"Hot Potato" anyone??

Discuss your favourite picks, broker, and trading or investment style.
firebraj
Contributor
Contributor
Posts: 24
Joined: 26 Sep 2016 12:29

Re: "Hot Potato" anyone??

Post by firebraj »

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.

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.
What's so risky about it, the bond allocation or the strategy?

Assuming you are young and you can stomach 25% in bonds I don't see the issue if you can hold this for 15 years.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: "Hot Potato" anyone??

Post by longinvest »

firebraj wrote:
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.

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.
What's so risky about it, the bond allocation or the strategy?
Firebraj,

The "Hot Potato" does not invest 25% in bonds! It invests 100% in one of four (sub-)asset classes and jumps from 100% in one to 100% in another every month, based on the trailing 12-months performance of each of the four (sub-)assets. You can find a full description of it on the following link:

http://www.moneysense.ca/save/investing ... portfolio/

firebraj wrote:Assuming you are young and you can stomach 25% in bonds I don't see the issue if you can hold this for 15 years.
Investing 25% in each and rebalancing once a year would be a "Couch Potato" approach, which would be the prudent thing to do (as long as the asset allocation corresponds to the investor's own circumstances).
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
firebraj
Contributor
Contributor
Posts: 24
Joined: 26 Sep 2016 12:29

Re: "Hot Potato" anyone??

Post by firebraj »

longinvest wrote:
firebraj wrote:
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.

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.
What's so risky about it, the bond allocation or the strategy?
Firebraj,

The "Hot Potato" does not invest 25% in bonds! It invests 100% in one of four (sub-)asset classes and jumps from 100% in one to 100% in another every month, based on the trailing 12-months performance of each of the four (sub-)assets. You can find a full description of it on the following link:

http://www.moneysense.ca/save/investing ... portfolio/

firebraj wrote:Assuming you are young and you can stomach 25% in bonds I don't see the issue if you can hold this for 15 years.
Investing 25% in each and rebalancing once a year would be a "Couch Potato" approach, which would be the prudent thing to do (as long as the asset allocation corresponds to the investor's own circumstances).
Holy cow, well in that case I can definitely see the risks. It's interesting to see that the human factor is such an important factor in maintaining a portfolio if done DIY.
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

As noted upthread, I initiated a four component Hot Potato sub-portfolio on Dec 1. The four components are XBB, XEF, XIU, and XUS. Since XIU had the best performance of the four components for the 12 month period to Nov 30, the sub-portfolio was invested in XIU.

For the 12 month period ended Dec 29, the performance of each of the components is:
XBB: +1.33%
XEF: -2.90%
XIU: +20.97%
XUS: +7.77%

XIU is still the best 12 month performer, meaning no changes are necessary for the first trading day of January. I'll revisit in a month.
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

XIU's 12 month return through Jan 31 is 25.38, XUS's is 11.42. XEF and XBB aren't even close. Therefore, no change needed, I continue to hold XIU. I'll reevaluate on March 1.

p.s. Since I'll be travelling on March 1, my reevaluation date will have to be March 2.
User avatar
scomac
Veteran Contributor
Veteran Contributor
Posts: 7788
Joined: 19 Feb 2005 09:47
Location: The Gateway to Wine Country

Re: "Hot Potato" anyone??

Post by scomac »

Sounds an awful lot like chasing the train after it has left the station. I've been guilty of that from time-to-time, but more like jumping on a stock that has done well in the previous three months. At least I feel like I've got a decent shot at catching a ride rather than watching the caboose disappear down the tracks... :wink:
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
User avatar
kcowan
Veteran Contributor
Veteran Contributor
Posts: 16033
Joined: 18 Apr 2006 20:33
Location: Pacific latitude 20/49

Re: "Hot Potato" anyone??

Post by kcowan »

scomac wrote:Sounds an awful lot like chasing the train after it has left the station. I've been guilty of that from time-to-time, but more like jumping on a stock that has done well in the previous three months. At least I feel like I've got a decent shot at catching a ride rather than watching the caboose disappear down the tracks... :wink:
:thumbsup: During my momentum stock period (2002-2007), 3 months was my entry point to either get on the train or jump off depending on performance. It worked enough to make it worthwhile. But it was a lot of work!

Now I have developed lazy tendencies. And we have enough. So I have abandoned it even though it is much easier to do these days. :wink:
For the fun of it...Keith
User avatar
mrPPincer
Contributor
Contributor
Posts: 52
Joined: 20 Dec 2014 18:54

Re: "Hot Potato" anyone??

Post by mrPPincer »

I've just read this thread and am intrigued with the idea, & am toying with the thought of trying this with a small chunk of funds in a registered TD e-series account. (Only 7% or so of the total portfolio).

