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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253044  
Subject: Small Port: Quarterly Rebalance Date: 2/23/2006 6:52 AM
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Introduction

I doubt there is too much interest in this sort of thing, but I needed to put together a portfolio for a friend with a small account, and thought it may help out a few to see what tests I ran before making a recommendation. My stated goals were:

1.) Minimize trading costs to about $100 / year using Scottrade as the standard at $7 / trade. Part of achieving this goal was to limit to quarterly rebalancing.

2.) Hold six stocks -- this is a whole lot less than I would typically recommend, but holding more eats up the profits too quickly.

3.) Positive return for all backtested years.

4.) As low a turnover in stocks as possible.

5.) A CAGR of at least 35% over a backtest of 20 years: 1986 - 2/17/2006.

6.) A quarterly win percent of at least 80%.

7.) Use a blend of two screens to minimize the difficulty of finding the picks and making the trades.

8.) Find the Gold and Silver screen that blends best with one of these screens -- H52EarnPS, LowPE5Zltd, LPE_YLD or YLDEARNYEAR -- and also achieves my stated goals.

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$100 / Year or Less in Commissions

Of the 181 blends I tested forty-five were able to achieve this goal.

Hold Six Stocks

This was easy since I only tested blends with six stocks -- three from each screen.

Positive Return for All Backtested Years

Requiring a positive return in all years cuts the 181 blends down to just twenty-one.

Low Turnover

This proves to be one of the most difficult requirements. This is primarily due to the fact that we are rebalancing quarterly. The values here cannot be compared to monthly rebalancing. Only twenty-three blends meet a threshold of less than 60% turnover.

20 Year Backtested CAGR of > 35%

This is easier to achieve than the other standards -- an amazing fifty-seven of the 181 blends achieve this goal.

Quarterly Win Percent of > 80%

This is yet another difficult hoop to jump through -- just nineteen of the blends meet the goal.

Two-Screen Blend

Again, this one is easy since I only tested two-screen blends.

How many would you guess meets each and every requirement? Ten? Five? Actually, just ONE blend matches my stated goals.

Optimal Blend

The optimal blend includes YLDEARNYEAR and PIH_CSO. It produces a CAGR of 38.11 with a GSD of 22.30 -- not bad holding just six stocks. The Sharpe comes out at 1.52. The average gain of all stocks held is 9.06% with a median gain of 6.87%. The turnover on this blend is a very low 51.64%. Only YldDiv blended with LPE_YLD has a lower turnover at 47.26%, but it produces a CAGR of just 21.55% with a Sharpe of just 1.02. What I most like about this blend, however, is the fact that it produces a positive return 83% of all quarters. Consequently, it ranks #2 for turnover, #4 for Sharpe and #1 for Years >=0. Another impressive aspect is the fact that at $7 / trade you'd have an average trading cost of just $63 / year.

All Start Weeks on the Optimal Blend

I tested with all start weeks using an annual hold and found that 94% of all weeks produced a positive return. 73% of all start weeks beat the S&P 500. The average annual drawdown was a relatively low 14.58%. The average GSD was 21.13, while the average ROI was 39.57%.

I've got all the details for each screen tested if there is interest. Just say so if you would like me to post more of the blends that I tested.
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