Weekend Reads

Below is my weekend investment reading list:

A Wealth of Common Sense:

One Year Returns Don’t Tell You Anything
The Difference Between a Portfolio Manager & Portfolio Management
Misconceptions About Individual Bonds vs. Bond Funds

Closed-end funds trading at steep discounts – Investment News

5 Myths about U.S. government debt – JP Morgan

Invest Like a Hedge Fund Manager: AlphaClone CEO Maz Jadallah Shares His Insider Tips – ETFdb

Multi-Factor Investing – Dual Momentum

The Greatest Gift You Can Give a Young Person – The Reformed Broker

Sovereign High Yield Bond Strategy & Would You Pay Your Advisor $1,000,000 in Fees? Meb Faber

What is the Right Allocation Percent to Alternatives? Attain Capital

Swedroe: More Factors Don’t Always Help – ETF.com

Cliff Asness Quick Hits: Smart Beta and Risk Parity – Alpha Architect

How to make proper equity simulations on a budget – Part 1 Data – Following the Trend


Dual ETF Momentum October Update

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.  Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, also details Dual Momentum as a total portfolio strategy.

My Dual ETF Momentum spreadsheet is available here and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual Momentum”.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in the 2013 Year in Review and the January 2015 Update.

Below are the four portfolios along with current signals:



As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future.

Weekend Reads

Below is my weekend investment reading list:

‘Never Buy a Boat’ and Other Misguided Financial Advice – The Big Picture

Swedroe: Building Optimal Value Portfolios – ETF.com

Is trend following market timing? – Newfound Research

PIMCO Examines How Liquid Alternatives Fit into Portfolios – DailyAlts

How Can a Strategy Still Work If Everyone Knows About It? AQR

From Research Affiliates:

How NOT to Wipe Out with Momentum
Are Buybacks an Oasis or a Mirage?
Investing versus Flipping

From Pragmatic Capitalism:

Gambling, Investing, Luck & Skill Edition
How Long Can You Stick With Failing Factor Investing?

From Alpha Architect:

Can Investors Achieve Commodity Exposure via Equities?
New Evidence: Simple Forecasts Beat Complex Forecasts
Combining volatility, momentum, and trend in asset allocation

Apathy as a Strategy – A Wealth of Common Sense

Mebane Faber has a new white paper out, available here

Dividend Champion Portfolio October Update

The High Yield Dividend Champion Portfolio is a publicly tracked stock portfolio on Scott’s Investments.  Its goal is to capture quality high yield stocks with a history of raising dividends.

The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.  Stocks from the Dividend Champion list are then ranked on yield, payout ratio, P/E, and 3 year dividend growth rate.

Stocks are sold on the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

The top 15 stocks  are below and displayed in order of their overall ranking (figures are September month-end):

Name Symbol Yield Payout 3-yr P/E
Helmerich & Payne Inc. HP 5.82 49.11 116.13 8.44
Emerson Electric EMR 4.26 52.08 7.04 12.24
ExxonMobil Corp. XOM 3.93 52.05 13.43 13.25
Chevron Corp. CVX 5.43 66.25 10.86 12.21
Universal Health Realty Trust UHT 5.45 55.65 1.29 10.20
Eagle Financial Services EFSI 3.48 45.71 2.26 13.14
Wal-Mart Stores Inc. WMT 3.02 41.00 10.98 13.56
Cincinnati Financial CINF 3.42 46.46 2.78 13.59
Questar Corp. STR 4.33 65.63 6.55 15.16
Tompkins Financial Corp. TMP 3.15 44.80 4.99 14.23
Dover Corp. DOV 2.94 41.38 16.29 14.08
Old Republic International ORI 4.73 59.68 1.41 12.61
Sonoco Products Co. SON 3.71 54.69 3.36 14.74
Community Trust Banc. CTBI 3.49 48.82 1.60 13.98
T. Rowe Price Group TROW 2.99 45.61 12.38 15.24

EFSI is not eligible for purchase due to its low liquidity.

There is turnover in one position this month.  Universal (UVV), a holding since April, will be sold for a gain of 9.62%.  The proceeds will be used to purchase Walmart (WMT).

The current portfolio is below:

Position Average Purchase Price Initial Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 103.1835 12/6/2012 -15.68%
EMR 49.64 8/4/2015 -6.93%
ORI 16.22 4/4/2014 -2.03%
WMT 65.68 10/6/2015 0.00%
TMP 44.46 8/6/2014 20.11%
CTBI 36.55 5/5/2014 -5.31%
XOM 89.01 4/5/2013 -12.49%
HP 90.57 10/6/2014 -37.98%
STR 22.8 3/6/2015 -11.71%
UHT 55.27 4/8/2015 -14.49%

Book Review: DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth

Readers of Scott’s Investments know I am a proponent of do-it-yourself investing solutions. I am also a big fan of Alpha Architect, so I was excited when I was asked to review a book which combines the best of both worlds, DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth (DIY).

Authors Wes Gray, Jack Vogel, and David Foulke, all of Alpha Architect, split DIY into two parts.  Part one uses a variety of studies and evidence to argue we, as individual investors,  can beat the experts.  Part two shows us specifically how we can beat the experts by implementing a do-it-yourself investment solution.

Chapter 1 argues model-based decision making yields better results than discretionary decision making.  Model-based decision making involves development, implementation, and assessment. Experts are not completely discredited by the authors, who argue they are critical for certain elements of our decision making. Specifically, experts are necessary to develop and assess decision-making processes, but a central tenant of DIY is that executing decision making should be systematic.