The problem is, with interest rates close to rock-bottom, TD Canadian Bond Index - e doesn't look all that attractive, with it's 0.50% MER.

Not sure if it's worth the risk of being in bonds when rates could go up.
I'm thinking a better alternative might be to use a Canadian money market fund instead if/when all the three equity categories go negative over the previous 12-month period.

What would you go with in a TD e-series hot potato, TDB909 which is interest rate sensitive, or a money market fund like TDB106, which has a higher MER and pays out only 0.3% or so, but is not interest rate sensitive?

http://quote.morningstar.ca/QuickTakes/ ... ture=en-CA

http://quote.morningstar.ca/QuickTakes/ ... ture=en-CA
DenisD
Veteran Contributor
Veteran Contributor
Posts: 4081
Joined: 19 Feb 2005 01:24
Location: Calgary

Re: "Hot Potato" anyone??

Post by DenisD »

TDB8150 pays 0.75%.
User avatar
mrPPincer
Contributor
Contributor
Posts: 52
Joined: 20 Dec 2014 18:54

Re: "Hot Potato" anyone??

Post by mrPPincer »

DenisD wrote:TDB8150 pays 0.75%.
That would work if I moved my e-series online MF account over into a TDDI registered acct.

I've had the e-series in both kinds of accounts, and I preferred using the online TD MF account to the way TDWH did it, but it's something to consider, probably the way to go, thanks.
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

XIU's return for the 12 month period ended Feb 28 is 23.48% vs 21.34% for XUS. (The returns of XBB and XEF trail badly for the period). My hot potato sub-portfolio will, therefore, remain in XIU for the next month.
User avatar
SoninlawofGus
Veteran Contributor
Veteran Contributor
Posts: 1284
Joined: 21 Aug 2007 12:10
Location: Ottawa

Re: "Hot Potato" anyone??

Post by SoninlawofGus »

If the underlying theory is one of momentum investing, then what to make of currency exchange? I suppose that just gives you potentially two sources of momentum on the same index.
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

I was out of the country (without a personal computer) from March 14 to April 8. Today I see that for the 12 month period ended March 31, the return of XUS was 20.34% vs a return of 19.03% for XIU. Thus, had I not been traveling, I would on April 3 (the first trading day in April) have sold my XIU and purchased XUS.

As it happens, for the 12 month period ended April 6 (the April 7 numbers are not yet available but should be Monday morning), XIU's return is 21.63% and XUS's 18.42%.

Unless someone mounts a compelling argument to the contrary, I'll continue to hold XIU through to the next reevaluation date of April 30. My rationale is that Monday, April 10 is the first trading day in April available to me, and for the 12 month period ending Friday, April 7, XIU's return is better than the 12 month return of any of the other hot potato constituents.

(This illustrates just one of the ways real life returns can differ from theoretical returns.)
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

This morning BlackRock posted 12 mth returns for the period ended April 30 for XBB (2.73%), XEF (21.75%), XIU (15.75%), and XUS (28.18%).

I therefore closed my position in XIU and purchased 635 units of XUS @$41.02.
BoomBoom99
Contributor
Contributor
Posts: 12
Joined: 15 May 2017 18:56

Re: "Hot Potato" anyone??

Post by BoomBoom99 »

NormR, if you're checking in...

Hi, new member here!

I'm interested in giving the "Global Hot Potato" strategy a run. My biggest concern, however, is the use of 12 month returns to determine which index is chosen going forward. As this strategy is a momentum approach would not a shorter return period make more sense? The long term results are impressive but I wonder if backtesting was also done with shorter test periods like 3 months or 6 months to see how they compare to the settled upon 12 month period? I'm also guessing the drawdown during down markets would be less severe with a shorter return period.

Comments please!
ig17
Veteran Contributor
Veteran Contributor
Posts: 3418
Joined: 21 Feb 2005 20:54

Re: "Hot Potato" anyone??

Post by ig17 »

BoomBoom99 wrote: 15 May 2017 19:20 NormR, if you're checking in...

Hi, new member here!

I'm interested in giving the "Global Hot Potato" strategy a run. My biggest concern, however, is the use of 12 month returns to determine which index is chosen going forward. As this strategy is a momentum approach would not a shorter return period make more sense? The long term results are impressive but I wonder if backtesting was also done with shorter test periods like 3 months or 6 months to see how they compare to the settled upon 12 month period? I'm also guessing the drawdown during down markets would be less severe with a shorter return period.

Comments please!
Norm's Global Hot Potato is very similar to Gary Antonacci's GEM strategy (Global Equity Momentum). Gary addressed your question here:

https://www.optimalmomentum.com/faq.html
Gary Antonacci wrote: How do you determine the best look back periods for your models? Won’t shorter look back periods get you into and out of the markets sooner?

