"Hot Potato" anyone??

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inquisitive_one
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"Hot Potato" anyone??

Post by inquisitive_one » 31 Jul 2016 15:06

A friend mentioned the "hot potato" theory to me, as an experiment on his RRSP account. It seems like a hybrid of passive & active investing. This is what the portfolio looks like:

25% TD Canadian Bond Index - e {TDB909} -> MER 0.50%
25% TD Canadian Index - e {TDB900} -> MER 0.33%
25% TD US Index - e {TDB902} -> MER 0.35%
25% TD International Index - e {TDB911} -> MER 0.51%

Right off the bat, I noticed that the MER is a bit high. However, with TD e-series funds, there are no costs in buying and selling (after 90 days). Unlike other brokerages, my friend doesn't deal with the $10 commissions. So, he has been rebalancing his portfolio every month for 3 months now. So far, he has made $800 after 3 months.

Have you tried the "hot potato" theory out? If so, I'd like to hear how your portfolio is doing. Is it better than the passive investing, using Vanguard ETFs? Any pros or cons?

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Re: "Hot Potato" anyone??

Post by DenisD » 31 Jul 2016 15:16


longinvest
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Re: "Hot Potato" anyone??

Post by longinvest » 31 Jul 2016 17:03

I would not recommend investing into such risky portfolio to anybody.

But, if you are such a risk seeker, it would be really nice if you kept us informed, on this thread, of how it works out for you. I would be really interested to see how the Hot Potato behaves in real life, after being made public, as opposed as how it behaves in backtested scenarios.

This could become a very interesting thread, specially if you informed us about your trades the next day after you make them (no later, to maintain credibility, but no earlier, so that nobody tries to front-run your trades). You would have to provide enough information (e.g. relative size of trades, for example), so that we can independently reconstruct the returns of the portfolio.
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Re: "Hot Potato" anyone??

Post by MarketLost » 31 Jul 2016 18:08

longinvest wrote:I would not recommend investing into such risky portfolio to anybody.

But, if you are such a risk seeker, it would be really nice if you kept us informed, on this thread, of how it works out for you. I would be really interested to see how the Hot Potato behaves in real life, after being made public, as opposed as how it behaves in backtested scenarios.
I've always been amazed how well trading strategies work out in backtesting. They never seem to work out so well in practice, but the backtesting is always amazing.

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Re: "Hot Potato" anyone??

Post by ig17 » 31 Jul 2016 18:13

Hot Potato strategy is very similar to Gary Antonacci's Dual Momentum strategy:

http://www.dualmomentum.net/
http://www.optimalmomentum.com/
https://www.amazon.com/Dual-Momentum-In ... 0071849440

Samuel Lee (a former ETF analyst at Morningstar and a very smart dude) did an independent back test of the strategy:

Is Gary Antonacci's Global Equity Momentum Strategy Robust?

His conclusion:
To answer the initial question: Yes, Antonacci's GEM is robust to changing specifications. Risk-adjusted returns are universally better across a wide range of parameters. Even when we extend stock-bond timing back to 1926, the strategy works. However, returns tend to degenerate—sometimes significantly—when we move away from a 12-month lookback window.

I ignored costs. However, the strategy still would've worked over the past twenty years (better, in fact), when trading costs were cheap. That the market does not seem to have arbitraged away these profits should be disturbing. Either the market is disgustingly inefficient, allowing this kind of simple price-based strategy to work (it violates the weak-form efficient market hypothesis) or we are chasing a will-o'-the-wisp created by data-mining.

A more important question: Would I put my own money into this strategy? Yes. In fact, I have been applying a trading system very similar to GEM with over a third of my personal assets since 2011. My live performance has been in line with the back-tests, bolstering my confidence in the strategy. There is no substitute for out-of-sample, live, real-money performance.

Lazy Ninja
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Re: "Hot Potato" anyone??

Post by Lazy Ninja » 31 Jul 2016 18:37

I remember seeing Norm's article on the hot potato when it first appeared in Moneysense. I recall thinking that even the warm potato approach was too hot for me. I wouldn't feel comfortable being 100% invested in anything for any length of time (be it domestic equities, foreign equities, bonds or even cash). Trying something similar with a portion of the portfolio could be interesting though....

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Re: "Hot Potato" anyone??

