Beating the S&P takes Discipline Not Brains

August 19, 2010

in 401K,Investing,Retirement,Roth IRA

I’m testing the stock screening software at and find it impressive.  There are plenty of good pre-defined screens that beat the S&P handily over 3, 5 and 10 year periods, but I developed some of my own.  Here is one that satisfies my need for simplicity.  It is an all-ETF screen using only the following symbols: IVV, IJH, IWM, EFA, EEM, IEF.  That covers the US large, mid, and small caps, international, emerging countries, and the intermediate treasury bonds.  I set a rule that the 13 day moving average (MA) must be above the 75 day MA, and the price must be above the 75 day MA.  It is set up to run weekly.  Back tests for 10 years show a gain of 163% vs. a loss of -7.1% for the S&P.  The secret is in the downside protection this simple formula offers.  If none of these meet the criteria you sell all and sit in cash until you get a buy.  You can ignore the news and the politicians and relax in the knowledge that your account will grow over time.  Why doesn’t everyone do this?  They lack the discipline.  It will take you about 10 minutes per week to run the model, and execute your buy and sell orders.  That is, if you remove your emotions and just execute the model. 

One caveat: do this in a tax-deferred account to avoid the short-term gains.

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