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| ★ wanayoo — archive 1999 http://www.fool.com/workshop/1999/workshop991019.htm | Nouvelle recherche | Portail wanayoo |
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Foolish Workshop
By
El SEGUNDO, CA (Oct. 19, 1999) -- In my last two articles I have been focusing on the costs of investing in various mechanical strategies. In part 1, I talked about how to convert a strategy's backtested return which didn't consider costs into a real-world return. In part 2, we looked specifically at strategies that trade monthly. We saw that someone starting with $2000.00 could end up losing to a money market fund while following a monthly strategy that returned 42% annually before costs. Amount Invested RS-26 M PEG-26 M PEG-26 S PEG-26 A Cost Free Return 42.0% 44.1% 47.9% 45.8% $2000 3.9% -12.6% 32.7% 35.6% $5000 24.8% 14.9% 40.5% 41.2% $7500 29.5% 21.0% 42.2% 42.4% $10,000 31.8% 24.1% 43.1% 43.0% $20,000 35.3% 28.7% 44.4% 44.0% $30,000 36.4% 30.2% 44.8% 44.3% $50,000 37.3% 31.4% 45.2% 44.5% $100,000 38.0% 32.4% 45.5% 44.7% $1,000,000 38.6% 33.2% 45.7% 44.9% M = Monthly S = Semi-Annual A = Annual Assumptions: 4-Stock Portfolio's - all starting in January $10.00 Trades Annual and Semi screens turned over all the stocks every time RS-26 M made 28 trades/yr. PEG Monthly had 38 trades per year RS screen assumed a spread of 0.41%. All PEG screens assumed a spread of 0.89% (based on actual spreads for October 1st stock selections) As you can see, because of the frequent trading and high spreads even with a $1 million portfolio, the PEG monthly strategy loses almost 11 percentage points from its backtested average return. For the RS-26, the results aren't quite as bad because the screen has lower turnover. With a $1 million dollar portfolio, the investor's return will drop 3.35% due to costs. The returns drop steadily, though, as lower and lower portfolio values are used. But the big question here is: What's the point of monthly trading? It never beats the semi-annual and annual screens? I don't think that this chart is the stake in the heart of monthly trading. It's possible to pay less than $10 per trade, and these are only two strategies, both of which have fairly high turnover. An investor who pays less per trade and is using a monthly screen that has lower turnover may find the costs less of a problem, but only if returns are at least as high as the average over the past 12 years. Then again, the chart above assumes that the money is in a tax-deferred account. At the very least, it should put a stake in the heart of monthly strategies if taxes are considered and, of course, it sounds the death knell for smaller portfolios using a monthly strategy. It also should certainly be a wake up call for all investors to look very, very closely at costs as a percentage of their own portfolios especially if they trade frequently. Remember when making any investment decision, don't let greed today make you feel foolish tomorrow. Until next time, Fool On!
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