In the follow up to our webinar about how to compose top performing ETFs strategies among the QuantTrader community last weekend, we received many interesting questions and ideas to follow up. One question in particular I´d like to share in a post, as it involves all our “All Strategies” subscribers.John L. asks: “Using a simple meta strategy by choosing the top two strategies from the previous month (from the monthly newsletter), and investing in them the next month (repeating that each month). I wonder if that can be backtested and compared to past 3 months or a static meta strategy. Perhaps comparing the top 2 each month strategy to the choosing the top 2 from the last 3 months. And comparing the top 2 each month or 3 months to a static strategy of the top 2 - 4 over the full backtest period or past 5 or 10 years.”So in other words, what´s the best way to pick from the Top Performing ETFs Strategies of the last months, and allocate equal amount of money among them? We publish the performance of all our strategies monthly in a handy ranking table, so it´s easy to pick each month the best performers of the last months, and repeat this throughout the year.The idea is appealing, as it is an enhancement from our Portfolio Builder Approach, where we apply modern portfolio theory to assemble a fixed weighting portfolio based on the historical performance and co-variance between the strategies. By modifying this to a momentum style “strategy picking” of top performing ETFs strategies we react to changes in the market and therefore overcome one of the critiques MPT receives frequently.Top Performing ETFs Strategies in one PortfolioI modelled this quickly in QuantTrader, following the “Strategy of Strategies” approach we introduced in QuantTrader in the last [...]
We analyse one of the Fidelity Freedom Target Date Funds (FFFDX) versus a portfolio of ETF rotation strategies - The findings will surprise you! This is a guest post by Richard Manley, first published on Richard´s Corner, the Logical Invest User Community: Defined contribution retirement plan using target date funds There’s no shortage of challenges facing working people in these days. In addition to job outsourcing and the offshoring whole operations, inflation/deflation and zero interest rates on savings, most workers who have a retirement plan have one that’s called a “defined contribution plan”, in the US in many cases it’s also called a 401K. In such a plan, a participant contributes before-tax funds, often matched to some degree by the employer, into an account that is intended to accrue and grow until retirement age when it can be distributed over one’s retirement lifetime. This kind of plan of course puts the responsibility and burden of making wise investment choices on the individual. Most working folks are not trained in finance or security selection or portfolio construction and are thus left to rely on their own uninformed devices or advice from financial gurus in the media or in newsletters or cable TV talking heads, or merely to reactionary emotions that attend to most of us during extreme financial events. The U.S Dept. of Labor’s new “Fiduciary Rule” will take effect in April, but what practical effect this may have on individual’s specific investment actions under defined contribution plans remains to be seen. As a retirement plan investor, I’ve experienced all these pitfalls and more while I’ve tried to save enough to comfortably retire someday. A coherent approach to managing my modest retirement assets was clearly lacking and as a result I found myself thrashing my account to respond to the [...]
Special topic this month: 401k Investments Logical Invest Investment Outlook January 2017 Our top 2016 strategies: The Maximum Yield strategy with 29.92% return. The Leveraged Universal strategy with 22.33% return. The NASDAQ 100 strategy with 21.54% return. SPY, the S&P500 ETF, returned 12.00%. Market comment: To put 2016 in perspective, we must go back to 2015 and remind ourselves how the rising dollar environment affected diversified investors. Most asset classes suffered through 2015. The S&P 500 stayed flat, long term Treasuries lost 2%, gold lost 9%, emerging markets shed 17% and USO, the crude oil ETF was down 44%. To make things worse, in August 2015 there was a sharp correction in equities which caused many "weak hands" to just exit the market. The first half of 2016, by contrast, rewarded anyone holding any of these assets.The second half proved far more challenging as rising yields expectations depressed bond prices, with TLT loosing 16% from July to December. Expecting higher yields in the U.S. can cause an appreciation in the U.S. dollar which in turn causes weakness in dollar denominated assets like gold and foreign equity. All of these assets gave back some of the early 2016 gains. Two major events, the Brexit vote and U.S. elections proved to be much less disruptive than expected. For 2016, The S&P 500 returned 12%, long term Treasuries gave up early gains to stay flat and gold gained 6%. Emerging markets gained a respectable 14%. All our strategies were positive for the year. Our 'non-equity' strategies did well outperforming their respective benchmarks: Our volatility harvesting strategy (MYRS) returned 29.92%. Our Bond rotation strategy (BRS) returned 13.62%, compared to 1% for TLT and 2.4% for AGG. Our Gold hedged strategy (Gold-USD) returned 15.74% compared to 6% for Gold. For 2017, in preparation for rising yields, we have adapted our strategies to rely less on the 30-year Treasury ETF (TLT). We introduced inflation [...]
