Best Index Investment Strategy?

[Newt_Buggs]

I would be very interested in such a thread

[jimmysnow]

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Giving up a lot of EV being so diversified and passive. Great for Joe Sixpack but the readers here should understand risk. With the new leveraged ETF's, readers here could easily beat that portfolio with same risk and minimal time invested.

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There is no such thing as a free lunch. It is possible to create portfolios with higher EV but at a cost of higher risk. I'd be willing to discuss your portfolio recommendation, but I'd prefer to do it in another thread. This is a thread on index investment strategy. Why don't you start a new thread on leveraged ETF allocations.

-Tom

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Arbitrage is a prime example of a free lunch.

My point was if readers here can beat 400nl they can managed risk. So it be stupid for same person to be so diversified. They could invest in 3-4 ETFs and use a longterm risk model(p/e 200Ma)and the returns will be higher with comparable risk then your cookie cutter portfolio. You portfolio has too many positions and is losing EV somewhere.

I was talking about the new ProShares 2x leveraged ETF,s. Not sure why you think these were not ETFs or would not apply to a ETF index investment strategy. You could even use your allocations but replace small caps with ultra Russell 2000 ETF. Reduce the size by half and move the difference into fixed income. Boom less risk for the same return. AKA on your way to a free lunch.
http://www.proshares.com/ [img]/images/graemlins/grin.gif[/img]

[Jeff W]

Leveraged ETFs are a bad idea for buy-and-hold investors. They do not work like you say. For example, over the last ten years, Rydex Nova fund (150% Daily S&P 500) has returned 3.5% annually compared to 5.9% annually for the Vanguard S&P 500 index fund.

[jively]

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Arbitrage is a prime example of a free lunch.

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So do you have a simple way for clients to use arbitrage in a long-term portfolio without being time consuming?

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My point was if readers here can beat 400nl they can managed risk. So it be stupid for same person to be so diversified. They could invest in 3-4 ETFs and use a longterm risk model(p/e 200Ma)and the returns will be higher with comparable risk then your cookie cutter portfolio. You portfolio has too many positions and is losing EV somewhere.

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If you are suggesting something with 200-day moving averages, this is not a simple "index investment strategy." You are talking about having to watch your investments. With my portfolio, you can buy, don't pay attention for a year, rebalance, and then go back to not paying attention.

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I was talking about the new ProShares 2x leveraged ETF,s. Not sure why you think these were not ETFs or would not apply to a ETF index investment strategy. You could even use your allocations but replace small caps with ultra Russell 2000 ETF. Reduce the size by half and move the difference into fixed income. Boom less risk for the same return. AKA on your way to a free lunch.
http://www.proshares.com/ [img]/images/graemlins/grin.gif[/img]

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I have looked at some articles on these. They provide twice the daily returns, but they will not produce twice the long-term returns.

There is a lot of history for portfolios of diversified index funds. We can see what the returns and annual standard deviations have been over lots of time periods. Do you have any type of long history, or theoretical back-testing for the funds? Then show me your allocation (with 50% leveraged ETFs and 50% fixed income), and let's see if your annual returns are higher, and if the risk is really the same or less.

-Tom

[jimmysnow]

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So do you have a simple way for clients to use arbitrage in a long-term portfolio without being time consuming?

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No of course not...I was just disproving that risk does not have to be high for good returns.
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If you are suggesting something with 200-day moving averages, this is not a simple "index investment strategy." You are talking about having to watch your investments. With my portfolio, you can buy, don't pay attention for a year, rebalance, and then go back to not paying attention.

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Well average trade about twice a year with simple crossover system. Few hours a year of time invested.
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There is a lot of history for portfolios of diversified index funds. We can see what the returns and annual standard deviations have been over lots of time periods. Do you have any type of long history, or theoretical back-testing for the funds? Then show me your allocation (with 50% leveraged ETFs and 50% fixed income), and let's see if your annual returns are higher, and if the risk is really the same or less.

