Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for November 2021 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for November 2021 (Final)
1st ETF 2nd ETF 3rd ETF

Strategic Allocation

Is there a best way to select and weight asset classes for long-term diversification benefits? These blog entries address this strategic allocation question.

Very Simple Asset Class ETF Momentum Strategy (VSACEMS)

A subscriber requested evaluation of a streamlined version of the Simple Asset Class ETF Momentum Strategy (SACEMS) that considers only three exchange-traded funds (ETF):

  • SPDR S&P 500 (SPY)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)

To evaluate, we test a strategy that each month picks the one of these ETFs with the highest total return over a set momentum ranking (lookback) interval. We call the strategy Very SACEMS (VSACEMS) Top 1. We consider lookback intervals of one to 12 months. We then select one of these lookback intervals and generate performance statistics similar to those for SACEMS. We consider three benchmarks:

  1. SPY – buy and hold SPY.
  2. SPY:SMA10 Cash – Hold SPY (3-month U.S. Treasury bills) when SPY is above (below) its 10-month simple moving average (SMA10) at the end of the prior month.
  3. SPY:SMA10 TLT – Hold SPY (TLT) when SPY is above (below) its SMA10 at the end of the prior month.

Using monthly dividend-adjusted prices for the above three assets during July 2002 (limited by TLT and LQD) through April 2021, we find that: Keep Reading

Dynamic Retirement Portfolio Sustainable Withdrawal Rate

How can retirees estimate whether their investment strategy will sustain all the withdrawals they expect to make in retirement? In his February 2021 paper entitled “The Sustainability of (Global) Withdrawal Strategies”, Javier Estrada  presents two tools to monitor retirement plans for early signs of trouble:

  1. One evaluates sustainability of an existing withdrawal strategy.
  2. The other calculates the sustainable level of inflation-adjusted withdrawals at any given point during retirement.

Both change over time according to (1) deviations of actual returns from those used in modeling the retirement portfolio and (2) the number of years left in retirement. He also illustrates these tools for a sample of 21 countries and the world over a 120-year period assuming a 30-year retirement with 30 annual withdrawals at the beginning of each year. The terminal value one year after the final withdrawal is the bequest. All returns and portfolio values are in real (inflation-adjusted) terms. Using annual real total returns for stocks and government bonds for 21 countries in local currencies/inflation rates and the world in U.S. dollars/inflation rate from the Dimson-Marsh-Staunton database during 1900 through 2019, he finds that: Keep Reading

SPY-TLT Allocation Momentum?

A subscriber suggested review of the “SPY-TLT Universal Investment Strategy”, which each day allocates 100% of funds to SPDR S&P 500 (SPY) and/or iShares 20+ Year Treasury Bond (TLT) with SPY-TLT allocations equal to that with the best risk-adjusted daily performance over the past few months. There are 11 SPY-TLT allocation percentage choices: 100-0, 90-10, 80-20, 70-30, 60-40, 50-50, 40-60, 30-70, 20-80, 10-90 and 0-100. We test a simplified version of the strategy as follows:

  1. Each trading day, calculate dividend-adjusted close-to-close SPY and TLT returns.
  2. As soon as enough days are available, calculate the ratio of average daily return to standard deviation of daily returns over the past 63 trading days (about three months) for each of the 11 allocation choices. This lookback interval is common for such analyses and is within the lookback interval range of 50-80 days suggested by the author.
  3. For each day thereafter, maintain a portfolio with SPY-TLT allocations equal to those of the winning allocation choice over the specified lookback interval. We consider both same-close (requiring slight anticipation of the winning allocation choice) and next-open rebalancing executions (because such anticipation appears problematic).

We ignore small rebalancing frictions incurred daily when the allocation does not change. We initially ignore rebalancing frictions when the allocation does change, but then perform a frictions sensitivity test. Using daily dividend-adjusted opening and closing prices for SPY and TLT during July 30, 2002 (limited by TLT) through April 20, 2021, we find that: Keep Reading

A Few Notes on The Gone Fishin’ Portfolio

In the preface to the 2021 edition of his book, The Gone Fishin’ Portfolio: Get Wise, Get Wealthy…and Get on With Your Life, Alexander Green sets the following goal: “[S]how readers the safest, simplest way to achieve and maintain financial independence. …I’ll cover the investment basics and unite them in a simple, straightforward investment strategy that will allow you to earn higher returns with moderate risk, ultralow costs, and a minimal investment of time and energy. …Setting up the Gone Fishin’ Portfolio is a snap. Maintaining it takes less than 20 minutes a year.” Based on his 35 years of experience as an investment analyst, portfolio manager and financial writer, he concludes that:

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Effect of Trading Frictions on SACEMS

