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Follower ○○

Performance Chasing Large Growth Funds

I would appreciate receiving feedback about the performance chasing detailed below that I have been using and plan to continue using to make gradual changes to my portfolio.

I am 70 years old.  The current allocations of my portfolio are 55.44% to stock funds, 31.20% to bond funds, 8.17% to individual stocks, and 5.60% to cash and cash equivalents.

One kind of performance chasing I have continued to use begins by buying only stock funds that consistently have high annual returns, rolling returns, and Morningstar ratings, and then doing the following:

1.  Sell increasingly larger slices of those stock funds that continued to cause me to incur large opportunity costs because of how easily they could be replaced by stock funds that consistently had much higher annual returns and rolling returns.  Obviously owning a stock fund that had been only 2% lower than some other fund for a small number of years could not cause me to incur a large opportunity cost.

2.  Reallocating the proceeds of those sales to those funds that consistently had those much higher annual returns and rolling returns.

Another kind of performance chasing that I have continued to use for approximately the last ten years has been to (a) sell slices of individual stocks (especially when I could do so without adverse tax consequences while they were near their respective 52-week highs), and (b) reallocate the proceeds to the above kinds of stock funds.  The primary reason for continuing to do this is that the annual returns and the rolling returns for my separate Morningstar portfolio that includes just my individual stocks have continued to be so much lower than those for my separate Morningstar portfolio that includes just my stock funds, and no reason has appeared to exist for why I should continue to incur the opportunity costs that continuing to maintain a group of individual stocks had continued to impose.  

The primary consequences of using those two kinds of performance chasing for approximately the last five years and my plans to continue using them are enumerated below:

1.  I sold increasingly large slices of funds in Morningstar's Large Value category, and that has gradually decreased my allocation to them from approximately 13.5% of my assets to only 1.00%

2.  I also sold increasingly larger slices of funds in Morningstar's mid-cap, small cap, and foreign categories, and that has gradually decreased my allocation to them from approximately 10.5% of my assets to only 1.42%.

3.  I reallocated most of the proceeds from those sales (1 and 2 above) and also the proceeds from the sales of slices of individual stocks to funds in Morningstar's Large Growth category, and that has gradually increased my allocation to them from approximately 13.5% of my assets to 27.19%.

4.  I also reallocated a large portion of the proceeds from both of the above kinds of sales to funds in Morningstar's Large Blend category, and that has increased my allocation to them from approximately 13.5% of my assets to 22.43%.

5.  I plan to keep gradually increasing my allocation to funds in Morningstar's Large Growth category by reallocating to them the proceeds of future sales of my two smallest allocations (1 and 2 above), slices of individual stocks, and slices of funds in Morningstar's Large Blend category to the extent that I can harvest their respective large long term capital gains without adverse tax consequences.   I plan to keep doing this until owning one or more funds in Morningstar's Large Value, Large Blend, mid-cap, small cap, or foreign categories will no longer continue to be such a sizeable drag on the returns of my portfolio and cause me to incur such large opportunity costs as they have done.  

The extent of that drag and those large opportunity costs is some what demonstrated by the 3-month, YTD, 12-month, 3-year, 5-year, and 10-year returns for my Morningstar Watchlist that includes only my positions in funds that are in Morningstar's Large Growth category and have become 27.19% of my assets.  Those returns respectively exceed by 9.01%, 25.17%, 29.52%,10.34%, and 4.68% those for my Morningstar Watchlist that includes only my positions in funds that are in Morningstar's Large Blend category and have become 22.43% of my assets. 

6.  I plan to begin to sell increasingly larger slices of funds in Morningstar's Large Growth category before they cause me to incur the large opportunity costs that owning funds in Morningstar's Large Value, mid-cap, small cap, and foreign categories have caused me to incur, and not to wait as long to do so as I did with those funds. 

7.  I do not plan to again have a significant position in any fund that is in Morningstar's Large Value, mid-cap, small cap, or foreign categories until the extremely wide margins between the annual and rolling returns for one of those funds and those for my Morningstar Watchlist that includes only my positions in funds that are in Morningstar's Large Growth category become narrow enough to make the benefits from the diversification that it could provide adequate compensation for the extent to which it could be a drag on the returns of my portfolio.

Because those benefits appear to be so small, the time that will pass before that occurs appears to be very long. 

 

 

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Explorer ○○○

Re: Performance Chasing Large Growth Funds

What is your question?

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Frequent Contributor

Re: Performance Chasing Large Growth Funds


@BD wrote:

What is your question?


