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rtelford
CANADA
Joined: Apr 3, 2016
Post Count: 192
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Re: Expected Annualized Return
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Let me rephrase the question...
While I imagine most of us have a desired return expectation they would like to hit, which is the crux of my original question, the most realistic expected return is some percent over benchmark.
What is your goal of expected return over benchmark?
I'm guessing most would simply like to perform better than benchmark. Investment managers want a return over benchmark including fees so they are adding value.
In other words, we can build screens, simulate, back test and rinse/repeat. What % number are you trying to hit that makes the work worthwhile? I think you're right. If we can't beat the benchmark, then we might as well just invest in SPY. There's no point in putting all the work into this if we can't consistently beat the market. Personally, that's my goal. There's also the question of past performance. That sets a bar for me. I want my current performance to be as good as my past performance. That's a high bar since factors get arbitraged and transaction costs go up with larger AUM and you can't put 15% of your money in a nanocap if you're managing millions. So I keep a little chart that measures my six-month excess return (over a benchmark consisting of the stocks in my universe equally weighted) every month. If it generally trends upwards and rarely goes below 0%, then I'm very happy. (At the moment it hasn't dipped below 15% since the pandemic bear market. I had a horrible 2019, but everything's been coming up roses since. Prior to the pandemic, it was above 15% less than half the time.)
I share Yuval's sentiment here as well. It takes considerable time and energy to research and update strategies, so it should be worth the effort. In essence, my real-time performance target is to "consistently beat the benchmark by a wide margin (5-20%)".
As Yuval pointed out, performance deterioration is a risk. It will drop at some point, but the trick is figuring out if it's just normal underperformance or deterioration of the edge, not easy.
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