Willieg:<can we feel safe in applying the mechanical investment strategies to the TSE60.>That's really the $64,000 question, these days, isn't it? I'm personally toying with the idea of using the TSE35 for this year's rebalancing, because that's what has been tested. What I'll probably do is run the calculations using both indexes, and see how different they are. This has been tested before; typically, the two ports are pretty similar.More generally, though, I would venture to say yes. The reason for this is that the high yield method has been shown to work on what the statisticians call "out of sample" data. It started with the Dow30. Folks at the FoolUK tested on the London Exchange large-cap index, and it worked there. O'Shaughnessy tested a high yield strategy on large-cap US stocks (which would have caught, but gone beyond the Dow stocks) since 1950, and found that it works. David Dremen, in his New Contrarian Strategies, goes through some studies on value-picking methods and finds that high-yield strategies applied to large cap (but not small cap) stocks produces market beating returns over the long run. It has been shown to work on the TSE35. And if you read Ethan Haskel's columns here at the Fool (in the Daily Dow area), it works on the pool of stocks that he constructs and calls "Beating the S&P". It works on all those different pools of stocks, so it ought to work on what is really only a slight alteration to the existing TSE35.My only reserve is whether the stocks in the S&P/TSE60 are large cap enough, but the 60 includes the 35 from the TSE35, so you're only talking about 25 other stocks, and the stocks that tend to show up in the top 10 include Westcoast Transmission and EdperBrascan. I don't know how big those are, but they are probably big enough. The index was constructed specifically to be Canada's large cap index, and I trust that the folks at S&P know what they are doing.Will the returns be the same as the backtests on the TSE35? Probably not, but you don't expect that anyway.Another point is this: Some have asked, but haven't been able to get from the TSE, the backtest data on the 60. But this past weekend in the National Post financial section they had a benchmark returns column that gave the 10 year return on the 60 as being about 1% higher than the return on the TSE35. Now, some of that higher return might be the result of survivorship bias. I assume, for example, that the 10 year return means that they simply measured the return of the stocks now in the index, and didn't reconstruct the index for each year or as it might have been if it had started 10 years ago. So the historic return catches the huge rise of ATY, for example, which it probably would not have in real time, since at some point ATY would have been too small to be in the index.But assuming that historic return gets matched going forward, it means that the new index will set a higher benchmark for the high-yield strategies to beat. We'll have to wait and see whether the strategies will be able to keep up. They have with the Dow, over long periods of time, even when the Dow got updated.As to particular methods, because the stocks are pretty similar between the two indexes, probably the RP4 and DropPE3 will continue to work. (I'm having second thoughts, though, about the one I personally use, DS 2nd 5, which ranks the high yielders from 1 to 10 (1 being high) and invests in stocks 6 thru 10 (you avoid the utility companies that way). That one worked well for the TSE35 during the 11 years I tested it (1988 to 1998), but I'm not so sure it's a good idea to apply to the 60.)Your last question has to do with time of year. Last year I started in late October, ending up with mostly banks. Three stocks are down 14% or more; two are up, the port is a few percent positive right now (while the market is up hugely). I lean toward a late December rebalancing, simply because that's what has been tested. Find CWatt's research; I think those results support a late December start, though early January probably can't hurt, either. You can't cut things too fine with this stuff.Don
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