I think he's asking if we see any obvious flaws in his past methodology moving forward.  MY response would be that if he has been happy with what he's been doing, keep doing it.  If he's asking, "Should I do things EARLIER; anticipate somewhat?", then I'd suggest that this would move from an evidence-based decision process.  That, too, involves the possibility of opportunity cost.

To me, the issue is that if you are going to tinker, you HAVE to stay on top of things and not let them run too long in the wrong direction.  You need rules which get you OUT promptly; not just things that get you in and keep you in.

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Re: Performance Chasing Large Growth Funds

              We split our portfolio into 3 parts in the early 80’s, growth and reserves in a taxable account and income from a TIRA. We weren’t interested in a lifetime occupation. We set up an easy plan chasing performance of individual stocks only cherry picking from the top funds. No allocations, diversifications etc. Mostly tech for growth and HY for income since then.

               If your asking about your past plan I think it can and should be way more simplified as an aging retiree. With funds I would choose what you can live with because there is no holy grail of allocations or diversification. Also your future needs are unknown along with market movements and longevity.

                Buffet is correct here. Amateurs go overboard because most aren’t really sure of what they’re doing. Ego and addiction leads to really inferior returns long term. That’s why indexes are great for most. They out perform a majority of professionally managed funds and come in a variety of configurations to meet your personal circumstances. The S&P index returned almost 150% the last ten years. So if you spent 50% your portfolio still doubled. Will it again? That’s why you have a plan B, a set aside.

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Frequent Contributor

Re: Performance Chasing Large Growth Funds

hi alphajoehill

Nice post describing what you have done, and plan to do.

But why do you keep labeling your activity "performance chasing".?..these are pejorative words.  How about if you call it "STRATEGIC MOMENTUM/PERFORMANCE INVESTING PLAN."  This has been very successful for you, so why degrade it.

What you describe, I too have done for most of my investing life.  Many stock market studies show momentum is a free-lunch factor; especially in top decile stock/fund holdings.  You took advantage of that.  Same for me, as now a Fidelity High Tech Stock Fund (FSPTX) is now my largest portfolio holding.  Comes about due mostly to generic growth (performance).  Comes under the mantra:  When you are right, BE RIGHT BIG; when wrong, "be wrong small."  

For your future plans, why not just continue doing what you did.  Yes, you may want to get to a more dividend-supported theme as a retiree (think VIG), but basically you are doing things right, IMO.

Also, if we get a parabolic rise in large cap (now?) I struggle with taking some off the table, as prudent.  However,  I usually hold forever, my best performers...until they are not.  Nice problem to have.

However, suggest you plan for a change in the future such that international, or value, etc, may become the top performers.  If any space gets traction, start shifting from your large cap huge winners, into some of these spaces.  Do it slowly.  If it works...do more...and so on.

Lastly, how about considering some strategic investing, such as hedging against that which could be detrimental to your retirement.  Such as high inflation.  A small hedge may be precious metals investing of some form.  Or hedging against the value of the dollar (begs some international holdings).

And especially, what about that bond side allocation?  Are you getting measly income/rate returns now?  This side may also require some attention...along your same "performance theme."

I like the track you are on...best wishes.

R48

 

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Frequent Contributor

Re: Performance Chasing Large Growth Funds

I hold more large cap growth than any other now. When market tanked, purchased QQQ. I would not invest in more stock at thid date.

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Re: Performance Chasing Large Growth Funds

racqueteer

I thank you for feedback, and I would appreciate it very much if you or someone else would consider commenting on one or more of the following:

1.  Any particular kinds of evidence that you would or would not use in "an evidence based process".

2.  Any particular kinds of "rules" that you would or would not use to "get you OUT promptly".  For example, would that include using stop orders or something similar that is based on the size of a decline during a particular time frame?

3.  Reallocating the proceeds from the sales generated by getting "OUT".  For example, should that include something other than cash or cash equivalents?

4.  Any particular kinds of evidence or rules that you would or would not use to decide when and to what extent to get back in.

 

 

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Re: Performance Chasing Large Growth Funds

steelpony10

 

I appreciate your comments about "a way more simplified" plan and using "indexes".  I have been giving serious consideration to each of the following that should simplify my portfolio:

1.  Keep selling all of my individual stocks and all of my stock funds except for QQQ, FBGRX, and TRBCX, my best performing stock funds, to the extent that I can do so without significant adverse tax consequences and keep reallocating all of the proceeds from those sales to just QQQ, FBGRX, and TRBCX except for the amount of those proceeds needed to increase my allocations to bond funds so that I eventually end up with a 60/40 portfolio.

