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Accelerating Dual Momentum Investing

Warren Buffett has said that trying to time the market is the number one mistake to avoid.

Market timing is hard, if not impossible to do, as it often results in the investor buying or selling too late or too early rather than right on time.  To even consider a market timing strategy is generally frowned upon by professional investors.

But we’re not professional investors, we’re just engineers who were convinced that there must be a simple yet effective way to pick up on and follow trends in uncorrelated asset classes.  We don’t hope or expect to be right every time, but we do hope and expect this strategy to do a decent job at minimizing losses to improve the effect of compounding gains.

In this post, I will lay out the framework of a simple, intuitive and profitable strategy that has worked well over the last 150 years.  I will provide all the data used so that you can perform your own analysis.  I’ll also provide tools you can use to implement this, or a similar strategy, on your own for free.  No proprietary software necessary, no expensive financial advisor required – just you, some logic, and systematic rules-based investing (no emotion!).

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The Basics of Behavioral Finance: Tips and Tricks to Combat Your Cave Man Brain

Thousands of years ago one of your ancient ancestors was enjoying the spoils of a recent hunting trip when suddenly a saber toothed tiger jumped out of the bush.  Your cave man relative had a choice, fight off the tiger or drop the food and run.  They ran….and they ran fast.  The human brain is an amazing thing, it has evolved over the eons to help us survive.  Most of those eons involved surviving physical threats where flight over fight was often the smart choice.

The financial “threats” we face in the 21st century are diametrically opposed to the physical threats of ancient times.  Stock market crashes, unlike hungry saber toothed tigers, often present opportunities as opposed to imminent death.  My very simple example here downplays the complex neurobiology of the human brain that drives us to make poor financial decisions, but the end result is the same:  humans are hardwired to be poor investors.

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Which Country has the Best Stock Market?

After my post on ex-US stock asset classes, I started to wonder if there are particular specific countries that have attractive stock market.

Finding the historical returns of many different country stock markets would have been a tedious task; but thankfully the team at Credit Suisse does a summary of world equities every year in their annual yearbook!

In this post I’ll summarize the Credit Suisse yearbook and then dive a bit deeper into the returns of 4 different stock markets: the United States, Australia, Sweden, and South Africa.  All the data presented is available to view and analyze yourself, and we encourage you to do that!

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Solving the Great Diversification Debate: Gold, Commodities, Treasuries or REITs

For a portfolio compromised of mostly stocks and bonds, which asset provides the greatest diversification benefits?

In this post we’ll quantify the diversification benefits that gold, commodities, long term treasuries, and REITs provide to a portfolio of mostly stocks and bonds. Annual data will be reviewed going back to 1972 and daily data is also analyzed going back to mid-2006.

By the end of the post you’ll have a better idea of which alternative asset class to add to your portfolio to help reduce risk. As always, the data reviewed in this post is available to download.

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Historical Analysis of Bond Investment Returns Performance

How efficient is the bond market?  We’ve found inefficiencies within US sectors, size/style, and international stocks.  Do similar inefficiencies exist in the bond market?

One would belief that fixed income should be easier to accurately predict returns and thus the bond/fixed-income market should be relatively efficient.  In this post we’ll put this assumption to the test.

We’ll go through the annual returns of 11 different bond asset classes (and the S&P 500 and inflation for comparison) to analyze the performance of these bond assets.  This analysis includes a look at the historical data (available to download here), comparison of moving trends, calculate 4 performance and 4 risk metrics, look at the correlation matrix, offer some additional resources and point out some investment opportunities to consider.

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Emerging Market and Small Cap Outperformance: Historical Comparison of International Equities

Are there any international equity asset classes that have historically offered better risk/reward characteristics?  We found in US stocks that midcap value has been a very attractive investment in the long run, are there similar asset classes outside of the US?

Turns out there are two: international (ex-US) small cap stocks, and emerging market stocks.

In this post we’ll compare historical returns data from 1972 through the end of 2016 and highlight these two international stock asset classes that have grossly outperformed their peers.  We’ll look at correlations between these asset classes and US stocks too to see if there are better or worse diversification opportunities.

As always, all data presented is available to download.

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The Corrosive Nature of Investment Fees

Corrosion is the slow decay of metallic materials that, over a long period of time, can lead to catastrophic failure of a structure.  Investment fees act in a similar nature, slowly and constantly eating away at your returns and severely damaging your potential to buy that house, put your kids through college or retire when you want.  The good news is that, like an engineer dealing with corrosion, you can avoid the damage if you make smart decisions to protect yourself.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”  -Warren Buffett

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Engineering a Balanced Index Fund

Did our engineered indexes peak your investment interest; but did they still seem a little too risky for what you are comfortable with?

In those indexes we pick US stocks on a monthly basis; and we’ve made an effort to pick stocks across uncorrelated sectors.  But at the end of the day, they all still carry US stock market risk. Portfolio management seeks to reduce risk by spreading your investments across many uncorrelated asset classes like international equities, bonds, and gold. So let’s do that with our engineered indexes to engineer a balanced index fund!

In this post we’ll add an allocation to international equities, bonds, and gold to our diversified US equity engineered indexes.  What we’ll be left with are two very well diversified funds that have exhibited about half the risk of the S&P 500 while matching, and even beating its returns.

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Engineering an Index Fund

Buying an S&P 500 index fund is boring yet simple. In the world of investing, boring and simple generally means inexpensive yet high returns. But if its too boring, excitement seeking humans (like myself) may opt for “sexier” investment opportunities.

The trouble is that sexy stocks and “strategies” are both expensive and their returns are underwhelming. But can we apply some lessons learned from previous analysis to make a boring and simple investment strategy… fun and exciting!?

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