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Interview: If You Had $250,000, How Would You Allocate it?

Recently, during an interview, I was asked this question, to suggest a possible portfolio allocation for people (Singaporeans) in their early 30s, with $250k of investible cash to start with. Here is my answer in full:

If you only have $250k to start with, I would suggest a diversified approach of various asset classses to maximise returns.:

  • 25% allocated to cash (war chest)
  • 10% to wild bets
  • 20% to trading account
  • 20% to commodities
  • 20% to businesses, startups, angel investments
  • 5% to stocks, REITs, ETFs

Currently, the bulk of the holdings is in cash, since the market is pretty “risk-on” at the moment with much political and economic uncertainty about trade wars and real wars. Hence, I only included minimal stock holdings, as the stock markets (S&P 500)are at 8-9 year highs, so I will wait to buy in at a lower price should the opportunity arise.

One important factor is the 20% allocation to trading account, as this generate monthly cashflow from stocks/forex trading to continue growing the total portfolio size aggressively, which can then be allocated to other asset classes within the portfolio.

10% to cryptocurrencies is considered a “wild bet” which could be a zero or hero; lastly 20% to businesses is for people who have some prior experience to invest directly in businesses, or start their own. Personally, my portfolio includes several businesses, including a cafe and pub.

I have allocated 20% to commodities, as commodities are likely at their cycle low. The GSCI (Goldman Sachs Commodity Index) is one of the main benchmark for commodity prices, and the (GSCI/S&P 500) is used to measure the prices of commodities relative to stock prices. Currently, this measure is at a 50-year low, which suggests cheap commodities as a potential investment.

I have excluded real estate from this sample portfolio, as I do not include “own stay” property as an investment asset, and $250k is too small for any major property investment. For my own portfolio, i have invested in several properties as I feel that the Singapore property market will continue to rise for the next 5-10 years.

I have also excluded fixed income, as for Singaporeans, the CPF (SA account at 4%) is pretty much similar to a “risk-free” high-yield bond, hence it serves well as the fixed income component of the portfolio. For my own portfolio, i have hit the minimum sum, which will provide a good safety net for retirement.

I hope this has provided you a good template to start building your portfolio, but do keep in mind that ideally you should be looking to rebalance your portfolio every 1-3 months.

The January Barometer: An Accurate Predictor of Stocks for 2017?

There are many speculations about leading indicators in the market, and one of the most popular ones is the January Barometer. In this post, we will explore this phenomenon, and see if it holds up to the test, and whether it will provide any useful insights going forward.

WHAT IS THE JANUARY BAROMETER?

“As January goes, so will the market go for the year.” – Wall Street Folklore

The January barometer is a tool used to determine if the year will be bullish on the equity space. If January sees a winning month, the year would be a winning year.

January can be said to be an indicator to whether the year would be bullish or not.

This idea first emerged in the 1972 edition of Yale Hirsch’s Stock Trader’s Almanac. Here’s what was published:

“We doubt that any technique or indicator ever devised has been so remarkably accurate as the January Barometer. The barometer, which indicates that as January goes, so will the market go for the total year, has proven correct in 20 of the last 24 years…. Very few stock market indicators show such an 83.3 percent accuracy for even short spans of time.”

 

 

PREVIOUSLY… INVESTIGATING THE SANTA CLAUS RALLY

A couple of months back, I collected statistics for a simple ‘buy in January, sell in February’ portfolio. How it works is simple: I would purchase the stock index on 1 January, and sell it on 1 February and see the results.

Buy in January, Sell in February Statistics

2011: 4.34%

2012: 1.28%

2013: 4.55%

2014: 5.62%

2015: -0.08% — Total returns for 5 years = +15.71%!!!

Over the last 5 years, it has indeed been a great run for the ‘buy in January, sell in February’ portfolio.