2.  Keep selling all my assets except for QQQ, AGG, BSV, and cash equivalents to the extent that I can do so without significant adverse tax consequences and keep reallocating all of the proceeds from those sales to just QQQ, AGG, BSV, and cash equivalents so that I eventually end up with a roughly 60/40 portfolio.

3.  Keep selling all my assets to the extent I can do so without adverse tax consequences and keep reallocating all of the proceeds from those sales to just an allocation fund like VLAAX (but that seems likely to have the largest opportunity costs even though that would probably be the simplest plan).  

I would appreciate it very much if you or someone else would consider commenting on one or more of the above.

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Explorer ○○○

Re: Performance Chasing Large Growth Funds


@alphajoehill wrote:

 

2.  Any particular kinds of "rules" that you would or would not use to "get you OUT promptly".  For example, would that include using stop orders or something similar that is based on the size of a decline during a particular time frame?

4.  Any particular kinds of evidence or rules that you would or would not use to decide when and to what extent to get back in.

 

 


Good luck trying to find anyone who uses their get in/get out "rules" in a purely mechanical fashion. Never heard of anyone who did. There's always weasel words associated with the rules that permit exceptions and render the rules pointless.

"Compelling value" being a classic example.

Typically used as a way of maintaining a mask of rationality and not admitting to emotion. Being above that, you see. Sniff sniff.

You can tell when the so-called rule has allegedly been successful when you see phrases like "I backed up the truck"---after the fact.

Don't you just love reading about investing on anonymous forums?

Did I ever tell you about the time I was down in Florida drinkin' wine with Edith Piaf, Admiral Rickover, and Jerry Lee Lewis? I swear...Hyman got dressed up in a gorilla suit and chased Edith up a palm tree. Laughed till I was sick. JLL was passed out on Mogen David and missed it all.

 

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Re: Performance Chasing Large Growth Funds

retiredat48

 

I thank you for the time you have taken to provide your feedback and especially your suggestions regarding a "more dividend supported theme", a "small hedge", and paying attention to "that bond allocation".  

I believe I used to have what you meant by a "more dividend supported theme" when VYM, YACKX, SDY, and TWEIX were my largest positions in funds that are in Morningstar's Large Value category, and I still keep them in a Morningstar Watchlist to keep an eye on them.  However, the returns for that watchlist are far lower than those for my Morningstar Watchlist that I have previously referenced and includes just my positions in funds that are in Morningstar's Large Blend category.  

Moreover, the kinds of data available from Portfolio Visualizer, with which I have only recently acquired some familiarity, appear to demonstrate that for the period of the last ten years that an amount invested in its U. S. Large Cap Value asset class would not have had a significantly lower stand deviation or maximum drawdown than that amount  would have had if it had been invested in its U. S. Large Growth asset class, let alone enough to compensate for the extent of the drag on the returns of my portfolio that it would have been.  I wonder how accurate or useful that kind of data might be.  Is it because it is not that accurate or useful that Morningstar does not provide it for for a portfolio although it does provide other kinds of data for a portfolio such as  the price earnings ratio for a portfolio?

I also wonder how large a "small hedge" would have to be  to serve a useful purpose.  I believe I have been reading comments  that an allocation of less than 10% to 15% of the total assets  to a particular asset class will not provide any significant benefits from the diversification that it provides.  

With respect to "that bond allocation", I did reallocate a significant portion of the two kinds of sales that I have previously referenced to bond funds, cash, and cash equivalents.  That has gradually increased my allocation to bond funds from approximately 15% of my assets to 31.20%  and my allocation to cash and cash equivalents from approximately 2% of my assets to 5.60%.  Those proceeds together with proceeds from the sales of increasingly larger slices of bond funds that have a standard deviation of more than 4.00 ( E. g. PIMIX, JMSIX, PHYZX, and ARTFX) have been used to increase my allocation to bond funds in Morningstar's short term and intermediate term categories that have a far lower standard deviation and much higher Morningstar Credit Quality rating (E.g. DODIX, WATFX, AGG, SCHZ, and BSV)  than those bond funds whose slices I had been selling.

I made those reallocations to have enough ballast that would continue to be relatively secure even though I cannot expect any significant returns from them.  In effect I decided to take almost all of my risks with stock funds and virtually none with bond funds.

I would appreciate it very much if you or someone else would consider commenting on any aspect of the above.

