This strategy was developed for investors who want to hold a portfolio of stocks that have had recent strong share price performance. Research has shown that stocks with strong price performance over the prior year tend to continue performing well.
About the Strategy
The strategy invests in listed US equities that fall within the S&P 500 index. The investment premise is to identify the strongest trending stocks in this universe and hitch a ride on their upward movements. This ‘momentum effect’ has been shown to produce market beating returns and is based on investor psychology of wanting to own stocks that have performed particularly well in the recent past. An added benefit of the strategy is that it switches to a defensive portfolio of three ETFs if stock markets aren’t performing sufficiently well.
The strategy would be classed as a ‘growth’ strategy and therefore is on the higher end of the risk/return spectrum. Risk is managed in the strategy through an ‘index filter’ that causes the strategy to shift completely to a defensive portfolio if the S&P 500 declines sufficiently. In the back-testing this protected the portfolio during the Global Financial Crisis although the trade-off is that the filter sometimes activates at times when hindsight would have suggested it shouldn’t have activated.
The US Momentum strategy has been developed and tested by simulating the investment performance over historical stock price data. This allows us to gather performance data based on how this strategy would have performed if we had run them during these prior time periods. The statistics in the table below summarise the results of this testing and compare them to the S&P 500.
|US Momentum Strategy||S&P 500 Accum Index|
|Construction||Ten of the best quality stocks selected from the S&P 500 and Nasdaq 100 indices||Free-float-adjusted market cap weighted, comprising 500 of the largest US stocks|
|Management||Rebalanced once per month on the 1st of the month||Rebalanced four times per year according to market cap and liquidity|
|Annual Average Return||12.0% per annum, before fees||5.7% per annum, before fees|
|Worst 12-month Return||39.7% (Feb-2008 to Feb-2009)||-43.3% (Feb-2008 to Feb-2009)|
*As at 31 December 2018, based on 15 years of back-tested data
Minimum Investment Amount and Period
There is no specific minimum investment amount although the minimum brokerage charged by your broker can put a practical limit on the minimum investment size. For example, if your broker charges a minimum of $10 per trade, this would represent a 0.5% charge on a trade size of $2,000 (portfolio size of $10,000 for five stocks). Given an annual portfolio turnover of approximately four times, this would produce an annual brokerage charge of 4%. In this example, with a minimum brokerage charge of $10, we would recommend an investment of no less than $10,000.
Rivkin recommends a time horizon of at least three years for this strategy due to the possibility of a negative return in any given year. Based on the strategy back-testing, the probability of a positive return over any three-year time horizon is 96% and therefore having an investment time horizon of at least this much maximises the probability of a positive investing outcome.
Fees and Charges
Rivkin’s advice product attracts a fixed annual subscription fee that does not depend on the amount invested. Other than this, the only fees and charges relate to those charged by your broker for trading. Under this model, the more funds you invest in our strategies, the lower the annual cost on a percentage basis. This strategy is also offered in a Separately Managed Account version for which you pay a small management fee for us to follow the strategy on your behalf.
Please note that this article contains back-tested data which shows how the model would have performed using historical data. “Backtest” results are neither an indicator nor a guarantee of future returns.
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