This got me excited, but I decided to look further back in history…

Breaking up the time periods into 5-year chucks, here are the statistics:

5-year “Buy in January, Sell in February” Statistics

2011-2015: +15.71%

2006-2010: -8.7%

2001-2005: +0.88%

1996-2000: -6.38%

The santa claus rally didn’t really exist as claimed by most sensationalists.

This time, we want to look at whether January tells us if the year would be a winning year.

 

JANUARY BULL RUN = WHOLE YEAR BULL RUN?

Quantpedia has a good summary of this, and the strategy is simple: Invest in equity market in each January. Stay invested in equity markets (via ETF, fund or futures) only if January return is positive otherwise switch investments to T-Bills.

To put it more simply, there are two scenarios:

Scenario 1: January positive –> Stay invested in equities

Scenario 2: January negative –> Exit equities

The results are shocking. Quoting from a research paper titled: “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

“We investigated the power of the January market return to predict returns for the next 11 months using 147 years of U.S. stock market returns.

Using 147 years of U.S market data, this was the result:

We found that, on average, the 11-month holding period return following positive Januarys was significantly higher, by a wide margin, (-7.76%) than the 11-month holding period return following negative Januarys.”

This meant that on average, a year with a positive January outperformed a year with negative January by 7.76%. This is a very significant difference.

 

 

 

5 TRADING STRATEGIES THAT WERE RESEARCHED

In the research paper that I mentioned above (you can read the whole paper by downloading it in the link at the bottom of this article), here are 2 strategies that can be taken knowing that January is a good predictor of the market for the rest of the 11 months:

(1) LONG/T-BILL STRATEGY

Long in Jan, continue being long if Jan is positive, but exit and go long on bonds if Jan is negative.

(2) LONG/SHORT STRATEGY

Long in Jan, continue being long if January is positive, but go short if Jan is negative.

The results for 1857 – 2008 are highlighted below:

Strategy 1 ( completely outperformed strategy 2.
Source: Page 21 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

In the research paper, 5 strategies were outlined, but I only cover the 2 that are relevant to our discussion.

It seems that this would be a very profitable strategy:

Firstly, buy stocks in January.

If January is positive, remain long on stocks from February to December.

If January is negative, exit stocks and go long on bonds from February to December.

In addition, the research paper also published returns for the years 1940 – 2008:


Strategy 1 completely outperformed strategy 2, even in the recent 70 years.
Source: Page 23 of “What’s the Best Way to Trade Using the January Barometer?” (M. J. Cooper, J. J. McConnell, A. V. Ovtchinnikov, 2009)

 

WHAT HAPPENED THIS YEAR?

The STI is up 5.5% for the month of January 2017. Going by the strategy outlined above, if you are a buy-and-hold investor, it would be wise to hold the STI until the end of 2017.

 

On the contrary, for the Dow, we’ve only seen a +0.4% increase in Jan 2017. At the time of writing this (2:00am Singapore Time, 1 Feb), it still makes sense to hold the U.S stock index until the end of 2017 (if you’re a buy-and-hold investor). That being said, it’s wise to employ price action strategies and focus on a precision entry/exit if you are already long.

While the January barometer is good information to know, it’s largely a super long-term strategy (10-20 years) and investors will position themselves well if they have strong price action fundamentals in a generally bullish market.

Going forward, I expect the stock market in both Singapore and U.S to be bullish. This is a probabilistic approach; I would still be making trades based on solid price action strategies, and make portfolio adjustments where necessary.

All the best for 2017, and happy trading! I hope that this article has shed some light for those who hate reading research papers 🙂

 

RESEARCH SOURCES & REFERENCES

investopedia.com/terms/j/januarybarometer.asp
cnbc.com/2014/01/30/uld-totally-ignore-the-january-barometer.html
quantpedia.com/screener/Details/113
papers.ssrn.com/sol3/papers.cfm?abstract_id=1436516
fullertreacymoney.com/content/2010-03-02/Januaryeffrct.pdf
Cover Image: wallpapercave.com

Santa Claus Rally: Do Stocks Always Run Up in December? (Statistics from the Past 20 Years Reveals Some Surprising Facts!)

