I was inspired by this post to take a closer look at various scenarios. My analysis assumes the stocks are bought once a month – at the beginning of every month. It can extended to rebalance everyday but not everyone can do that.
Initial investment: $1,000
Monthly investment: $100
Strategies
- Buy and hold: buy the top N market cap stocks of a given month. Do not sell the stock if it's not in the top N list in the following months.
- Rebalance: If an existing stock in the portfolio is not in the top_n stocks list in the current month then check when was the last month it was part of the top_n market cap stocks. If the resulting month difference is greater or equal to
rebalance_threshold_monthsthen sell the stock and tax the gains. The sale proceeds (minus short term taxes) are added to the monthly investment budget equally among the current top_n stocks. If there was a loss then I simply use the total sale proceeds. Eg, Assume AMZN was top 3 stocks last month but not this month. If the threshold months is 1 then we sell AMZN this month, tax the gains, and distribute the sale proceeds equally to buy this months top 3 stocks.
Backtesting. Start: 2018-1, End: 2024-1. Edit: End 2024-8.
| Strategy | Rebalance threshold months | Top 5 | Top 3 | Top 1 | SPY | QQQ |
|---|---|---|---|---|---|---|
| Buy and hold | N/A | $20,793 | $21,967 | $17,530 | $15,266 | $17,989 |
| Rebalance. Short terms capital gain tax 24% | 3 | $19,791 | $22,383 | $13,625 | $15,266 | $17,989 |
| Rebalance. Short terms capital gain tax 24% | 2 | $19,802 | $22,108 | $14,141 | $15,266 | $17,989 |
| Rebalance. Short terms capital gain tax 24% | 1 | $19,582 | $22,206 | $13,982 | $15,266 | $17,989 |
| Rebalance on tax advantage account | 3 | $20,229 | $23,050 | $15,555 | $15,266 | $17,989 |
| Rebalance on tax advantage account | 2 | $20,181 | $22,738 | $16,138 | $15,266 | $17,989 |
| Rebalance on tax advantage account | 1 | $19,847 | $22,825 | $16,142 | $15,266 | $17,989 |
Regardless of the strategy buying top 3 market cap stocks seems most optimal. Buy and hold handily beats SPY and QQQ. And if you have the itch to rebalance then rebalancing on the 3rd month seems most optimal. But note that past performance is not indicative of future performance.
Back testing longer term. Start: 2010-1, End: 2024-8
| Strategy | Rebalance threshold months | Top 5 | Top 3 | Top 1 | SPY | QQQ |
|---|---|---|---|---|---|---|
| Buy and hold | N/A | $107,205 | $122,673 | $75,026 | $58,958 | $90,923 |
| Rebalance. Short terms capital gain tax 24% | 3 | $127,848 | $146,441 | $42,948 | $58,958 | $90,923 |
| Rebalance. Short terms capital gain tax 24% | 2 | $123,116 | $145,579 | $44,803 | $58,958 | $90,923 |
| Rebalance. Short terms capital gain tax 24% | 1 | $127,423 | $143,843 | $51,132 | $58,958 | $90,923 |
| Rebalance on tax advantage account | 3 | $129,959 | $150,096 | $56,915 | $58,958 | $90,923 |
| Rebalance on tax advantage account | 2 | $124,976 | $148,884 | $60,258 | $58,958 | $90,923 |
| Rebalance on tax advantage account | 1 | $129,178 | $147,589 | $72,899 | $58,958 | $90,923 |
Long term, buying top 3 market cap stocks seems most optimal, regardless of the strategy. Buying and holding handily beats SPY and QQQ. If rebalancing then rebalancing on the 3rd month seems most optimal (maybe 4th or 5th month is even better but I didn't check it).
Disclaimers
THIS IS NOT FINANCIAL ADVICE. THIS IS PURELY A THEORETICAL EXERCISE AND IT SHOULD NOT BE USED UNLESS PROPERLY STUDIED AND REPRODUCED BY YOU. USE AT YOUR OWN RISK.
Detail analysis: What if you had just bought the highest market cap stocks
byu/tums_antacid inwallstreetbets
Posted by tums_antacid
14 Comments
Soooo buy hi and sell low ehh
Can you add in a transaction cost? Maybe 0.1% is lost every time you buy
14 years is long term now? How would this have done from 97 to now?
I saw the other analysis, buying the #1 company but had thought what if bought top 5, so buying top 3 is best.
I want to do this when fear and greed index crashes to 25 range, can you test buying the top 3 when fear and greed index tanks vs buying first of the month, instead save for those big drawn down periods and invest all then. I think can have even bigger gains.
Wow, really interesting. Thanks for doing this, I’m going to continue to research this strategy
Backtest it for 50 years (not just the era where tech outperformed) or compare it with nasdaq.
So where am I buying calls?
Can you clarify a little more please? So buy and hold means never sell a stock in this case? So you start off with 1, 3 or 5 stocks but as things progress, your portfolio could contain 10s of stocks over a 10 year period? Just feels strange not having an exit plan for a stock you’re entering into…
This is cool and sounds a lot like the old school Dog’s of the Dow where you buy only a handful of the biggest caps and rebalance yearly.
[https://www.dogsofthedow.com](https://www.dogsofthedow.com)
Breaking news: big tech outperforms the S&P 500. Regards everywhere shocked and confused.
that is what i do and it works for me. then when one stock overperforms, i sell it and profit when i am low on cash. it works if you know a lot about the companies and trends related to them
It’s buy high & sell higher strategy
It works 10/10!!
Trust ! ❤️💯
Can you explain rebalance? Evenly distributing the total amount invested in each security purchased during a time period?
Intersting post and comments, thanks.
So, how does one run or backtest this analysis quickly.
I can download data and write some python or excel scripts, but what platform (besides Bloomberg) enables a non finance professional to run this analysis?