# 16.7% Return From 1981-2015- Does this work?



## ArianB (Jun 20, 2016)

Hi Everyone,
I am a big fan of the couch potato strategy and have been disciplined to it for the past few years. *HOWEVER* I came across an article in MoneySense about a strategy called the *"Global Hot Couch Potato"*. Essentially its a hybrid of active and passive investing. Similar to the couch potato you have your 4 asset classes:


Canadian Bonds

Canadian Stocks

U.S Stocks

International Stocks

*The only difference is that:* At the end of every month you are rebalancing into the ONE asset class that performed the best over the past 12 months. So you will always be invested in one ETF at a given point ( this scares me). That specific ETF will be the ETF that had the highest return over the past 12 months. It is such a tempting strategy but I am not 100% comfortable moving forward, here are some other statistics that continue to tempt me: 


 2008 decline of only 10% while the Couch Potato dropped 31.1%.

 It made an average of 1.7 large trades per year from 1981 to 2015. So although you are rebalancing every month you are usually staying in the same asset class. This makes me comfortable because it is still not completely active investing but almost like a hybrid. Also the trading fee's won't be too high. 

 Once again from 1981-2015this strategy averaged returns of 16.7%. 

I would love to start implementing this strategy into my portfolio but I am not 100% sold yet...does anyone have any experience or opinions on this "momentum" strategy?

Thanks
ArianB


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## OnlyMyOpinion (Sep 1, 2013)

If you really, really want to try it - do you have the ability to allocate a small, clearly identified % of your TSFA or RRSP account to this method? Then you could try it in a small way for a year or two and see if you feel the performance and effort are worth it compared to your couch potato results.
You wouldn't want to do it in a non-registered account with equivalent etf's because it would create a ACB nightmare.


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## sags (May 15, 2010)

1981 to 2015 appears to be a decent period for stock price growth in any event.

If a person had simply purchased $1000 USD worth of shares in Berkshire in 1981 it would be worth $391,469 USD today.

http://www.businessinsider.com/warren-buffett-berkshire-hathaway-historical-returns-2015-3

Take it back only 3 years earlier to 1978 and the $1000 investment would be worth $1,408,790 today........earlier than that and it really gets crazy.


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## olivaw (Nov 21, 2010)

The idea is interesting so I read up on it here. 



> The basic Hot Potato method is inspired by money manager James Montier’s 2003 article “Cheap Countries Outperform,” which can be found in his book Behavioural Investing. Montier noted that the stock markets of countries that fared the best over the prior 12 months continued to outperform. It is a classic case of momentum in markets and we wanted to test whether a similar approach would work for Canadians.
> 
> To find out, we start with the original Couch Potato portfolio as a baseline. The original portfolio contains equal dollar amounts of Canadian bonds, Canadian stocks, and U.S. stocks. This no-fuss approach fared well from 1981 through 2015 with average annual returns of 10.0%. That assumes annual rebalancing back to an equal dollar amount of each index. (We used the FTSE TMX Canada Bond Universe index, the S&P/TSX Composite index and the S&P 500 for the performance calculations. All figures include the reinvestment of dividends and interest income, but not fees and taxes, which vary depending on personal circumstances.)
> 
> ...


I am not a great investor so I decided long ago to refrain from anything beyond simple Couch Potato investing. . I worry about any strategy that claims to be able to beat the market. There have been a number of past ideas that back tested well but failed to beat the market going forward. BRIC, growth, dividend, value, mid-caps etc.etc.


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## ArianB (Jun 20, 2016)

*9800*



OnlyMyOpinion said:


> If you really, really want to try it - do you have the ability to allocate a small, clearly identified % of your TSFA or RRSP account to this method? Then you could try it in a small way for a year or two and see if you feel the performance and effort are worth it compared to your couch potato results.
> You wouldn't want to do it in a non-registered account with equivalent etf's because it would create a ACB nightmare.


If I were to do this I put all my investments towards it...one year wouldn't really make a difference if I am investing for another 30 years. My only concern is how valid is 16.7% return. Where does this number come from?


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## ArianB (Jun 20, 2016)

I TOTALLY agree with you...outperformance really raises a red flag for me. But this has really been backtested for 34 years and the returns are way more then the regular couch potato (or so the article says). 6.7% MORE can result into hundreds of thousands of dollars. 