Happy new year –and let´s start it set-up for success with some Markowitz Modern Portfolio Theory! As previously announced, we´re updating our Portfolio Builder Optimization periodically, both in the Online and Offline Version. Updated Portfolio Builder Optimization for 2017 employing Markowitz Modern Portfolio Theory Why that? Recall the Portfolio Builder is using a Markowitz Modern Portfolio Theory approach, that is, we´re using past returns, volatilities and co-variances to determine an optimum fixed-weight allocation among our different strategies under certain rules: Either to Maximize the Sharpe Ratio (Risk/Return), target a volatility level one feels comfortable with, or to limit historical drawdown in the expectation this will also hold true for the future. Using Markowitz Modern Portfolio Theory While full-blood Markowitz aficionados will now probably feel the urgent need to stone us to death, yes, same to some other peers in the industry our approach is dynamic and we do not feel the past is set in .. hmm.. stone! As such, we need to update our Portfolio Builder Optimization periodically based on the most recent returns, volatilities and co-variances of and between our strategies. As the overall optimization is based on data from the past 8 years and we´re only adding the last quarter of data the changes are relatively small as you can see in the following. 2016 results of our 10 Portfolios for everybody But before going into the allocations for 2017, how was the performance of the 10 “pre-configured” Portfolio´s during 2016? Results using our Online Portfolio Builder are as follows: But overall with all Portfolios in the double-digit area, six of ten Portfolios topping 20% in returns and all but the minimum Volatility Portfolio exceeding the 12% return of the S&P 500, the conclusion of a partly bumpy year with many surprises is excellent. It pays out [...]
Diversification is a cornerstone to successful investing. In simple form, when measurably diverse assets are combined in a portfolio, the investors portfolio risks are reduced without any sacrifice of returns. This is a rare “free lunch”, it is well accepted part of modern financial portfolios, and to stay financially healthy it is important not to skip lunch. When one asset is going down while the other is going up, the portfolios risk is reduced without the normal penalty of risk/return trade-offs. We take advantage of that when our systems dynamically blend things like the S&P 500 and treasury bonds, which often exhibit negative correlation to each other (which is ideal).Applying Portfolio Diversification to Strategies: Our subscribers can take this take a step further. Our investing algorithms take on a blend of the properties of their underlying assets combined with the “alpha” edges from the investing rules. The returns of each investing strategy should be thought of as an asset, which are different and unique from the underlying holdings. So holding a portfolio of strategies functions much like holding a portfolio of assets. To evaluate the risk profile of the strategy, we examine the history of the returns of those strategies, much like when holding a basket of stocks the historical returns of each stock would be evaluated.
From the next strategy email on, the Bond Rotation Strategy will also use adaptive ETF allocation, to make is more suitable as IRA or 401k Investment Strategy. This new technique allows a 30% higher Sharpe (return to risk) ratio. Together with this change we have also changed the ETF selection from the old: AGG - iShares Core Total US Bond (4-5yr) BOND - PIMCO Total Return ETF CWB - SPDR Barclays Convertible Bond HYLD - AdvisorShs Peritus High-Yield Bond (3-4yr) SHY - Barclays Low Duration Treasury (2-yr) TLH - iShares Barclays 401k 10-Year Treasury (9-11yr) Ro the new ETF selection: CWB - SPDR Barclays Convertible Bond JNK: SPDR Barcap High-Yield Junk Bond (4-7yr) PCY: PowerShares Emerging Mkts Bond (7-9yr) TLT: iShares Barclays 401k Long-Term Trsry (15-18yr) The new BRS strategy does not need the total US market bonds AGG and BOND anymore. In fact for the old strategy, these bonds have been used to simulate an intermediate mix between treasuries and corporate bonds. The new BRS strategy can now invest in any mix of these bonds due to the adaptive allocation. Also the SHY (cash) ETF is not necessary anymore, because the allocations will be automatically reduced to zero if this would be necessary. Excellent features as an IRA or 401k Investment Strategy We also go back to the passively managed JNK high yield junk bond after the actively managed HYLD junk bond was showing an extremely bad performance these last months. So better don't have any fund manager interfering with the strategies in the future. New is the emerging market sovereign debt bond PCY which gives the strategy some international diversification. TLH has been replaced by the more liquid TLT treasury ETF. All together, the strategy becomes simpler, with less ETFs, but with a significantly better performance. We recently were approached by a subscriber [...]
For our „All Strategies“ Subscriber who use the Portfolio Builder to blend their own mix of Logical Invest Strategies, here some updates and a short mid-year review:We have now included the “World Top 4 Strategy” into both the online an offline tool. To keep the charts readable, we opted for replacing the Aggressive Version of our “Global Sector Rotation”. The preconfigured and optimized Markowitz Portfolios have been updated, only slight changes in the allocations occurred – all are <5%, so in most cases these can be neglected due to account size.
