Do You Pay Taxes? Then Avoid Dividends and Do this Instead

In this white paper, we question an investing strategy that’s so beloved, it borders on sacrosanct – dividend-investing. Yet if you love dividends, we encourage you to keep an open mind, for rejecting these ideas would only shortchange yourself. That’s because we believe the alternative approach we suggest you consider has the potential to increase your returns significantly. And that’s just the start, because we think it also carries benefits that could result in even greater improvements for taxable investors.


Worried About the Market? It Might Be Time for this Strategy

As we get closer to the end of this bull market, whenever that may be, we see many investors are wondering two things: 1) will “whatever’s next” be as bad as 2000 and 2008; and 2) if so, is there a way to avoid it?

No one knows exactly when this bull will finally run out of steam, or how far it will fall; yet, there are signs we’re approaching an inflection point.

In this white paper, we’ll cover four signs of an aging bull, briefly revisit traditional strategies to help protect your portfolio, then highlight a strategy that has the potential to actually profit during a bear market. In our Appendices, we’ll wrap up by detailing an extension to this strategy that many investors might find interesting, and we’ll offer a pointed word to advisors.


Think Income and Growth Don’t Exist in this Market? Think Again.

Are you have the following argument with yourself?

“I need an investment that’s going to provide me not only income, but growth too. Unfortunately, investors have been piling into dividend funds for years now in their search for yield. I’m worried that this has left me few reasonably-valued opportunities. If I invest in a potentially overvalued dividend fund today and this 8-year bull market finally runs out of steam tomorrow, then I’m risking serious losses. On the other hand, keeping my money on the sidelines is returning me zero. Is there an answer?”

As I’m about to show you in this paper, yes, I believe there is an answer – and a good one. Income and growth are still possible, even in this market, though admittedly, harder to find.


The Trinity Portfolio

Does market uncertainty have you concerned about your wealth? If so, you’re not alone.

Many investors today are anxious because they lack a cohesive plan. Their investments are more an assortment of unrelated assets than deliberately-chosen pieces of a unified strategy. Unfortunately, this can leave their wealth exposed.

Our Trinity Portfolio offers a different approach. It’s a holistic investing framework, sturdy, as it’s rooted in respected, wealth-building investment principles, yet also strategic, able to adapt to all sorts of market conditions. The result is a unified framework that we believe can help relieve investors of the anxiety of “what’s the right strategy right now?”

Do you want help generating real investing wealth with less anxiety? Read how the Trinity Portfolio can help.


A Quantitative Approach to Tactical Asset Allocation

In this paper we update our 2006 white paper “A Quantitative Approach to Tactical Asset Allocation” with new data from the 2008-2012 period. How well did the purpose of the original paper – to present a simple quantitative method that improves the risk-adjusted returns across various asset classes – hold up since publication? Overall, we find that the models have performed well in real-time, achieving equity like returns with bond like volatility and drawdowns. We also examine the effects of departures from the original system including adding more asset classes, introducing various portfolio allocations, and implementing alternative cash management strategies.


Relative Strength Strategies for Investing

The purpose of this paper is to present simple quantitative methods that improve risk-adjusted returns for investing in US equity sectors and global asset class portfolios. A relative strength model is tested on the French-Fama US equity sector data back to the 1920s that results in increased absolute returns with equity-like risk. The relative strength portfolios outperform the buy and hold benchmark in approximately 70% of all years and returns are persistent across time. The addition of a trend-following parameter to dynamically hedge the portfolio decreases both volatility and drawdown. The relative strength model is then tested across a portfolio of global asset classes with supporting results.


Global Value: Building Trading Models with the 10 Year CAPE

Over seventy years ago Benjamin Graham and David Dodd proposed valuing securities with earnings smoothed across multiple years. Robert Shiller popularized this method with his version of this cyclically adjusted price-to-earnings ratio (CAPE) in the late 1990s, and issued a timely warning of poor stock returns to follow in the coming years. We apply this valuation metric across over thirty foreign markets and find it both practical and useful, and indeed witness even greater examples of bubbles and busts abroad than in the United States. We then create a trading system to build global stock portfolios based on valuation, and find significant outperformance by selecting markets based on relative and absolute valuation.


Where the Black Swans Hide & the 10 Best Days Myth

Below we examine market outliers in financial markets. How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already been declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.