I am really a simple investor just like you but if I can get 6.7% more and it has been back tested for 34 years...why not?


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## ArianB (Jun 20, 2016)

olivaw said:


> The idea is interesting so I read up on it
> 
> 
> I am not a great investor so I decided long ago to refrain from anything beyond simple Couch Potato investing. . I worry about any strategy that claims to be able to beat the market. There have been a number of past ideas that back tested well but failed to beat the market going forward. BRIC, growth, dividend, value, mid-caps etc.etc.


I TOTALLY agree with you...outperformance really raises a red flag for me. But this has really been backtested for 34 years and the returns are way more then the regular couch potato (or so the article says). 6.7% MORE can result into hundreds of thousands of dollars. 

I am really a simple investor just like you but if I can get 6.7% more and it has been back tested for 34 years...why not?


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## ArianB (Jun 20, 2016)

sags said:


> 1981 to 2015 appears to be a decent period for stock price growth in any event.


I do agree with this...however this strategy has returned 6.7% more then the couch potato strategy in the same 34 year time frame.


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## james4beach (Nov 15, 2012)

You've framed it exactly in the years of the greatest bull market in world history.

I'd strongly recommend backtesting it to other periods that were NOT such strong bull periods. 34 years is not a very long time.


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## Eder (Feb 16, 2011)

pigs get slau........ err nm


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## GreatLaker (Mar 23, 2014)

*150 Portfolios Better Than Yours*

History repeats itself... except when it doesn't.

150 Portfolios Better Than Yours

Why Isn’t Everyone Beating the Market?


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## james4beach (Nov 15, 2012)

That second post is great


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## Nerd Investor (Nov 3, 2015)

This will work over the long-term, but like any other form investing, the most important thing is that you believe in what you are doing and stick with it. 
Otherwise you will bail out after a few years of underperformance. One of the biggest strengths of index investing is that you never have to question if it's "working", you're just accepting the benchmark.


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## james4beach (Nov 15, 2012)

ArianB said:


> At the end of every month you are rebalancing into the ONE asset class that performed the best over the past 12 months.


This is a return-chasing method very similar to what I'm experimenting with in my "DIVZ" thread
http://canadianmoneyforum.com/showthread.php/49914-Tracking-my-non-dividend-portfolio-DIVZ

Yes I believe it can have excellent long-term returns, but with higher volatility, especially in market downturns. I'm about to publish my new set of stock picks for the half year


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## Nerd Investor (Nov 3, 2015)

james4beach said:


> This is a return-chasing method very similar to what I'm experimenting with in my "DIVZ" thread
> http://canadianmoneyforum.com/showthread.php/49914-Tracking-my-non-dividend-portfolio-DIVZ
> 
> Yes I believe it can have excellent long-term returns, but with higher volatility, especially in market downturns. I'm about to publish my new set of stock picks for the half year


Actually, you generally end up with less volatility which is what drives the overall returns, because you're getting out of the market when stocks start under-performing, avoiding the really big drawdowns. 
Generally, it lags in extremely bullish periods since you are getting in late.


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## james4beach (Nov 15, 2012)

Nerd Investor said:


> Actually, you generally end up with less volatility which is what drives the overall returns, because you're getting out of the market when stocks start under-performing


But ArianB's post didn't describe anything about getting out of the market. Perhaps you're talking about a different strategy than the OP's ?

I do agree that ArianB's method holds promise. I don't doubt that it can give great long term returns. But I share the criticism in GreatLaker's links ... to do this long term, you need a kind of stamina and long term dedication. That's really difficult to do over periods like 40 years. Index investing doesn't involve a burden such as that.

For example, my DIVZ portfolio construction seems promising, and I've been running the experiment on paper for a number of years. It only requires a bit of work every 6 months. I've had a very busy stretch at work, and things in my personal life, that has lowered the priority of re-analyzing my portfolio. So the task slips down the priority list.

Over many decades, how likely will it be that I can "stick to the plan"? And keep up my interest and enthusiasm in that plan as my returns slip, when they have a bad streak? The same thing will happen for any home-brewed investment strategy ... as good as they might be! It's one thing to run it for a couple years, but it's an entirely different thing to run it for decades, and stick to the strategy.


