More Fidelity Rotational Work

Reminder: Shortly after I post these notes, the family and I will be leaving for Saratoga to attend the races. Afterward it’s out to dinner with a cousin I haven’t seen in a couple of years. Tonights update will be fairly late and there will not be any trading notes tomorrow. Thanks for your understanding!

You may recall in July there were 3 days of Trading Notes devoted to the Fidelity Select Rotational Project. You can review those notes:

For the benefit of newer members the Fidelity Select Funds are essentially 41 groups and/or sector funds. The rotational method forces one into the strongest ones and holds them until they are replaced in the rankings. The returns this method has over the last 25 or so years, I think, are exemplary.

The problem is the draw downs that occur at times. They are severe.

Screen Shot 2014-07-02 at 8.10.23 AM

This chart shows the growth of 100K if we rotated the top 2 funds. In other words we keep the top two ranked funds until such time as they are replaced in the rankings and then we switch. The top 4 had a  slightly better performance this time around, they seem to vacillate back and forth as to which is better at any given time. I update this performance quarterly, the above is through the end of June 2014.

Having served in the brokerage industry for a dozen years or so I know that at most of those valley’s many if not most will throw in the towel, just at the equity is about to turn That being said I have over the past couple of years attempted to introduce some market timing basis a major average.  The CAGR worsened and the draw downs increased. Horrid.

If I add a trailing stop of 8% on the fund I improve performance by 75 basis points, not bad.  This of course does not consider the Fidelity redemption fee if held less than 30 days (1%). There are only about a dozen instance where that may have been a problem.

Unfortunately the software I use to run these back tests does not allow certain things to happen that I’d like to test. In other words in the above example the 8% was not really. The back tester is run in the monthly time frame so the stop is only affected when it is down 8% or more at the end of the month.

Alex thinks he can take this into Microsoft Excel to see exactly where the 8% was hit. The other thing I would like to do is take the chandelier and if the fund is underneath the chandelier make that our buy stop.

Work continues and you will be kept up to date. This by the way is easy enough to follow with out a computer program, I would just like to know what the results would have been before writing it up.

Talking Points and Megan Washington: Why I live in mortal dread of public speaking:

These Go To Eleven (Market Anthropology)
Gladwell: The Gangster’s Guide to Upward Mobility (New Yorker)
Why is the yield curve flattening? (Money Illusion)
If We Release a Small Fraction of Arctic Carbon, ‘We’re F’d’ (Vice)
The Bottom Is In For Treasuries (EconMatters)
Federal Reserve finds US households are unwell (FT Alphaville)
Is the Stock Market Rigged? Yes…In Your Favor (Investing Caffeine)
Should Employers Ban Email After Work Hours? (HBR)
5 Top Tech Stocks That Mutual Funds Are Scooping Up (I B D)
Million-Dollar Mobile Homes  (WSJ)
Don’t Fear the Reaper (Yahoo Finance)
The Error-Proof Portfolio: 6 Rebalancing Mistakes to Avoid (Morningstar)
Wall Street Didn’t Win — Financial Reform Is Working (Time)
Some unfortunate realities of the investment business. (A Wealth of Common Sense)
Social Media Arguments: Can’t-Win Propositions (NY Times)
The Most Fascinating Profile You’ll Ever Read About a Guy and His Boring Startup (Wired)
12 books every investor should read (Farnam Street)
Who Stole the Four-Hour Workday? (Vice)

Megan Washington: Why I live in mortal dread of public speaking

Have a Great Day!