Learning to Love Investment Bubbles: What if Sir Isaac Newton had been a Trendfollower?

Investment manias and financial bubbles have likely existed for as long as humans have been involved in financial markets. In this research piece we take a look at some of the more famous market bubbles in history and the extreme volatility and drawdowns they experienced. We then examine a simple trendfollowing approach investors could use to manage their risk. Across twelve market bubbles we find that a trendfollowing system would have improved return while reducing volatility. Most importantly, it would have reduced drawdowns significantly leading to the most important rule in all of investing – surviving to invest another day.


Finding Yield in a 2% World

Many investors are surprised to learn that the largest asset class in the world is foreign debt. US investors often allocate very little to foreign bonds, and when they do, it is through capitalization weighted indexes. These indexes allocate the highest weighting to countries with the most debt outstanding. Is there a better way to invest in global bonds? We examine a simple value approach applied to global sovereign bonds and find that it works well across decades. In a world of very low and even negative yields, a value approach could potentially add a well needed source of income to a diversified portfolio.


Learning to Play Offense and Defense: Combining Value and Momentum from the Bottom Up, and the Top Down

Sorting stocks based on value and momentum factors historically has led to outperformance over the broad US stock market. However, any long-only strategy is subject to similar volatility and drawdowns as the S&P 500. Drawdowns of 50%, or even 60-90% make implementation of a stock strategy very challenging. Is there a way to add value on stock selection, but also reduce volatility and drawdowns of a long only strategy with hedging techniques? In this paper we examine the possibility of following a strategy that combines aggressive offense and smart defense to target outsized returns with manageable risk and drawdowns.


What if 8% is Really 0%? Pension Funds Investing with Fingers-Crossed and Eyes Closed

It is well known that pension funds in the United States are underfunded even if they achieve their projected 8% rate of return. The scope of pension underfunding increases to an astonishing level when more probable future rates are employed. A reduction in the future rate of return from 8% to the more reasonable risk-free rate of approximately 4% causes the liabilities to explode by trillions of dollars. As bond yields declined over the past twenty years, pension funds moved toward more aggressive equity-based portfolios in an attempt to reach for this 8% return. By investing in a portfolio with uncertain outcomes, pension funds could experience increasingly volatile and even negative returns. Paradoxically, in an effort to chase the universal 8% rate, pension funds may be laying the groundwork for returns even lower than the risk free rate. In an effort to offer an empirical basis for this possibility, we conclude the paper with a relevant comparison – the return of a hypothetical Japanese pension for the past two decades. We believe that pension funds need to at least prepare for the unfathomable: 0% returns for 20 years. Most pension funds, regrettably, have not adequately stress tested their portfolios for these scenarios.


Global CAPE Model Optimization

We use the Shiller CAPE Model proposed by Mebane Faber as a template for the exploration of a variety of portfolio optimization methods. By virtue of the Model’s systematic allocation to the ‘cheapest’ markets with the highest theoretical risk premia, the model has the potential to extract high costs from ‘behavioural taxes’ related to the model’s extreme volatility and drawdown character. We apply several portfolio optimization techniques with the objective of maximizing portfolio Sharpe ratios and minimizing drawdowns, including dynamic volatility weighting, risk parity, target risk and minimum variance. Consistent with recent published research on robust portfolio optimization, return to risk ratios improve broadly, with the greatest impact achieved from procedures that manage positions and/or portfolios to an ex ante target volatility. A theoretical framework is also proposed.


Politics and Profit: Combining the Presidential Cycle and the January Effect

Does the intersection of two market anomalies set the stage for outsized performance? The first is what is known as the Presidential Cycle. This theory goes that equity returns during the third and fourth years of a President’s term are more favorable than the first two years. A second market bias is the large outperformance of small cap stocks in January. Historically small caps outperformed large caps in 80% of all Januaries by 3 percentage points per year. Historically across the 48 months in the four year cycle the January of Year 3 is the single biggest outperformer with median returns since 1927 of nearly 8% a month for small caps. Does this mean that January is guaranteed to be great? Again, nothing is guaranteed – Year 3 Januaries have varied from 27% to down 10%. While many of these tendencies are just that, investors can view them as head or tailwinds that could give bulls and bears pause.