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## Pluto (Sep 12, 2013)

*Why doesn't everyone beat the market?*

In response to the link to an article of that name a few posts back. 

Everyone is the market, so everyone can't beat it. 

In order for some to beat it, some have to do something that everyone else isn't doing, but not just anything. Right now everyone, well not everyone, but you know what I mean, thinks stocks are the only game in town because interest rates are so low, and dividends are so much better. Dividends are better, but not always. They are better when no one, well not no one but you know what I mean, thinks bonds are the only game in town, and that's usually around the time stocks were subjected to a very very serious pounding and yields are at multi year highs. But at that time, everyone, well not everyone, have their boots filled with you know what, and go with the herd, sell stocks low, and buy bonds anyway, and wait for the next leg down, while stocks actually go up. 

the market is weird right now, so any cash I acquire is likely going into some bond ETF. Why? because, BREXIT aside, stocks are the only game in town. I really like stocks for the long run, but in the long run we are all dead, so why buy stocks while the expected 10 year return is dismal? Why not buy something like XSH, with 3% yield and wait for the day when everyone, well not everyone, is waiting for the next leg down? 

If I was an ETF investor, I could beat the market. I could beat the one stock index ETF I was invested in. How? Margin. When? When no one, was using margin. Then when my stock etf recovered enough, and everyone was starting to use margin, I'd tapper off of margin by selling some units into strength. It is a decent strategy because everyone won't do it.


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## james4beach (Nov 15, 2012)

I want to point out the obvious thing on that last post, that if the index goes down you will be under-performing the index by using margin.


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## Pluto (Sep 12, 2013)

james4beach said:


> I want to point out the obvious thing on that last post, that if the index goes down you will be under-performing the index by using margin.


Yes, very true. There is always an assumption that could go wrong, and in this case the assumption is the markets will recover. I decided a long time a go that if I was going to invest in stocks, I have to accept the assumption on faith. If I tried to eliminate all uncertainty, I'd be paralyzed at market bottoms and fail to buy at the very best time. 
Also this is why I favour dividend paying stocks. If the markets fail to recover, or take a long time to recover, I am still getting some tangible return in the meantime.

Using margin does entail that risk. I'd only use it in the event of a severe bear market and when undervaluation was obvious.


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## james4beach (Nov 15, 2012)

ArianB said:


> At the end of every month you are rebalancing into the ONE asset class that performed the best over the past 12 months.


To see something very much like this, take a look at my thread that tracks my DIVZ portfolio
http://canadianmoneyforum.com/showthread.php/49914-Tracking-my-non-dividend-portfolio-DIVZ

I posted the latest 6 month iteration and performance figures today, here

Just like your idea, it involves staying invested in best performing sectors. I do this at the individual stock level, but it's the same concept as using a sector ETF. From my 3 year experiment I can tell you the following caveats

(1) It gets scary at times because of the concentrated exposure. Look at the 2015 second half performance, horrible at -18.5%. There are going to be some very rough periods like that.

(2) The time and stamina to maintain this long term. I'm already nearly three weeks late doing my 6 month analysis, because... higher priorities. Life, work. These kinds of strategies are difficult to maintain long term because you need to make the time. You also have to be willing to whether those horrible negative periods and stick to the strategy.

Those are some real impediments to doing this kind of thing long term. Couch potato style index investing is much simpler, and unlike methods like mine & yours, you won't screw it up by failing to sit down to work on it.


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## Nerd Investor (Nov 3, 2015)

james4beach said:


> But ArianB's post didn't describe anything about getting out of the market. Perhaps you're talking about a different strategy than the OP's ?
> 
> I do agree that ArianB's method holds promise. I don't doubt that it can give great long term returns. But I share the criticism in GreatLaker's links ... to do this long term, you need a kind of stamina and long term dedication. That's really difficult to do over periods like 40 years. Index investing doesn't involve a burden such as that.
> 
> ...


I should have been clearer. 
You're never really "out of the market" as in going to cash, but when equities are under performing you are moving 100% to bonds in which case you are out of the stock market completely. This is the part of the strategy that avoids the worst of the drawdowns, even though you might be late to the game during bull markets.


