‐2014, for a total of 86 rolling intervals. He further explores two adjustments (twists) to the 90/10 allocation:

  1. T1 – If stocks are up the past year, take the annual withdrawal from stocks and rebalance to 90/10. If stocks are down, take the annual withdrawal from bonds and do not rebalance.
  2. T2 – If stocks outperform bonds the past year, take the annual withdrawal from stocks and rebalance to 90/10. If stocks underperform, take the annual withdrawal from bonds and do not rebalance.

Using U.S. stock market and U.S. Treasury bill (T-bill) annual real total returns as compiled by Dimson‐Marsh‐Staunton for 1900 through 2014, he finds that: Keep Reading

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Current Momentum Winners

ETF Momentum Signal
for December 2015 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
12.0% 12.3%
Top 3 ETFs SPY
12.6% 7.4%
Strategy Overview
Current Value Allocations

ETF Value Signal
for December 2015 (Preliminary)





The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
12.7% 9.8% 7.9%
Strategy Overview
Recent Research
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