This is an honest post to search for whether trading individual stocks is really worth it. I understand that individual models/simulations can post eye-popping returns, but I’m wondering if the average P123 user can consistently post market-beating returns across an entire portfolio, net of expenses.
I have been a P123 member for just over 5 years. While I do not design my own models, I am smart about how I invest/trade: I keep trading costs low; I subscribe to multiple models with proven track records and high scores in the momentum and value rankings; I stay committed to models (don’t back out when the going gets tough); I invest in a mix of large caps, mid caps, and small caps, etc. I have always subscribed to anywhere from 4-6 Designer Models (or R2G models in the old vernacular), and I follow the trade signals meticulously and in a timely fashion.
I have 15 years of investing experience, and I have chased many fads and follies in those 15 years. I’ve tried stocks, ETFs, mutual funds, leveraged ETFs, etc. But I continue to learn from my mistakes and become a wiser investor.
Here are some quick stats on Designer Models as of today:
– 23.6% of models have positive excess return over the past 3 months (69 of 292)
– 41.9% of models have positive excess return over the past 1 year (108 of 258)
– 42% of models have positive excess return over the past 2 years (87 of 207)
Those results don’t lead to very good odds of beating the market by using Designer Models. Further, these numbers exclude the countless models that have been retired over the past 2 years. If you were able to account for that survivorship bias, the percentage of models with excess returns would be lower. Clearly, it’s been a tough period for Designer Models. I wonder if it’s naive of me to think I am smart enough to find the minority of models that will outperform over the long-term.
What if we could see the since inception excess return of every model that lasted more than 6 months here on the platform? What percentage of them would have excess returns since inception?
My personal portfolio performance since joining the site is 11.65% annualized, net of trading costs/fees (time-weighted rate of return). However, during that same period (starting date of 2/11/13), the S&P 500 Total Return Index is up 14.65% annualized. The MSCI EAFE Index is up just 5.72% annualized during that period, which certainly has been a headwind for my returns. My international exposure has likely ranged from 15-25% of the portfolio during this period. But even a portfolio of 80% SPY and 20% EFA would have beaten my performance by over 100 basis points annually over the past 5+ years. So is it worth all my time and energy in researching and trading models, only to trail the market?
Year-to-date, I am down 3.24%, while the S&P 500 Total Return is up 9.27% through yesterday. I have always been drawn more to value strategies than growth strategies, so it’s understandable that my personal portfolio would struggle as value continues to lag growth over the past number of years. I’m trying to ascertain whether the ship will right itself, or if I need a change of strategy.
As I see it, there are several challenges facing the individual investor as he attempts to beat the market:
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We can all find great models/backtests/ideas. But how successfully do we put them together to form a portfolio that can beat the market over time?
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Position sizing and model sizing. The temptation is to size up on the positions in our “hot models” and size down on the “cold models”. Further, the temptation is to commit more capital to the hot models and less capital to the cold models.
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If a model has “gone cold”, how do I know whether it will come back? I have seen many great models from reputable designers be sent to the trash bin due to lousy performance. But the models always looked good…until they didn’t.
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A lot of the microcap/small-cap models on here seem to be chasing the same collection of stocks. Thus, for me it seems like a crap-shoot from one model to another. One model just happened to enter and exit at an opportune time, while another model had different timing.
I just finished reading Jack Bogle’s book, “The Little Book of Common Sense Investing”. I read it with an open mind, and I came away mostly persuaded in the truth of Bogle’s arguments. I understand a guy like Bogle is probably anathema in the P123 world, but his arguments (and his success) merit attention. I am considering a rebuild my portfolio with a simple mix of Vanguard Total Stock Market Index, a mid-cap ETF like EZM, a small-cap ETF like EES, and Vanguard Total International Stock Index for something like 10-20% of my portfolio. I would be getting off the hamster wheel of trying to beat the market.
What length of time is a sufficient testing period for my life on P123? Am I giving up too soon on trading individual stocks?