Christmas in London; checkout these unorthodox white lights hanging across oxford street
Image Source: chadwicks.ie

Christmas has started early in many places around the world as retailers and malls deck out their retail space with Christmas music, deco, and the like. I especially like the decorations done in some of the major cities in the world, such as that in London. Of course, not only are stores enjoying the higher sales volume; the stock market and forex market tend to go into the same festive mood during this period.

However, is the mood really that buoyant during Christmas?

Christmas in the NYSE
Image Source: USA Today

“What about a Santa Claus Rally?”

Graphic shows average monthly change in Standard and Poor’sChart Source: Stock Trader’s Almanac 2010

In my previous blog post, I mentioned that the statistics for Nov to Feb rallies in past years is pretty positive. Starting from 1950 to 2009, the average November-January rally brings in 4.2% returns. It seems buying on any dip from now till about February next year would be a statistically sound trade.

So, being the statistics freak that I am, I decided to do some excel sheet magic and figure out what really goes on during the festive season.

WHAT HAS HAPPENED TO THE U.S STOCK MARKET IN THE PAST 5 YEARS?

This time, I decided to take a look at the statistics even more closely. For the past 5 years, this is what happened:

1Chart Source: The Amazing Microsoft Excel. And Yahoo finance for historical data. 🙂

Looks good, but if you bought on 1 Dec and sold on the first day of the next year, this would be what you get:

December Statistics:

2011: 4.64%

2012: 5.12%

2013: -3.52%

2014: -2.96%

2015: -4.98% — Total returns for 5 years = -1.71%!!!

For a grand total of… -1.71% returns over 5 years. Wonderful.  I decided to sum up the data in groups of 5 years, and see how the returns would be if we had this simple “buy in December, sell in January” strategy.

5-year “Buy in December, Sell in January” Statistics:

2011-2015: -1.71%

2006-2010: -14.06%

2001-2005: -1.30%

1996-2000: 10.46%

So it seems that the only time December was a profitable month was in 1996-2000. Let’s go into more stats and compare the number of winning Decembers versus the number of losing Decembers:

123

Using my trusty “countif” formula, I discovered this;

For the past 20 years of trading, 50% of Decembers were profitable for the S&P500 index, while 50% of Decembers were losing months.

10 out of 20 of the past 20 years were losing months.

Curiously enough, for crude oil, 9 of 10 of the past 10 Decembers ended in losses.

And of course, being the nerd/geek I am, I decided to test it out on other months. Suppose you bought in January, and closed in February:

January Statistics:

2011: 4.34%

2012: 1.28%

2013: 4.55%

2014: 5.62%

2015: -0.08% — Total returns for 5 years = +15.71%!!!

February Statistics:

2011: 2.77%

2012: 3.34%

2013: 0.39%

2014: -2.01%

2015: 6.18% — Total returns for 5 years = +10.66%!!!

March Statistics:

2011: -0.67%

2012: 1.92%

2013: 0.70%

2014: 0.98%

2015: 0.39% — Total returns for 5 years = +3.33%!!!

Now that we’ve seen that the “buy in January, sell in February” portfolio yielded the best results in the past 5 years, let’s check out the past twenty years.

5-year “Buy in January, Sell in February” Statistics:

2011-2015: +15.71%

2006-2010: -8.7%

2001-2005: +0.88%

1996-2000: -6.38%

Uh oh. Looks like the buy-in January phenomenon is quite a recent thing. It surely didn’t happen in the preceding 15 years. However, I’ve heard of the Santa Claus rally, so let’s see what happens if we only buy when Santa is around. What happens if you buy 1 week before christmas, and sell 1 week after christmas?

After some simple calculations, here are the results:

“Buy 1 week Before Christmas, Sell 1 week After Christmas” Statistics:

2015: -6.69%

2014: -2.01%

2013: 0.16%

2012: 5.03%

2011: 2.66% – 5-year performance: -0.85%!!!