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Yes I have and yes it would. Back-tested using 2x leveraged on SP-500 since 1957. Using 4% interest when short it returned the following verses buy and hold.
50/200MA Crossover
Annualized Returns - 11.23
Standard Deviation (Annual) - 22.68
Average Drawdown (Annual) -16.8
Peak Drawdown -59.9
Sharpe Ratio - .41

Buy and Hold
Annualized Returns - 7.1
Standard Deviation (Annual) - 16
Average Drawdown (Annual) -13.48
Peak Drawdown -49.16
Sharpe Ratio - .28
That is assuming 3% fees and no taxes. To be honest capital gains may have killed the returns. Still the point is for minimal time invested can improve risk reward ratio of the portfolio.
Even with buy and hold approach your portfolio can improve more with less diversification. Clients can use the Christopher Moth paper as a touchstone. I use his best return/risk asset allocation as my IRA core portfolio:

American stocks (S&P 500) 31%
US Treasury bonds (SSB GBI) 24%
Foreign government bonds (SSB WGBI ex-US 22%
A basket of commodities (GSCI) 23%

This portfolio has an expected annual return of 11.5% (not adjusted for inflation, not reflecting management fees) and a risk of 7.5% (measured as standard deviation of quarterly returns). If USD securities become worthless, then maybe foreign ones will be okay. If the whole system caves in, there will still be commodities which retain some value. It aims to preserve capital without hurting the returns.

I think you missed my point. Yes your textbook portfolio is great for 99% of your clients but readers here should be able to beat that without much effort. I am sure you would not recommend your clients to play poker as a investment. Yet you could for the readers here because they understand risk.

[jimmysnow]

3.5% return of the mutual fund is not a measure of its total return, only its price history. Your analysis is in fact flawed. Mutual funds make distributions which reduce the net asset value (price) on the ex-dividend date and are in turn reflected as a lower return if you do not account for the additional shares you receive through dividend re-investment or the receipt of capital gains and dividends in cash. Please find the distributions for the RYNVX fund over just the past few years. I believe if you account for these distributions and increase the number of shares to reflect the distributions, you would have an accurate depiction of how the total return of the two investments would compare.

20-Dec-06 $ 2.014 Dividend
30-Dec-05 $ 0.297 Dividend
23-Dec-05 $ 0.553 Dividend
31-Dec-03 $ 0.005 Dividend
12-Dec-03 $ 0.005 Dividend
16-Nov-01 $ 0.052 Dividend
27-Jul-01 $ 0.073 Dividend
6-Nov-98 $ 0.411 Dividend
5-Dec-97 $ 0.051 Dividend
4-Dec-96 $ 0.25 Dividend
21-Jun-95 $ 0.888 Dividend
23-Dec-94 $ 0.21 Dividend

[Jeff W]

Rydex Nova Fund

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Total returns reflect the reinvestment of all dividends.

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[jively]

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Yes I have and yes it would. Back-tested using 2x leveraged on SP-500 since 1957. Using 4% interest when short it returned the following verses buy and hold.
50/200MA Crossover
Annualized Returns - 11.23
Standard Deviation (Annual) - 22.68
Average Drawdown (Annual) -16.8
Peak Drawdown -59.9
Sharpe Ratio - .41

Buy and Hold
Annualized Returns - 7.1
Standard Deviation (Annual) - 16
Average Drawdown (Annual) -13.48
Peak Drawdown -49.16
Sharpe Ratio - .28
That is assuming 3% fees and no taxes. To be honest capital gains may have killed the returns. Still the point is for minimal time invested can improve risk reward ratio of the portfolio.

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Are you comparing the leveraged S&P 500 with the S&P 500? I asked you to compare your leveraged diversified portfolio to my diversified portfolio. (And I show the S&P 500 averaging 10.6% from 1957-2006. Why are you subtracting 3% fees?)

The ifa.com web site has a lot of backtested results. Their "portfolio 90" is a 100% stock portfolio similar to the one that I recommended in this thread, but using DFA funds instead of Vanguard funds. According to this page, the hypothetical portfolio 90 averaged 13.51% with a SD of 14.15%. That is significantly better than your results.

Note that there are a lot of disclaimers about the backtesting; the international, emerging market stocks, and REIT data does not go back into the 50's and 60's, so they substitute US data.

-Tom

[jimmysnow]

My point that you are avoiding is that for someone skilled in risk, such as a winning 400nl poker player, should use a more advance strategy. (leverage, rolling leaps, less diversified)
I assumed 3% fees in active traded account. Use whatever number you like for fees. I was comparing 2x leveraged SP 500 verses str8 up SP 500. Leveraged portfolio with simple crossover indicator beat SP 500 with comparable risk.
The portfolio I posted has an expected future return of 11.5% and risk of 7.5%. That I am sure this will have better returns and lower risk then what your portfolio will return in future years. In the end who knows but I do know anybody will averaged capital allocation skills will do better in a more advance portfolio.

[jimmysnow]

I take your word for it Rydex Nova funds sucks. If you add a 200ma as a indicator to buy and sell you still would have beat beat the SP 500 by a bunch. Leveraged portfolio using ETFs, options, or margin will beat the market as long as you use some simple indicator to keep the risk comparable.