Post by newguy » 31 Jul 2016 18:53

What we've got here is failure to communicate.

It's just a normal 75/25 portfolio for the terminally bored. Luckily, TD has changed the minimum no fee holding period to 30 days or it'd expensive.

There's an e-portfolio that does the same thing but for a higher fee I imagine. I don't know how often they re-balance, but it's probably frequent.

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Re: "Hot Potato" anyone??

Post by Lazy Ninja » 31 Jul 2016 19:17

newguy wrote:What we've got here is failure to communicate.
If so I think it's because what the OP was describing sounds like a simple equal weight four fund portfolio that is rebalanced monthly. What I was referring to was the actual hot potato as I understood it that DenisD linked to, which is definitely not a "normal 75/25 portfolio for the terminally bored". Indeed, my objection to implementing the hot potato as explained by Norm's article is that it looks far too exciting for me!

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Re: "Hot Potato" anyone??

Post by Shakespeare » 31 Jul 2016 19:25

I don't know how often they re-balance, but it's probably frequent.
The point of a momentum approach is to rebalance infrequently.

Mean reversion generally works at a longer time scale than momentum.
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newguy
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Re: "Hot Potato" anyone??

Post by newguy » 31 Jul 2016 19:38

Shakespeare wrote:
I don't know how often they re-balance, but it's probably frequent.
The point of a momentum approach is to rebalance infrequently.

Mean reversion generally works at a longer time scale than momentum.
Of course. I was pointing out this fund exists, I just don't know their re-bal freq.

https://www.tdassetmanagement.com/fundD ... &site=TDCT (??someone broke td)

True about mean reversion but some studies show better performance with frequent re-balancing. :?:

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Re: "Hot Potato" anyone??

Post by twa2w » 31 Jul 2016 21:03

Not sure from the posts here that everyone is on the same page as to what the hot potato portfolio really is. If I understand it correctly, it is as follows...

Lets say it is Jan 1, 2016 and you have 100,000 to invest. You look at the 4 etfs mentioned and look at the previous 12 month return from Jan 1 2015 to Dec 31, 2015. You then invest 100,000 in the one etf that had the best return in that prev 12 months.

On Feb 1, 2016 you check the returns for the four etfs for the prev 12 month period from Feb 1, 2015 to Jan 31, 2016. If the fund you were invested in had the highest 12 month return, you leave all your money in it. If another etf had the best 12 month return, you sell all of the etf it was in and put all your money in the new etf.

On Mar 1st and every month thereafter you repeat this process.

So it is simply a momentum strategy, putting all your money monthly in one of 4 assets that that had the best return over the previous 12 months using etfs.

According to Norm's back test, there were not very many trades.

You could use any Cdn bond, Cdn equity, intl equity, us equity to do this portfolio.

Is this how every one else interpret it.

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newguy
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Re: "Hot Potato" anyone??

Post by newguy » 31 Jul 2016 21:12

twa2w wrote:Is this how every one else interpret it.
That's how I interpret "Hot Potato", the OP shows 4 funds equal weight so... :?:

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Re: "Hot Potato" anyone??

Post by AltaRed » 31 Jul 2016 21:23

newguy wrote:
twa2w wrote:Is this how every one else interpret it.
That's how I interpret "Hot Potato", the OP shows 4 funds equal weight so... :?:

newguy
Agreed. No idea what the OP had in mind. As others have mentioned, I wouldn't have the gonads to undertake this with a significant part of my portfolio, never mind all of it.
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Re: "Hot Potato" anyone??

Post by Shakespeare » 31 Jul 2016 21:34

It would be much less risky at 50% bonds and 50% one equity ETF. Could only be done in a RRSP or TFSA, however, because of tax drag.
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Re: "Hot Potato" anyone??

Post by NormR » 31 Jul 2016 21:37

The Hot Potato approach isn’t for everyone and should only be attempted by aggressive, seasoned investors. New investors should stick with the more conventional Couch Potato method, which encourages long holding periods. As always, for the best outcome, know your inner investor. Some people can handle a little heat—or a great deal of it. Others can’t stand even a touch of pepper. Pick the portfolio that’s right for you because your piece of mind will depend on it.
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Re: "Hot Potato" anyone??