Academic research shows that over the long run, momentum for stocks works well with a look back period of 3 to 12 months. I like to use longer look back periods to minimize transaction costs and increase the likelihood of long-term capital gains.

While shorter look backs may get you out of and back into markets sooner, they can produce more whipsaw losses and actually lead to lower returns and larger drawdowns. A 12-month look back period was found to work well by Cowles & Jones in their 1937 momentum study. It has held up remarkably well ever since and is commonly used in other academic research. Staying with this look back reduces concerns about data mining.
ig17
Veteran Contributor
Veteran Contributor
Posts: 3418
Joined: 21 Feb 2005 20:54

Re: "Hot Potato" anyone??

Post by ig17 »

This blog post includes backtest results for 3, 6, 9 and 12 month look back periods:

http://svrn.co/blog/2015/8/2/is-gary-an ... egy-robust
DenisD
Veteran Contributor
Veteran Contributor
Posts: 4081
Joined: 19 Feb 2005 01:24
Location: Calgary

Re: "Hot Potato" anyone??

Post by DenisD »

An update on the Hot Potato by NormR
I’m looking forward to talking about the finer points of the Hot Potato portfolio on Saturday, May 27 at the Toronto Reference Library during the MoneySense Roadmap to Riches event. The gathering features a variety of speakers.

As a result, it seems like high time to update the returns of the Hot Potato portfolio.
Hot Potato beats Couch Potato by 1.5% over one year and 5.8%/year over 30 years.
oppositeset
Contributor
Contributor
Posts: 21
Joined: 18 Mar 2016 02:49

Re: "Hot Potato" anyone??

Post by oppositeset »

Hi Ockham

Wouldn't it make more sense if you were checking 1 year returns of SPY and EFA because a big component XUS and XEF performance is the Canadian dollar dropping against US $ ?
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

oppositeset wrote: 28 May 2017 11:47 Hi Ockham

Wouldn't it make more sense if you were checking 1 year returns of SPY and EFA because a big component XUS and XEF performance is the Canadian dollar dropping against US $ ?

Thanks for the question.

Neither SPY nor EFA are Cdn $$ hedged. Therefore, from a Canadian portfolio perspective, the performance of SPY will be roughly equivalent to the performance of XUS, and the performance of EFA will be roughly equivalent to that of XEF.

To avoid the impacts of currency fluctuations, I would need to use something like XSP instead of XUS and something like XIN instead of XEF. XSP and XIN would be appropriate Cdn $$ hedged substitutes.

So why not use XSP and XIN?? The Canadian Couch Potato does not recommend currency hedging. There are two primary reasons: (i) hedging compromises, perhaps even defeats, the diversification benefits of holding ex-Canada securities, and (ii) hedging is inefficient in its imprecision and added costs.

P.S. The Hot Potato is a play money experiment for me. I do not use currency hedged product in my real portfolio.
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

12 month returns for period ended May 31 are in: XUS (+20.81), XEF (+20.24), XIU (+13.43), and XBB (+2.70). I will, therefore, remain invested in XUS for June.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: "Hot Potato" anyone??

Post by AltaRed »

ockham wrote: 01 Jun 2017 14:00 12 month returns for period ended May 31 are in: XUS (+20.81), XEF (+20.24), XIU (+13.43), and XBB (+2.70). I will, therefore, remain invested in XUS for June.
Just to re-affirm from one of your earlier posts, that your experiment is in a registered account to avoid CG taxes each year?
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
ockham
Veteran Contributor
Veteran Contributor
Posts: 2214
Joined: 04 Apr 2006 21:50
Location: The Prairies

Re: "Hot Potato" anyone??

Post by ockham »

Yes, in my RRSP, no tax consequences to the experiment. Six months into it, there's been only the one trade, XUS replacing XIU at beginning of May.
oppositeset
Contributor
Contributor
Posts: 21
Joined: 18 Mar 2016 02:49

Re: "Hot Potato" anyone??

Post by oppositeset »

I joined you in the experiment today. Bought some XUS in my rrsp
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33398
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: "Hot Potato" anyone??

Post by AltaRed »

ockham wrote: 01 Jun 2017 16:09 Yes, in my RRSP, no tax consequences to the experiment. Six months into it, there's been only the one trade, XUS replacing XIU at beginning of May.
I am toying with the idea in my RRSP as GICs/Bonds/debentures mature, maybe half of it (but before you gasp... my RRSP is a whimper in my overall portfolio).

Dumb question from someone never before in this situation: Is there any conflict having the same asset in an RRSP as a non-reg account (in my case XEF). Seem to recall issues around superficial loss rules?
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
Post Reply