Studies of Life

Learning by doing.

My Momentum, Sector Rotation and Fundamentals Investment Portfolio – ROI 9.8%

18 May 2013 by Jim

I’ve been looking into investments recently in order to make my savings work a bit harder, especially considering the abysmal deposit interest rates currently in effect all over Europe after the ECB cut its leading interest rate down to 0,5% in early May 2013.

After reading several investment books, some of which were excellent, I’ve got into the subject matter and feel pretty confident that I now have a general direction in which I am going. Let me explain that triple strategy here.

Update July 2013: This post was about my first investment strategy and is no longer current, as I’ve since switched to the Piotroski method.

 – A triple portfolio – 

As I don’t want to have all my eggs in one basket, I’ve chosen to go with a combination of three strategies which all seem easy, logical and very simple to understand and implement.

First, there’s the momentum part, which currently makes up about 30% of my portfolio. It is based upon the thesis that trends do continue for some time in the stock market, so when a stock is already going up, it will probably continue doing so for a while. The precise implementation of momentum investing I’ve chosen is to follow a sample portfolio published and updated weekly by the german investor magazine “Der Aktionär”. It’s called “TSI” portfolio and is based on a mathematical calculation which expresses the strength of the current upwards trend as a number. The concept is largely based on relative strength according to Levy. This part of my portfolio holds only German stocks in EUR.

Second, there’s the sector rotation, which makes up 45% of my portfolio. This is my own version of sector rotation, which is based on investing in ETFs, three of them every month, one country ETF, one US sector ETF and one asset class ETF. In every category, I choose the ETF with the biggest increase in value over the last 3 months. Right now, this part of my portfolio is a combination of the $DRN Direxion Daily Real Estate Bull, the $DXJ WisdomTree Japan Hedged Equity Fund, the $BIB Ultra Nasdaq Biotechnology ETF and the $UPRO ProShares UltraPro S&P 500, which is an addition to the three sector ETFs. I bought that one two months ago and it has done very well so I am not yet selling, but it is not inherently part of the sector strategy part.

Thirdly, there’s a fundamentals part which makes up 25% of my portfolio and includes European or US stocks with very good fundamentals, which includes rising earnings, P/E below 10, low debt-to-assets ratio and high profit margins, among others. I try to focus on smaller companies here that are not that popular with other investors. Usually, once they become popular, their P/E does not stay that low.

– Tracking the results –

I looked throughout the web for a good portfolio tracker and I was pretty disappointed by what I found. MorningStar has a good one but it can’t handle EUR transactions or stocks, so the two solutions I am sticking with now is the Financial Times tracker and Google Finance. I have a certain preference for Google, but since they axed Google Reader recently they could just as well get rid of their Finance section.

Anyway, here are the first results after 2 months of investing (I started out with 20 000 EUR initially):

  Holdings Value Change Gain %
Cash 145.62EUR
ETFs 4 8,871.22EUR +11.17% 508.67EUR  44%
Fundamentals 5 4,886.15EUR -0.88% -65.22EUR  24%
TSI Portfolio 5 6,435.89EUR +3.70% 196.43EUR  32%
Total 16 20,338.88EUR  +3.73% 656.97

Screen Shot 2013-05-18 at 11.44.56

3.73% is not all that bad for about 65 days of investing, especially for an investment novice, but I did sell and buy too often I suppose, accumulating lots of fees without which the rate of return would be even higher. I traded definitely more than 20 times in these two months. The current annualised rate of return, all fees included, is 9,8%. I do not know what the larger drop at the end is there for, I’ve checked and there was no huge change at that moment. I suppose it’s just a bug in Google’s tracking algorithms. Overall I’m a lot worse than the SP500 right now, but at least I got out of the red zone, even if not by much.

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