Okay, so my last post got a good amount of comments. If I’m doing this right, from 1994 to 2023 this strategy averaged 22% in an extreme scenario in which you had to rebalance every year. However, as mentioned in the previous post, on average the rebalancing (selling 100% of the previous highest market cap stock and then buying with 100% of my portfolio the new highest market cap stock) occurred every 2.9 years. But what if we were to extend the back test to more than just 30 years? Here’s part 2 of this strategy: 1981-1994.
This is how far back I could go, I couldn’t find yearly returns of stocks listed in the previous years. Again, this strategy will ONLY be applied to USA companies as so will the strategy.
Results: from 1981 to half of 1988 the highest market cap was IBM. The returns during those years would have been: -16.19% in 1981; +69.22% in 1982; +26.75% in 1983; +0.92% in 1984; +26.30% in 1985; -22.83% in 1986; -2.89% in 1987 and +4.5% in half of 1988. Then XOM became the biggest market cap halfway through the year of 1988 and kept its dominance until the end of 1991. The returns would have been the following: +10% in half of 1988; +19.63% in 1989; +8.85% in 1990 and +23.30% in 1991. At the very start of 1992, GE became the highest market cap stock and it held its dominance throughout 1994. The returns would have been: +15.10% in 1992; +26.04% in 1993 and +0.21% in 1994. That leads us to an average pre tax return rate of 26.9%. With taxes, applied on the average of rebalancement during these years, which was 1 rebalancement every 2.14 years (in the calculations I considered every 2 years) we get an average after tax annual return rate of 21.27%. But how was the market doing during these times? From 1988 to 1994 the s&p 500 averaged an annual return rate of 13.5%. The total backtest (part 1 and part 2) proves this strategy would have on average returned twice as much as the s&p 500 over the course of the last 37 years.
UPDATE: What if you had just bought the highest market cap stock and rebalanced anytime a new stock took its place? PART 2
byu/EdoBillions inwallstreetbets
Posted by EdoBillions
19 Comments
This is actually a common mistake people who fall in love with a stock do. The core fallacy is that of rebalancing in the same asset as it underperforms the rest. You are cutting from winning trades and putting more in a losing trade. In your case if the highest market cap stock kept going down, new stocks would take its place on the way down but you would keep rebalancing just like someone who is convinced there will be a strong bounce to take price where they feel price for that stock deserves to be. If you keep rebalancing in one place whether because highest market cap or because you are fanatic about a company then you’d be putting your entire portfolio in a death spiral.
Thats actually super interesting and not even that regarded at the same time
Sounds like the perfect formula to lose money… Going with the highest market cap stock means it may not grow as much as it used to. The room for grow is shrinking more and more. In contrast, a 100x smaller company can grow 100x faster and better. Thus, diversifying your portfolio means that you allowing yourself to grow from multiple sources.
Additionally, the largest market cap stock could get hit any minute and drop 30% or more. During market crash some sectors are severely hurt while others maybe just a little. You’re exposing yourself to get smashed any minute, smart!
Use logic, not historic numbers as they are not proof for the way forward… Just my opinion.
So, you’re saying…
When a stock becomes #1, you buy it. But you sell it when another stock becomes #1.
When are you going to realize your gains?
What happens if the #1 stock you’re invested in plummets and then another stock becomes #1? Are you not selling at a loss?
The tax impact seems pretty low. Did you assume LT cap gains every time or did you hit it with ST gains when a rebalance/rotation was less than a year. Difference in ST and LT can be double.
So I’m still a little confused, are you only reinvesting your initial capital or are you rolling 100% of gains into the next stock every time. Because I’m wondering on the tax implications if it’s the later.
I would simply invest in the stocks at IPO before they became the highest market cap
EZ
This aint r/stocks, get the hell outta here!
Why not buy the highest 5 and further reduce your risk? Or the highest 50 stock by market cap. Better yet, why not buy the highest 500? SPY/VOO…
Genuinely curious. Is there some strategy we can develop to minimize risk and minimize the stocks you’re holding?
Bro I don’t know why you are getting so much hate. I like your analysis.
It’s like buy only the best parts of the index. Seems reasonable in theory, and I believe you proved out that it has outperformed the index.
Of course the only real question is will that continue? I don’t have any reason to think it wouldn’t just curious your take on that? Would you ever see a situation where the bottom 498 are getting more gains than the top 2?
Psny stock #polestar
Thank you OP for actually crunching the numbers for something that most of us would just talk about while high and forget about.
so what are we buying tuesday
Simple strategy with past numbers on its side. I like the idea.
There is zero reason to assume past performance equals future returns.
You don’t possess a time machine.
People forget that just because they’ve successfully traveled on 1000s of planes – that this one might be the one that has a door plug eject at 13k feet.
Just because your past girlfriend thought you were great doesn’t mean your future one will.
Thats also statistics.
As a boss would say right now…what value does this bring the business today. Or in the future.
Nothing.
Probably time to refocus on your current investment profile since you cannot redo this.
Nice. If you follow this further you could start a Substack. Everyone in the finance world love/hates beta and momentum and that it’s so simple and outperforms.
Fuck it, I am trying this shit with some fun money lol
Make an ETF already
Okay, okay… hear me out.
What if you bought the top three best performing stocks, and then rebalance whenever one changed?