Post by Lazy Ninja » 01 Aug 2016 11:54

I've been thinking a bit more about how I might implement the hot potato with a portion of my portfolio. Leaving aside the admittedly important question of whether or not this is a crazy idea, I see two issues I would have to address: asset location and how I could fund the experiment in the first place. My current account sizes work quite well from an asset location perspective. I have U.S. and international equities in the $U.S. RRSP, Canadian equities in the TFSA and fixed income split between the $CAD RRSP and the TFSA.

I hadn't given any thought to what account would be best for an approach where I'm not even sure what asset class I would be holding from month to month, but it seems to me that the $CAD RRSP would probably be best. That account makes up about 15% of the total portfolio. Current holdings are just a GIC ladder and ZRR. Real return bonds have become something of a stranded asset class in my portfolio. They only make up 3-3.5% of the portfolio, and I am not interested in adding at these levels. ZRR was supposed to be a parking spot until I could afford to buy RRB's directly, but I'm still pretty far away from being able to do that. I think I'd be willing to part with ZRR to start a miniature hot potato experiment.

I was initially thinking of allocation perhaps 10-15% of the portfolio to the hot potato, but can't figure out an acceptable way to do that. At 3.5% it would be more like a play money thing than a serious experiment. Still, I'm thinking about it, and it is the start of a new month, so...

I should probably read Norm's disclaimer again....

Edit to add: if I decided I wanted ZRR back, that would likely mark the end of the experiment.

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Re: "Hot Potato" anyone??

Post by Lazy Ninja » 01 Aug 2016 17:20

Given that I'd be approaching this with less than 5% of the portfolio(to start), I wonder what people think of the idea of adding other asset classes. I don't see any particular reason that precious metals, REITs, emerging market equities and RRBs couldn't be considered for my modified approach as well. Having 100% of a portfolio allocated to precious metals or emerging markets would seem to me to be bordering on lunacy, but at 3-4%, maybe not so much.

It would surely result in more trading, but I still think it merits consideration. Thoughts?

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Re: "Hot Potato" anyone??

Post by MarketLost » 01 Aug 2016 17:29

twa2w wrote:Not sure from the posts here that everyone is on the same page as to what the hot potato portfolio really is. If I understand it correctly, it is as follows...

Lets say it is Jan 1, 2016 and you have 100,000 to invest. You look at the 4 etfs mentioned and look at the previous 12 month return from Jan 1 2015 to Dec 31, 2015. You then invest 100,000 in the one etf that had the best return in that prev 12 months.

On Feb 1, 2016 you check the returns for the four etfs for the prev 12 month period from Feb 1, 2015 to Jan 31, 2016. If the fund you were invested in had the highest 12 month return, you leave all your money in it. If another etf had the best 12 month return, you sell all of the etf it was in and put all your money in the new etf.

On Mar 1st and every month thereafter you repeat this process.

So it is simply a momentum strategy, putting all your money monthly in one of 4 assets that that had the best return over the previous 12 months using etfs.

According to Norm's back test, there were not very many trades.

You could use any Cdn bond, Cdn equity, intl equity, us equity to do this portfolio.

Is this how every one else interpret it.
I'm not sure if you need to do the re-balancing each month after the 12th, but other than that, that's pretty much what I see. What I question is how the backtesting can be correct considering that the articles are doing testing on products that didn't exist. The SPYDR didn't exist until 1993, and international funds didn't exist until 2005, so it seems rather pointless to use datapoints that start in 1980. I'd be more convinced if I saw some hard data from investors who employed this strategy with the real life products.

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Re: "Hot Potato" anyone??

Post by NormR » 01 Aug 2016 18:12

MarketLost wrote:What I question is how the backtesting can be correct considering that the articles are doing testing on products that didn't exist. The SPYDR didn't exist until 1993, and international funds didn't exist until 2005, so it seems rather pointless to use datapoints that start in 1980.
The indexes existed and, for what it's worth, Vanguard's first S&P 500 index fund was created in 1976. The article deliberately doesn't recommend specific products.
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Re: "Hot Potato" anyone??

Post by ig17 » 01 Aug 2016 18:26

Lazy Ninja wrote:Given that I'd be approaching this with less than 5% of the portfolio(to start), I wonder what people think of the idea of adding other asset classes. I don't see any particular reason that precious metals, REITs, emerging market equities and RRBs couldn't be considered for my modified approach as well. Having 100% of a portfolio allocated to precious metals or emerging markets would seem to me to be bordering on lunacy, but at 3-4%, maybe not so much.