Chapters 2 and 3 argue human behavioral biases can lead to poor decision making.  The authors rely on a body of research that shows humans tend to make story-based, rather than evidence-based decisions.  To make matters worse, our species is consistently overconfident, fueling our poor decisions.

Chapter 4 transitions from a study of broad human behavioral biases to applications of these biases in investing.  The authors argue for evidence-based investing instead of story-based investing. Stories permeate financial markets, but in order to be good investors we should instead follow the evidence.

In Part Two (Chapters 5 – 10) the authors show us how we can beat financial experts. Their argument is guided by a “FACTS” framework. FACTS stands for Fees, Access, Complexity, Taxes, and Search.  The authors argue these principles should always be used when assessing any investment strategy.

Chapter 6 introduces the reader to basic asset allocation strategies.  The cornerstone of asset allocation is diversification, and the authors use some popular  asset allocation models to argue fine-tuning asset allocation strategies does not really matter over long periods.  In addition, they find that equal-weight portfolios meet or beat “fancy” asset allocation strategies.  In other words, a simple, diverse asset allocation strategy is robust.

Chapter 7 discusses risk management models as a means to improve risk-adjusted returns in asset allocation.  The authors argue that simple trend following models are effective risk management strategies.  Specifically, simple moving average systems (such as a 10 month or 12 month moving average) and time-series momentum have been shown to be effective. The conclusion is that a simple 50/50 split between the two systems generate an excellent risk-reward profile.

Chapter 8 highlights the benefits of simple security selection models. The authors argue two factors, value and momentum, are reliable and simple to implement for DIY investors.  They highlight a specific value system that ranks stocks based on EBIT/TEV (earnings before interest and taxes divided by total enterprise value) which has strong historical returns.  They also test a simple momentum system on individual stocks with strong historical returns.  They show that the two systems combined into a 50 percent value and 50 percent momentum portfolio generates even higher returns than either system by itself.

Chapter 9 puts the entire DIY system together. The authors create a system which allocates across asset classes.  Risk management techniques are used to manage drawdowns and volatility. Finally, asset classes are allocated to value and momentum strategies to further enhance performance.

DIY consolidates many of the arguments I have read on Alpha Architect in recent years.  It is well constructed, researched, concise, and accessible for professionals and inexperienced investors. The target audience is both family offices and individual investors and both could benefit from following a DIY solution.  I recommend DIY whether you are new to investing, an experienced office, an Alpha Architect reader or not.

Implementing the value and momentum strategies as detailed in the book (via individual stocks) could be a challenge for individual/small investors. However, the strategies outlined in the book can be replicated via ETFs.  DIY lacks specific ETF recommendations but my site tracks a  “RAA Spreadsheet” using ETFs that is similar in style to the strategies outlined in the book. In the coming days, the sheet will be updated to more closely align with the strategies in DIY. In addition, Alpha Architect also posts the DIY allocation strategy for free.


October Update – ETFReplay.com Portfolio

The ETFReplay.com Portfolio holdings have been updated for October 2015.  I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility.

The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6 month total returns (weighted 40%), 3 month total returns (weighted 30%), and 3 month price volatility (weighted 30%). The top 4 are purchased  at the beginning of each month. When a holding drops out of the top 5 ETFs it will be sold and replaced with the next highest ranked ETF.

The 14 ETFs are listed below:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
HYG iShares iBoxx High-Yield Corp Bond
EEM iShares MSCI Emerging Markets
LQD iShares iBoxx Invest Grade Bond
TIP iShares Barclays TIPS
VTI Vanguard MSCI Total U.S. Stock Market
DBC PowerShares DB Commodity Index
GLD SPDR Gold Shares
TLT iShares Barclays Long-Term Trsry
SHY iShares Barclays 1-3 Year Treasry Bnd Fd


Bring Your Portfolio Into The 21st Century
Free Access – INO.com Special Report

In addition, ETFs must be ranked above the cash-like ETF (SHY) in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here. This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class.

The cash filter is in effect this month, the same as the previous three months.  SHY is the highest rated ETF in the 6/3/3 system.  Therefore, SHY will continue to be the sole holding in the portfolio.

The top 5 ranked ETFs based on the 6/3/3 system as of 9/30/15 are below:

SHY Barclays Low Duration Treasury (2-yr)
LQD iShares iBoxx Invest Grade Bond
TIP iShares Barclays TIPS
PCY PowerShares Emerging Mkts Bond
TLT iShares Barclays Long-Term Trsry


In 2014 I introduced a pure momentum system, which ranks the same basket of 14 ETFs based solely on 6 month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy.

The top 4 six month momentum ETFs are below:

6 month Momentum
SHY Barclays Low Duration Treasury (2-yr)
PCY PowerShares Emerging Mkts Bond
TIP iShares Barclays TIPS
LQD iShares iBoxx Invest Grade Bond


(TLT), a holding for one month, will be sold for a gain of 1.75%.  The proceeds will be used to purchase (LQD).

The updated holdings for each portfolio are below.

6/3/3 strategy:

Position Avg Purchase Price Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
SHY 84.86 5/29/2015 & 6/30/15 $12,644.14 $12,663.51 0.15%


Pure Momentum strategy:

Position Purchase Price Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
PCY 27.65 8/31/ 2015 $2,350.25 $2,331.55 -0.80%
SHY 84.86 7/31/ 2015 $2,460.94 $2,464.71 0.15%
TIP 111.58 8/31/ 2015 $2,343.18 $2,324.49 -0.80%
LQD 116.09 9/30/ 2015 $2,321.80 $2,321.80 0.00%