 

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Re: Performance Chasing Large Growth Funds


@alphajoehill wrote:

racqueteer

I thank you for feedback, and I would appreciate it very much if you or someone else would consider commenting on one or more of the following:

1.  Any particular kinds of evidence that you would or would not use in "an evidence based process".

2.  Any particular kinds of "rules" that you would or would not use to "get you OUT promptly".  For example, would that include using stop orders or something similar that is based on the size of a decline during a particular time frame?

3.  Reallocating the proceeds from the sales generated by getting "OUT".  For example, should that include something other than cash or cash equivalents?

4.  Any particular kinds of evidence or rules that you would or would not use to decide when and to what extent to get back in.


Unfortunately, I can't say that I have the answers for another investor; so anything I would suggest is going to be related to how I see things.  I have some expectation for what an investment will do, and what function I expect it to serve.  When it stops serving its purpose, or I find it ISN'T doing what I expected, it's time to look elsewhere.  Built into that, there is a time frame of some kind.  Maybe I expect 8% over the course of a year, but only get 1%.  Ok, not serving the purpose that led me to buy it,  but maybe I let it go for almost the full year before pulling the string on it.  Or I expect an investment to have low volatility, but suddenly it becomes a bit unmoored.  Ok, if what led me to buy it wasn't actually the case; it's not meeting expectations.  Another thing for me is that I'll only accept volatility if I'm being adequately compensated for holding the asset.  If it's much more volatile than 'normal', it better be making me a much better return, and I'll keep it on a tighter leash.  It's all quite subjective, unfortunately, and that requires constant monitoring.  I get the feeling you don't want to be too much on top of this, so you need something more hard and fast.

It's only fair to note that I don't get it right all the time either; PCI burned me pretty badly, for example.  I was too slow recognizing that there was a real problem to get out on time.  I DID, however, see that it wasn't coming BACK as I expected and went to equities which DID.

In any event, you appear to have a methodology for getting IN, but I didn't really see that for getting OUT?  Maybe for you, trailing stops ARE the ticket.  Maybe not; sometimes they pull you out and you miss a rapid bounce back.  Tight stops trigger more often.  Loose stops might lose you more money' but less often.  If you have trading fees, the ins and outs are going to add up!  Maybe just reverse what you did going up?  I personally just take the cash from a sale and hold it AS cash until I decide what I want that cash to DO.  I suspect all this subjectivity will be of little use, but you need A plan, your plan, for reversing course.  I just didn't see a thought-out EXIT plan for you.

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Re: Performance Chasing Large Growth Funds


@alphajoehill wrote:

steelpony10

 

I appreciate your comments about "a way more simplified" plan and using "indexes".  I have been giving serious consideration to each of the following that should simplify my portfolio:

1.  Keep selling all of my individual stocks and all of my stock funds except for QQQ, FBGRX, and TRBCX, my best performing stock funds, to the extent that I can do so without significant adverse tax consequences and keep reallocating all of the proceeds from those sales to just QQQ, FBGRX, and TRBCX except for the amount of those proceeds needed to increase my allocations to bond funds so that I eventually end up with a 60/40 portfolio.

2.  Keep selling all my assets except for QQQ, AGG, BSV, and cash equivalents to the extent that I can do so without significant adverse tax consequences and keep reallocating all of the proceeds from those sales to just QQQ, AGG, BSV, and cash equivalents so that I eventually end up with a roughly 60/40 portfolio.

3.  Keep selling all my assets to the extent I can do so without adverse tax consequences and keep reallocating all of the proceeds from those sales to just an allocation fund like VLAAX (but that seems likely to have the largest opportunity costs even though that would probably be the simplest plan).  

I would appreciate it very much if you or someone else would consider commenting on one or more of the above.


         When I reached around 70 we quit investing because we believe we met all our goals.  For us dying with more assets then needed required taking on a part time job during retirement for a LTC facility or heirs. There’s enough excuses do this until you pass if one wants to. 

          I see by your comments and really not just you probably 90% of posters make this way more complicated then needs to be in my opinion. The key to it all as mentioned earlier there is no holy grail of allocations to cover the 3 unknowns. If you think 60/40 is it then you can do it with 3 holdings a S&P index and a bond index with cash. Or skip bonds. You can “think” all you want that slicing that into 50 diverse and allocated parts is better but that’s really an unknown game of wack a mole forever. 