By request of several followers, we have now included the version with 3x leverage of the Universal Investment Strategy using synthetic SPXL and TMF data from 2002. Portfolio Builder now with leverage We're about to publish a full article on this exciting option for this weekend, but want to pre-alert you about this upcoming adition. While this is a very aggressive strategy with leverage, it blends very nicely with a 10%-20% allocation into a portfolio targeting Maximum annual return with a 10% or 20% volatility constraint. We have therefore also updated the optimized portfolios, and by another request included the MaxCAGR with volatility constraint of 20% and 25% volatility. Here a preview of the full backtest since 2002 of the version with leverage A visualization of the new portfolio options with blends of this strategy with leverage: And the timeseries of the synthetically constructed SPXL and TMF /3x leverage) since 2002 (both ETF have an inception date in 2009). We will explain the methodology of this more in detail in the upcoming post. Stay tuned for our next post, but review the portfolio options in our Portfolio Builder before, which now includes the version with leverage. A team of followers and us is working on an advanced offline Portfolio Builder, which offers additional features to optimize and customize your portfolios, as well as full daily return and equity data. This is still in development, but feel free to preview and join the team if interested. If you are new to our site, here an overview of our Universal Investment strategy: "The SPY-TLT Universal Investment Strategy (UIS) is one of our new core investment strategies. Probably the most basic of all rotation strategies, is the switching strategy between the S&P 500 US stock market (SPY) and long duration Treasuries (TLT). The [...]
A vivid and open exchange between the user community and the team behind Logical Invest has always been a main focus and motivation for us. Beside coming up with new innovative investment strategies, we feel we can add value by creating a space for exchanging on investment practices, money and wealth management and the tools needed for getting it up & running in real life.We´re therefore delighted to announce a new feature to further drive this exchange: Richard´s Corner, the Logical Invest User Community, moderated by Richard Manley, a long time user and critical commenter of our services.Richard is retired from a career as an engineer, analyst, planner and manger that spanned more than 40 years where he evaluated engineering and finance alternatives for large scale capital intensive projects. He is a volunteer for the AARP tax assistance program for the elderly, an advocate of life-long learning, and is interested in making the best of his 401K assets.Purpose of Richard’s CornerRichard's Corner provides a focused venue for Logical invest subscribers to share their experiences using the Logical Invest service, especially the Logical Invest tool sets – Portfolio Builder, Consolidated Strategies and QuantTrader. I think as subscribers engage in an informative exchange about how we use the tools we can all become more adept at taking advantage of their power.Possible topics to explore include:Logical Invest strategy combinations and investor goals,particular techniques used with the tools (e.g., custom solver solutions),investing and trading strategies,outcomes that Logical Invest subscribers experience relying on the tool set,circumstances within which the tools are applied (e.g., advisory service, family assets, retirement accumulation or long term distribution management, etc., …),maintaining discipline with the tools,and ideas for new features and capabilities that might make our investing lives both easier and more successful.We hope the exchange that takes place in this [...]
Special topic this month: Passive Investments Logical Invest Investment Outlook September 2016 Our top year-to-date strategies: The Leveraged Universal strategy with 39.09% return. The Maximum Yield strategy with 34.04% return. The World Top 4 with 20.51% return. SPY, the S&P500 ETF, returned 7.73%, year-to-date. New tools: The Online Custom Portfolio Builder The Consolidated Signals tool. Market comment: The summer market showed strength compared to its seasonal bias. The old saying "Sell in May and go away" did not hold up this year as SPY rose 5% and emerging markets jumped 8% during the summer. We are now moving into the fall season with the SPY near all time highs and the VIX index at very low levels. September and October have, historically, been good entry points for equity investors that led them to bullish end-of-year returns. This coupled with the election cycle are all market positive factors. Whether a correction materializes in the next two months is anyone's guess. Our strategies are partially hedged with treasuries and should be able to handle such a correction better than buy and hold. In regards to strategy performance, not much changed during August. Our top two strategies remained flat, holding on to their exceptional YTD returns of 34% for MYRS and 39% for 3x UIS. Our average return of all our strategies is at 16.7%. August's winner was the Bond Rotation strategy, adding 2%, reaching a very respectable 12% for the year. Interestingly TLT lost 1%, another example on how our BRS bond strategy is not always correlated to the long term Treasury ETF. Last month's BRS positions in emerging market credit (PCY) and U.S. high-yield (JNK) did pay off. The worst performer was our Global Sector Rotation, loosing 3% for the month. For September we favour our BUG strategy, the World Top 4, the Gold-USD and our stable Universal Investment Strategy. All=Strategy subscribers can read about our new tools can help allocate across strategies. We wish you a healthy and profitable September. Logical Invest, August 31, 2016 Strategy [...]