A subscriber asked about the effect of trading frictions on Simple Asset Class ETF Momentum Strategy (SACEMS) performance across potential momentum measurement (lookback) intervals, assuming 0.1% one-way frictions for buying and selling exchange-traded funds (ETF). To investigate, we look at the impact of these frictions on the SACEMS Top 1 portfolio, which each month holds the one ETF from the SACEMS universe with the highest past return. We consider lookback intervals ranging from one month to 12 months. We focus on compound annual growth rates (CAGR), since frictions have little impact on maximum drawdown (MaxDD). Using SACEMS monthly holdings and gross returns during February 2007 through March 2021, we find that: Keep Reading

Retirement Income Planning Model

How should financial advisers and investors approach retirement income planning? In their January 2021 paper entitled “A Model Approach to Selecting a Personalized Retirement Income Strategy”, Alejandro Murguia and Wade Pfau design and validate a questionnaire designed to quantify retirement income styles based on six preference scales:

  1. Probability-based vs. Safety First (main) – depending on market growth vs. contractually promised.
  2. Optionality vs. Commitment (main) – flexibility to respond to changing economic conditions/personal situation vs. fixed commitment.
  3. Time-based vs. Perpetuity (secondary) – fixed horizon vs. indefinite retirement income.
  4. Accumulation vs. Distribution (secondary) – portfolio growth vs. predictable income during retirement.
  5. Front-loading vs. Back-loading (secondary) – higher income distributions during early retirement vs. consistent life-style throughout.
  6. True vs. Technical Liquidity (secondary) – earmarked reserves/buffers vs. reserves taken from other goals.

The output is the Retirement Income Style Awareness (RISA)™ Profile. They then link profile types to four main retirement income strategies:

  1. Systematic withdrawals with total return (conventional portfolio) investing.
  2. Risk wrap with deferred annuities.
  3. Protected income with immediate annuities.
  4. Time segmentation or bucketing.

Based on the body of retirement investment research and survey feedback from 1,478 readers of RetirementResearcher.com, they conclude that: Keep Reading

U.S. Federal Taxes and SACEVS, SACEMS

A subscriber requested an assessment of U.S. federal capital gains tax impacts on the Simple Asset Class ETF Value Strategy (SACEVS), the Simple Asset Class ETF Momentum Strategy (SACEMS) and combinations of the two for investors with taxable accounts. Modeling such impacts is difficult due to complexity of the tax code and its highly idiosyncratic effects across individual taxpayers. To get a rough idea of federal tax impacts, we use annual (calendar year) data and make the following (close to worst case for SACEVS and SACEMS) simplifying assumptions:

  • Federal taxes (income and capital gain) are per 2020 brackets.
  • All SACEVS/SACEMS gains are short-term, treated as income at the marginal rate (some years not true for SACEVS, especially Best Value; generally true for SACEMS).
  • All taxes for SACEVS and SACEMS are at marginal rates, debited annually, with losses carried forward and offsetting future gains until exhausted.
  • Benchmarks are (1) buying and holding SPDR S&P 500 (SPY) and (2) a monthly rebalanced 60% SPY, 40% iShares 20+ Year Treasury Bond (TLT) portfolio. Benchmarks are essentially buy-and-hold, the latter because monthly deviations from target allocations are usually modest, with long-term capital gain tax debited only at the end of the sample period.

We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as essential performance metrics. Using annual gross returns for SACEVS and the two benchmarks since 2003 and for SACEMS and SACEVS/SACEMS combinations since 2007, all through 2020, we find that:

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Longer Test of Simplest Asset Class ETF Momentum Strategy

A subscriber asked for an extended test of a very simple momentum strategy that each month holds Vanguard 500 Index Fund Investor Shares (VFINX) or Vanguard Long-Term Treasury Fund Investor Shares VUSTX according to which of these funds has the highest total return over the last three months. To investigate, based on the way mutual funds report prices, we calculate past 3-month total returns using dividend-adjusted prices for month-ends and strategy returns using dividend adjusted prices for first days of the following month. We assume zero fund switching costs and no restrictions on monthly fund switching. We use buying and holding VFINX as a benchmark. Using the specified fund price series and monthly 3-month U.S. Treasury bill (T-bill) yield from the end of May 1986 (limited by VUSTX) through the beginning of March 2021, we find that: Keep Reading

SACEVS with Margin

Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Value Strategy” (SACEVS)? To investigate effects of margin, we augment SACEVS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for Best Value (which picks the most undervalued premium) and Weighted (which weights all undervalued premiums according to degree of undervaluation) variations of SACEVS. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly total returns for SACEVS and monthly T-bill yields during July 2002 through February 2021, we find that:

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SACEMS with Margin

Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS)? To investigate effects of margin, we augment SACEMS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly gross total returns for SACEMS and monthly T-bill yields during July 2006 through February 2021, we find that:

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