One of investors' greatest challenges is to create a portfolio that meets their requirements for return while minimizing risk. The task is challenging on its own, but when you add the market volatility, interest rates, and the uncertain economic future, it's no wonder investors are banging their heads against the wall.
Seeking Alpha contributor, "Ploutos" presents his answer for "improving your return profile with a simple momentum strategy." It's quite simple, too...
Essentially, he compared historical returns between a portfolio with 100% stocks and a portfolio that alternated between 100% stocks or 100% bonds every month, depending on which outperformed in the prior month. We refer to the latter as the "momentum portfolio."
Specifically, he compared monthly returns from 1976 to 2011 from the iShares Barclays Aggregate Bond Fund (AGG), the most commonly referenced fixed income benchmark, and the S&P 500 Index (SPDR S&P 500 ETF (SPY)).
"When we annualize these monthly returns and the standard deviation of these returns, we get some extraordinary results." Indeed, his findings show that the two portfolios gave nearly the same returns.
But what's most interesting from an investment standpoint is that the alternating "momentum portfolio" only had about two-thirds the standard deviation, or two-thirds the risk, of the 100% equities portfolio. A third less risk is nothing to sneeze at.
"Ploutos" concludes that by simply rotating a portfolio between equities and bonds with the best trailing performance, or "momentum," an investor can get nearly the same returns with a lower expected level of risk.
Do you agree with this strategy?
Business section: Investing ideas
If you're looking for momentum ideas, the following list might offer a good starting point.
For ideas, we collected data on institutional money flows, and identified five rallying stocks that have seen significant institutional buying during the current quarter. All of the stocks mentioned below are trading above the 20-day, 50-day, and 200-day moving averages.
Big money managers have extensive resources to analyze investing ideas. So if they're buying a certain stock, it's worth paying close attention.
To further refine the quality of the list, we collected data on insider transactions and identified a list of rallying stocks that have seen significant insider buying over the last six months.
Smart money investors, like big hedge fund managers and company insiders, think these momentum stocks are going to keep rising -- do you agree?
Use this list as a starting point for your own analysis. (Click here for more interactive tools.)
2. CoreSite Realty
3. Idenix Pharmaceuticals
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, Insider data sourced from Yahoo! Finance.