It would surely result in more trading, but I still think it merits consideration. Thoughts?
Keep it simple.

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Re: "Hot Potato" anyone??

Post by MarketLost » 01 Aug 2016 19:05

NormR wrote:
MarketLost wrote:What I question is how the backtesting can be correct considering that the articles are doing testing on products that didn't exist. The SPYDR didn't exist until 1993, and international funds didn't exist until 2005, so it seems rather pointless to use datapoints that start in 1980.
The indexes existed and, for what it's worth, Vanguard's first S&P 500 index fund was created in 1976. The article deliberately doesn't recommend specific products.
True, but it was not quite the ETFs we know now, and it was a mixed bag, with higher fees, and it wasn't well funded until it merged with the Wellington. That wasn't really my point, other than the fact that you couldn't even do this until a few years ago.

The problem with just looking at the indexes is that the indexes are frictionless, i.e. they don't have bid-ask spreads, or rely on the timing of the investor, or have any tax or FX issues, of which there are many. They are just mathematical constructs. Furthermore, we don't have any clue as to how the ability to invest in market through funds would actually affect their returns. Nor am I certain if this method actually takes into consideration the loss of capital that occurs before you move to the better investment, or what happens if you moved to one that decided to be the worst.

Moreover, I have an issue with this academic approach. I started investing in 1986, and I've seen a lot of new investors telling you how they're going to make a killing. Everyone seems to have a "can't fail" system, and knows exactly how they're going to leave the market in the dust. Many of them have backtested their golden ideas, and are absolutely certain they are going to be buying low and selling high. It's not just the small investor, there is always some well-funded Wall-Street geniuses who are going to show you how to make risk-free alpha - LTCM anyone? All the systems work well on paper, then the long-tails of the market shows up, and all bets are off. During the last melt-down it seems like quant and hedge funds were blowing up on a regular basis, and I know people who still won't invest in the "rigged" markets to this day.

Again, it would be better to hear from real-life experience, especially if someone was doing this in the emerging markets.

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Re: "Hot Potato" anyone??

Post by DenisD » 01 Aug 2016 22:53

The Hot Potato algorithm is similar to what I've been doing with small-cap stocks for the past 10 years or so. I select a subset of the all stocks universe based on market cap and valuation. Then I buy 10 or 20 the companies within that subset with the best six month price gain. Maybe I should call it the Hot Peas. :D

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Re: "Hot Potato" anyone??

Post by brad911 » 02 Aug 2016 20:27

FWIW I made a lot of money in my early 20's trying out various methods stock jocks were talking about, publishing and bragging about. If I could go back again and start all over I would either index or pile it all into the dividend stocks I now own.

I don't need back testing to know how much richer I would be. I would have lost less and therefor made more which would have compounded into a much larger pool of capital than I have now. I'm not complaining; I'm happy with what I have and how its all worked out. I expect there would be an extra decimal at the end of my account if I had had the maturity and clarity to realize I didn't need the rollercoaster and instead invest like an old fart. The cashflow alone would have allowed me to retire between 40-45 and likely avoided some of the biggest bears in the market.

Edit: Good Example....
Saputo, an 11% rise. The quarterly dividend becomes 15 cents
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Re: "Hot Potato" anyone??

Post by inquisitive_one » 08 Aug 2016 20:49

I started on May 16th - $26,984.55
June 16 - $27,555.19
July 16 - $29,038.40
Today - $28,723.56
He has been investing only in TD CANADIAN INDEX - E (TDB900) for the whole time. I'm using YTD instead of the last year just because I kind of started in the middle of the year.
The ETFs will always be cheaper, but mutual funds are easier. There is a 2% fee if you sell or change a fund within 30 days, but that's the only restriction

So, it seems that my friend made 6.4% profit.

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Re: "Hot Potato" anyone??

Post by OnlyMyOpinion » 08 Aug 2016 21:37

Why only TDB900 the TD CDN Index since May? It looks like its 3mo is 5.19% and 1mo is 3.83% to July 31. But of the other funds included (TDB902, 909, and 911), it looks like TDB902 the TD US Index shows 9.90% 3mo and 4.74% 1mo. Wouldn't it be the momentum fund to be fully invested in under the HP strategy?

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