Sunday, April 6, 2014

Weekend Reads

This Saturday, I only read two articles of particular interest for me.

The first article is by Millennial Invest, and in the article it is discussing the alarmingly low risk tolerance of millennials, like myself. The cost of this low risk tolerance will be a huge hit to retirement portfolio values, so here's a few interesting graphs from the article.

The first graph is showing what the header of the graph says, the average real growth of $1 in the stock market given different starting points. I'm about 25 I suppose, so every dollar now ought to be $14 in the future when I retire if I invest aggressively.

Now here is something a bit more encouraging. If you're really a long term investor, as long as your investment horizon is over 25 years, you will definitely experience real growth in your investments even through horrible market scenarios. Things definitely look a lot more uplifting if it is extended past 30 years.

And of course, to give false hope, this graph shows the BEST case scenarios. Take it with a pinch of salt. The main point of me including this graph is to show the massive outperformance equities can provide if the time is right.

Moving on, the next interesting read is actually an SSRN research paper talking about the use of Utilities as a sector to rotate between high beta and low beta.

4% outperformance a year.... that is statistically very very relevant! Trying to replicate their method is rather simple as well. Just go onto StockCharts, add in the ROC and use 4 weeks. Click on this if you're too lazy, haha. If ROC is positive, XLU. If it is negative, VTI. That's it. Just looking at the last signal that the strategy would have generated, a sector rotation into XLU would be called for almost exactly at the start of 2014. YTD, the XLU has generated 9.39% of gains why the VTI has been sluggish and has only generated 1.41%.

I honestly find this strategy extremely interesting! The paper also talks more about what are the sources of this strategy's outperformance. Mainly, it is the fact that the Utilities sector is defensive, low-beta and more fundamentally focused than the rest of the stock market. Increased interest in the XLU points towards decreasing confidence in the VTI, which forewarns tail end risks and market volatility. I think it makes sense to me. I'm just amazed but the level of outperformance generated by this seemingly simple strategy!

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