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## twa2w (Mar 5, 2016)

The problem I see with this strategy is the short back test. This was during a very strong bull market in bonds, so if stocks were not doing well, then moving to bonds saved you a down turn in stocks while bonds were on a tear and gave you a decent return.
Now with rates at historical lows and the possibility of rising rates, bonds may not be a safe haven if stocks do not do well.
My guess is this will not do 16+% over the next 25 years but will still do ok as you will be mostly in stocks I suspect.


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## james4beach (Nov 15, 2012)

twa2w said:


> The problem I see with this strategy is the short back test. This was during a very strong bull market in bonds


Yes this is a big problem. In fact it was a simultaneous strong bull market in stocks and bonds, and a very long one at that. We're in a period that's a historical anomaly. This same criticism applies to many strategies in play today; they all work great during the stock/bond perpetual bull market. What happens when those conditions stop?



Nerd Investor said:


> I should have been clearer.
> You're never really "out of the market" as in going to cash, but when equities are under performing you are moving 100% to bonds


So is it that you track a number of ETFs, one of which is a bond index? And keep moving into whichever is performing the best in the last period? e.g. you select from among: XIC, ZSP, XEG, XFN, XGD, XBB. If you were looking at last 1 year as criteria, then you'd be 100% in XGD right now as it has returned +89%

In other period it may turn out that XBB has the best performance, in which case you'd go entirely into bonds. Is that what you're describing? This seems plausible and I could see it working.

Like others say, I'd suggest a more thorough back testing especially into periods that were simultaneously stock & bond bear markets. Look at the period Jan 1973 - Jan 1982. Over these *9 years* cash returned 8.2% annualized, which barely kept up with inflation. Memories of this kind of environment have faded from peoples memories. You can find these performances here

Stocks (S&P 500) returned 4.8% annualized in that period (along with a brutal -38% drawdown) ; and 10 yr treasuries returned 3.4% annualized. Obviously a balanced portfolio was similarly poor. All of these were pitiful and returned far less than CASH for nearly a decade!

I'll point out that the permanent portfolio saved the day again here. It returned 11.9% annualized with only -3.8% drawdown, which is nothing short of amazing. It's the only _simple_ strategy I know of that's worked during both bull and bear periods for stocks & bonds.

Many people think that today's loose monetary policy and unsustainable debts will eventually lead to this kind of high inflation environment again.


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## dubmac (Jan 9, 2011)

Found this article http://www.theglobeandmail.com/globe-investor/investment-ideas/its-all-about-income/article30558220/ which seems to support buying good dividend payers (emphasis on good) and leaving them alone to generate divvies. Bascially, the TSX is at the same valuations as in 2007* - but when it one reinvests dividends produced by companies - the increase is 30%. Buy and Hold investors - Happy Canada Day! 

*: editors note - we all know what happened in 2008!


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## Nerd Investor (Nov 3, 2015)

james4beach said:


> Yes this is a big problem. In fact it was a simultaneous strong bull market in stocks and bonds, and a very long one at that. We're in a period that's a historical anomaly. This same criticism applies to many strategies in play today; they all work great during the stock/bond perpetual bull market. What happens when those conditions stop?
> 
> 
> 
> ...


That's my understanding, although, I'm not 100% on the ins and outs as described by the Money Sense article.

For a similar strategy (and potentially the inspiration for that article) there a book called Dual Momentum by Gary Antonacci (I hope I spelled that right). It's called dual momentum because it looks at both relative and absolute momentum. In the strategy, you are holding one of three asset classes: US Stock Market, International Stock Market (excluding US obviously), Bonds. 

1) Select the best of either US or International Stocks based on the previous 1 year return. 
2) Compare that ETF's one year return to risk free 1-3 month T-Bills. 

If the equity ETF you selected has outperformed the T-Bills, hold that ETF. 
If the equity ETF has under performed the T-Bills, hold the Bond Fund. 

Similar but not quite the same as just selecting the best of the 3 classes.