I understand that the Santa Claus rally graphic at the top showed that over a 30-year period, buying in December and waiting until February seems like a prudent strategy. But the truth is most people don’t have 30 years to wait! I would rather go for something far more consistent and which takes a shorter time to see results.

In summary, this is what I’ve discovered from spending 10 minutes getting data, plucking in the values into Excel, and doing some simple calculations:

“The Santa Claus rally brought -0.85% over the past 5 years, and no considerable advantage is found in the months around Christmas.”

 

WHERE DO WE GO FROM HERE?

Let me know if there are any interesting phenomenon you would like me to research. The Santa Claus rally is a nice piece of information to know, but it clearly does not provide a trading edge. If it did, the entire market would trade it, and the edge would disappear.

I’ve shown you the statistical performance of this phenomenon, and I hope you’ve gained some useful knowledge. Some websites purport to ‘stock-pick’ over this holiday season, but I don’t see how the statistics could lie.

Cheers!

 

RESEARCH SOURCES & REFERENCES

https://www.zacks.com/stock/news/240876/5-best-stocks-to-buy-on-santa-claus-rally
http://www.investopedia.com/financial-edge/1211/is-the-santa-claus-rally-for-real.aspx
http://www.chartoasis.com/does-santa-claus-rally-occur.html
http://www.wikinvest.com/wiki/Santa_Claus_Rally
http://www.cnbc.com/2014/12/22/the-santa-claus-rally-vs-other-trader-lore.html
http://www.chadwicks.ie/blog/wp-content/uploads/2014/12/London.jpg

Monthly Portfolio Update for April 2016 – Ideal Portfolio Allocation Plan

Over the long weekend, I have taken the chance to come up with a target allocation for my investment portfolio, so that I can use it as a roadmap for my subsequent rebalancing, either monthly or quarterly.

This is very much a lazy portfolio approach, by diversifying across different asset classes to ensure steady returns in both up and down markets. This is especially important since the stock market looks pretty precarious, and holding too much in stocks will be very painful when it crashes.

monthly portfolio updates April 2016 1

Currently, the allocation to cash is quite large, but this is ideal at this late stage in the market. When the market has corrected significantly, the allocation to cash can be reduced to 15-25%, with the additional resources allocated to buying up more stocks and REITs.

About 10% is the target allocation for Commodities (mainly physical Gold kilo bars), which is to act as a hedge should the stock market crash. The rest of the cash is allocated to various products that provide yield returns for the capital and overall portfolio.

REVEALED: FULL PORTFOLIO HOLDINGS!

Here are my current holdings as at the end of April 2016:
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monthly portfolio updates April 2016 full holdings

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For more insights into my portfolio construction, and how you can create your own customized portfolio, drop by for a free workshop on the basics of trading & investing.
Check availability: http://synapsetrading.com/events/training-workshops/

 

WILL THERE BE A NEW REIT ETF ON SGX SOON?

Last year, SGX created a REIT Index (SGX S-REIT 20 Index), and I hope that this year, there will be a new REIT ETF, so that I can easily add all these REITs without have to buy each and every one of them individually.

Factsheet: http://f.edm.sgx.com/i/32/2095833887/V3MyGateway_02May16.pdf

Fingers crossed! 😀

SGX REIT index 030516 2 SGX REIT index 030516

Free Video Tutorials | Basics of Trading & Investing – 1(c) An Easy Way to Diversify your Portfolio

In collaboration with TradeHero & SGX (Singapore Exchange), we have developed a series of video tutorials that will make learning fun & easy for all beginners!

I have been tasked as the mastermind behind the content, drawing from my knowledge of the 200+ books I have read and 10,000+ hours of professional market experience as mentioned in the video.

For more free lessons, you can check out http://synapsetrading.com/free-lessons. Enjoy! :D