Tag Archives: investing-strategy

How To Predict Fund Performance (Podcast)

By Ronald Delegge The phrase “past performance is not an indicator of future performance” is a frequently written and spoken legal disclaimer for virtually all investments sold by Wall Street. Yet, hardly anyone from individual investors all the way to investment sales people really act like they believe it. Asset flows inevitably gravitate into funds with the hottest historical performance. And if a fund happens to be christened with a 4 or 5-star rating, the money really pours in. In fact, the very first thing that retail investors and professionals infatuate themselves with is historical performance. The herd mentality with picking mutual funds goes something like this: “The _____________ (fill in the blank) fund has easily outperformed the S&P 500 (NYSEARCA: VOO ) over the past ____________ (fill in the blank) years. It’s a proven winner!” And that’s generally how buy decisions are made. Never mind how the fund’s benchmark is irrelevant or how much risk the fund actually takes or how much the fund charges. None of these petty details matter to the historical performance enamored investor. Yet, people who focus exclusively on past performance are doomed to future underperformance. It’s one of those predictable ironies, that’s confirmed in new research from Morningstar. The study highlights the mistake of emphasizing historical performance. “While we think it makes sense to consider a variety of factors when choosing funds, our research continues to find that fund fees are a strong and dependable predictor of future success,” said Russel Kinnel, chair of Morningstar’s North America ratings committee. In other words, historical performance isn’t a determining factor in future returns. Kinnel added, “We found that the cheapest funds were at least two to three times more likely to succeed than the priciest funds. Strikingly, our finding held across virtually every asset class and time period we examined, which clearly indicates that investors should keep cost in mind no matter what type of fund they are considering.” (You can listen to Ron DeLegge’s full podcast interview with Russel Kinnel on the Index Investing Show. ) Highlights of the Morningstar study include: The lowest-cost U.S. stock funds succeeded three times as often as the highest-cost funds. The least-expensive quintile had a total return success rate of 62%, compared with 48% for the second-cheapest quintile, 39% for the middle quintile, 30% for the second-priciest quintile, and 20% for the most-expensive quintile. International-equity funds had a 51% success ratio for the least-expensive quintile compared with 21% for the most-expensive quintile. Among taxable-bond funds (NYSEARCA: BND ), the least-expensive quintile delivered a 59% success rate versus 17% for the most-expensive quintile. Municipal bond funds (NYSEARCA: MUB ) showed a similar pattern, with a 56% success rate for the least-expensive quintile and 16% for the most-expensive quintile. Disclosure: No positions Link to the original post on ETFguide.com

The Fate Of Financial Advisors Part II: Financial Advisors’ Daily Digest

ETFGuide laments that DOL and the SEC are not protecting the public, just burdening advisors. Max says advisors can make a good living and gain professional satisfaction if they take the trouble to understand the nitty gritty around the financial concerns of niche professionals. For the average advisor, though, Six forecasts a homogenized, (lower) salaried future. Yesterday’s advisors’ daily digest generated a few, but quite pointed and intelligent remarks about “the fate of financial advisors” (our topic of discussion). ETFGuide ‘s main point is that the policies of public agencies, while meant to protect the public, generally have the effect of making business life intolerable. This is a widely shared view among advisors today. The next two comments — and this is the great thing about SA’s community of advisors — offered hope, perspective and practical ideas in the face of this reality. Max @mcorder.net sort of rolls up his sleeves and explains that while investors’ lives grow more complicated, there remains a paucity of competent advisors who have versed themselves in the day-to-day concerns of various niche clienteles. If you’re willing to in turn roll up your sleeves and learn about the personal financial issues of say, dentists, read dental trade magazines and perhaps contribute to them, you’ve got yourself a niche business which, as he says, doesn’t “need a whole lot of…clients to earn a decent living.” Underscoring the appeal of this proposal is the informed prognostication of another commenter, Six , who offers reasons why trends are heading toward salaried advisors at fewer and bigger firms with compressed compensation. Six anticipates an increasing standardization of highly vetted fiduciary advice. Advisors already weighed down under the yoke of a rules-burdened corporate environment might therefore want to work harder and sooner to foster the kind of practice Max described. There’s always room for a good advisor, right? Check out their detailed comments, and let us know your thoughts here! Herewith today’s advisor-related news and views:

Day-Of-Month Effect On A Bond/Equity Portfolio

In this post we will: Take a look at a simple, momentum based, monthly rebalanced Equity/Bond portfolio. Search for what has been the optimal dates in the month to rebalance such a portfolio. Each month we allocate to two ETFs: SPY and TLT . If SPY has outperformed TLT we rebalance to 60% SPY – 40% TLT. If TLT has outperformed SPY we rebalance to 20% SPY – 80% TLT. For the first run we will re-balance on the first of the month and close at the last day of the month. Click to enlarge source: sanzprophet.com Now we will try different combinations of entry and exit days. We will try to purchase x days before or after the month and instead of exiting at the end of the month we will exit after y days. Click to enlarge source: sanzprophet.com Click to enlarge source: sanzprophet.com The top chart is optimized for Net Profit while the second one for annual return/max drawdown. They are similar in this case, but we will use the second one. According to the chart the best combinations have been: Buy 3-7 days after the month and hold for around 10-18 days. The BuyDayRefToMonth variable refers to when we buy relative to the turn of the month. For example -5 means we buy five days after the turn of the month (i.e., the 6th trading day). +5 means we buy 5 days before the month ends. The BarsnStop variable refers to how many days later we sell the positions. Looking at the charts more closely we see that buying after (not before) the 1st of the month gives consistently better results when set between 2 and 7 days. Click to enlarge source: sanzprophet.com How many days we hold the investment is less obvious and seems to work across the given range: Click to enlarge source: sanzprophet.com Let’s run this again but now only for 2012-May 2016: Click to enlarge source: sanzprophet.com Similar results. The only difference is that the holding times are shorter. Let’s now input the optimized numbers and run the backtest. Obviously we will get something that looks good since it has been fit to the data. We buy 6 days after the month and hold 10 trading days. Click to enlarge source: sanzprophet.com Conclusion: There are many variables that affect how we run a dynamic Equity/Bond portfolio. We optimized only two of them, namely when to rebalance relative to the turn of the month and how many days to hold the investment. In terms of entry it was better to wait 3-6 days after the month changes to enter the trade. When it comes to this bond/equity portfolio, rebalancing late is better. Disclosure: I am/we are long SPY, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.