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Dynamic Fund Selection vs. Buy-and-Hold

Posted by: Brian Dennehy

 

Selecting funds by using Momentum is a simple highly profitable process.  It requires some discipline, but not very much time.  However, life can get in the way, so here we take a look at how two clients fared from January 2012.

FundExpert launched in 2012.  Let’s assume that you joined the site when it launched and bought your first funds in January 2012, using our Dynamic Fund Selection (which is a form of Momentum analysis).  You focussed on UK growth funds (the UK All Companies sector).

How would you have done?  

The first funds purchased were:

  • Invesco Perpetual – High Income
  • Invesco Perpetual – Income 
  • Wise Investments – Evenlode Income

Then the review point came along in July 2012.  At this point imagine the “dynamic” You was operative, and you religiously switched out of these three funds and into the latest funds with the highest Dynamic Fund Rating.  You carried on in this disciplined fashion from then until now.

Now imagine a “less dynamic” You.  You aren’t lazy or stupid but busy life gets in the way of things like reviewing your funds every 6 months.  So you ended up retaining the above three funds from 2012 until now.

Let’s call the first approach the Dynamic Portfolio, and the second the buy-and-hold portfolio (albeit by accident).

In the chart below you can observe the following, assuming you invested £100,000 back in 2012:

  • The Dynamic Portfolio would now be worth £204,110 (grey line)
  • The buy-and-hold strategy grew to £179,010 (green line)
  • That extra bit of discipline generated £25,100 more compared to buy-and-hold 
  • They both generated a good margin more than both the sector average (purple) and the stock market index (pink).

But no strategy for selecting funds is perfect.  Over shorter periods you might get caught out if the market is volatile.  That happened this year when the UK stock market fell sharply, and again after the Brexit vote in June/July.  This is shown very clearly in the chart where you can see that since earlier this year that the Dynamic portfolio suffered from this volatility and has gone sideways, whereas the other three lines are clearly edging higher year-to-date.

This does not matter.  You must remain disciplined, and this ground lost in recent months will soon be made up.

But in the meantime, if you were disciplined since 2012, you are still a long way ahead of the alternatives.

It is worth repeating, at its heart Momentum is a simple process that, if applied consistently, can generate substantially more growth with a high degree of probability (see more of our long-term research here).  

But, as with many things, life can get in the way.  Distractions can mean missing a review point.  Sometimes you may have a particularly bad period and sell early or a great run and decide to hold on for a bit longer.  But do re-focus around the process as soon as you can.

Look out next week for “The worst possible time to invest” which reviews the same problem in a much scarier environment.

ACTION FOR INVESTORS

  • Focus on your process and apply it with discipline
  • Don’t be distracted by the noise around you
  • If you do get distracted, get back on track ASAP
  • Look out for our review of the worst time ever to invest next week.

FURTHER READING

 

Chart 1: Dynamic Fund Selection vs. buy-and-hold, the UK All Companies Sector average and the FTSE 100 

Topic: Generating growth


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BNY Mellon

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