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## twa2w (Mar 5, 2016)

As I understand the money sense article, on the first of every month you check the prev 12 month returns for the 4 categories. You put all your money into the best performing one. You do the same every month. If your prev months choice is still leading, you do nothing. If another has a better return, you sell and buy the new top performer. So potentially 12 buy sells a year. In the back testing there was not a lot of turnover. 
So not the thing for a taxable portfolio.
A strict momentum strategy.
There is a similiar strategy where you buy the worst performing asset. Hoping to buy low sell high.
Depending on the time frame tested, this has done well too.
But I don't think this would work with bonds in the mix, or St leastgoing forward. I have seen it done with the 6 major sock markets but only reviewed once per year.


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## james4beach (Nov 15, 2012)

When I was younger, I really poo-pooed these momentum type of investment strategies. I thought it was silly speculation to chase prices.

Over the years I've come to seen that much of the professional financial market investment also is more or less momentum investing. Whether it's stocks, commodities, FX, or real estsate, the dominant approaches really are about following trends and momentum.

For all the folksy "value" things we hear about Buffett, people misunderstand how he first made his fortune (and he got rich _early_). He started speculating in stocks early in a bull market. This was a very strong bull phase, and he became fabulously wealthy by *joining a strong bull run* in US stocks in the 1950s. There was over 3x increase in US stocks in this decade.

Buffett has done well adjusting capital allocation, for example becoming defensive in bear phases, but he fundamentally became rich by investing heavily into a rally -- joining the momentum.

Key steps in outperforming the stock market are (1) identifying a bull market, and (2) joining it, heavily. And (3) lightening up as the momentum weakens. It's how Buffett got rich too -- I mean back in 1950s.


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## Oldroe (Sep 18, 2009)

We have all been telling you this exact scenario and you read 2 Warren Buffet books and you get it.

Unbelievable!


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## Pluto (Sep 12, 2013)

james4beach said:


> Key steps in outperforming the stock market are (1) identifying a bull market, and (2) joining it, heavily. And (3) lightening up as the momentum weakens. It's how Buffett got rich too -- I mean back in 1950s.


Precisely.


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## amitdi (May 31, 2012)

james4beach said:


> You've framed it exactly in the years of the greatest bull market in world history.
> 
> I'd strongly recommend backtesting it to other periods that were NOT such strong bull periods. 34 years is not a very long time.


good point. but 34 yrs is still significant data. 

by other periods = you mean flatish, or only flatly rising markets because we have never had a significant period of bear markets, nothing that came close to 34 years. in other economies maybe, not in US.


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## amitdi (May 31, 2012)

read Dual Momentum Investing by Gary Antonacci

he has a similar strategy. Momentum works as long as one sticks to it. it will have higher drawdowns, so investor needs to stick with it in times of pain which is precisely a difficult thing to do. 

Momentum works on the assumption that 1) returns are sticky, and 2) prices will rise
assumption 2 is what all couch potato investors believe or else they would not have invested. #1 has been backtested in many studies, the above one and also in Dual Momentum and many other papers and books.


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## twa2w (Mar 5, 2016)

james4beach said:


> ...
> 
> For all the folksy "value" things we hear about Buffett, people misunderstand how he first made his fortune (and he got rich _early_). He started speculating in stocks early in a bull market. This was a very strong bull phase, and he became fabulously wealthy by *joining a strong bull run* in US stocks in the 1950s. There was over 3x increase in US stocks in this decade
> 
> Key steps in outperforming the stock market are (1) identifying a bull market, and (2) joining it, heavily. And (3) lightening up as the momentum weakens. It's how Buffett got rich too -- I mean back in 1950s.


Two things.
First Buffet beat the market by a significant margin especially in his early career.
He was worth 21,000 at age 20, 6 years later at 26 he was worth 140,000 and 1,000,000 at age 30. This is far better than 'the market'
He hit 1 billion at about age 56 and today worth close to 60 billion. So you could say the bulk of his fortune came in the last 25 years. But such is the power of compounding... Especially at a rate almost double the market( and close to triple some early years.)

Second, Ok if you identify a bull market, you have to have money to begin with to 'join in heavily' otherwise what does it do for you :-( 

Buffet has said more than once if he only had 1,000,000 to invest today, he could easily average better than 30% a year in todays markets. In fact I think he said 50% one time.


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