           Our whole custom  approach is different. We worked from a 3% (72/3=24 years) personal inflation rate until age 90 before any spend down. We then matched our income needs to that. We used CEF’s for income to excess which some find too risky. We found individual dividend stocks not enough, more risky and unpredictable.  You do need growth and to learn how to make numbers on a statement real money. How and when to take capital gains.
  
             Any setup is personal as you know. We’re all making investments based on past performance so they’re projections not predictions. We ran two retirement portfolios up to 35 years 1982-2017 for our parents with the same three sections and we follow the same model, loosely 20% cash and munis, 40% growth and 40% income. Ours projects a 5-6% real yield with capital gains past 90 an age reached by comparatively few. With less risk, funds, I would go higher with a growth component because Mr. Market is the last unknown. You’d be making a choice of less risk for more of an unknown. We chose what we might be able to control more, risk.

 

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Participant ○

Re: Performance Chasing Large Growth Funds

This too, will end badly. In time,  performance reverts to the mean.

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Re: Performance Chasing Large Growth Funds


@myob wrote:

This too, will end badly. In time,  performance reverts to the mean.


??What will end badly?

The Dow and S&P Indices are at all time highs.  Any investor who bought in last 100 years, is ahead.

Lastly, there are times when "this time it is different" was true...and great upside performance did not revert to any mean.  An example:  Stocks typically yielded 5% during the 1940s and 1950s; bonds yielded about 2%.  Then came households/retail investors buying stocks, and by mid sixties, stock yields were now at 2 1/2 % (prices rose to yield that).

Stocks never looked back; yields never back to 5% generally.

Fast forward to today.  Bond yields now about 1+%. ..and heading lower. With inflation, REAL yields now negative.  Easy to see stocks getting to typical 1+ % yield, without ever reverting to any mean.  That means, a large increase in prices even from these levels.  To me, Dow 55,000 within nine years is easily the most likely course for stocks...with fluctuations along the way.

R48

 

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Re: Performance Chasing Large Growth Funds


@retiredat48 wrote:

@myob wrote:

This too, will end badly. In time,  performance reverts to the mean.


??What will end badly?

The Dow and S&P Indices are at all time highs.  Any investor who bought in last 100 years, is ahead.

Lastly, there are times when "this time it is different" was true...and great upside performance did not revert to any mean.  An example:  Stocks typically yielded 5% during the 1940s and 1950s; bonds yielded about 2%.  Then came households/retail investors buying stocks, and by mid sixties, stock yields were now at 2 1/2 % (prices rose to yield that).

Stocks never looked back; yields never back to 5% generally.

Fast forward to today.  Bond yields now about 1+%. ..and heading lower. With inflation, REAL yields now negative.  Easy to see stocks getting to typical 1+ % yield, without ever reverting to any mean.  That means, a large increase in prices even from these levels.  To me, Dow 55,000 within nine years is easily the most likely course for stocks...with fluctuations along the way.

R48

 


      +1

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Re: Performance Chasing Large Growth Funds


@myob wrote:

This too, will end badly. In time,  performance reverts to the mean.


Badly for whom? FAANGM, QQQ, recovery stocks, large cap growth?
And what will be the mean?

if stocks always reverted to the mean after every increase there would never be any long term growth in the stock market. 

So how close will stocks revert to the mean? 

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Contributor ○○○

Re: Performance Chasing Large Growth Funds

How about after today?


@FatKat wrote:

I hold more large cap growth than any other now. When market tanked, purchased QQQ. I would not invest in more stock at thid date.


 

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Frequent Contributor

Re: Performance Chasing Large Growth Funds

Simplicity is key as one ages.

Just a general statement.

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Explorer ○

Re: Performance Chasing Large Growth Funds

Maybe that they if you assess that the S&P long term average is around 10% - nominal, then....it has to average out.  If it has been higher for a long period, expect it to be lower - i.e. revert to the mean.  I would expect this if I held the S&P.  Can’t be unhappy averaging 10% nominal over the long haul. 

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Re: Performance Chasing Large Growth Funds


@Slooow wrote:

Maybe that they if you assess that the S&P long term average is around 10% - nominal, then....it has to average out.  If it has been higher for a long period, expect it to be lower - i.e. revert to the mean.  I would expect this if I held the S&P.  Can’t be unhappy averaging 10% nominal over the long haul. 


Once you pick a specific average e.g., 10%, as the mean, you are playing the any given Sunday game where over some period of time Selected the market will average 10% which becomes your mean even though over Different periods returns will average above 10%.

In other words the mean will always be what you want it to be because the mean Return is always relative To a particular period.

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