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rtelford
Re: Expected Annualized Return

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.

Ryan Telford -- also find me at:
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Sep 8, 2022 5:00:22 PM       
sthorson
Re: Expected Annualized Return

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.


Performance fall off would be expected if the strategy is not nimble enough to adapt to regime changes, which is why a long time ago I developed my strategy with flexibility in mind. Being able to detect factor reward ebb and flow.

My strategy took three years to perfect back in 1994 - 1997. Went live with it January 1997, so coming up on 25 years of track record. Haven't changed a thing about it in all that time other than porting it off from Excel and into P123. I do still run the portfolio optimization in Excel because its more efficient. The portfolio is rebalanced monthly, annual turnover is +/- 150%.

I suppose I'm putting this info out there to support having a long term conviction to your strategy. My 24 year annualized is 12.2%, 5 year 21.4% and 10 year 15.5%. My benchmark is the Russell 3000, strategy is All Cap but tends to be Mid-Cap heavy. I flow with the market. There were periods where the trailing 3 year returns were ridiculous.

The long term return is skewed low in that I took time out of the market from 2013 - 2017. During that time I occasionally rebalanced as time permitted. I also got killed in 2008 - 2009.

I'd like to hear from more members as to return expectations. No need to be shy, we've all had enormous years, as well as those years where nothing went right.

Cheers!

Steve T.

Sep 8, 2022 5:55:12 PM       
Edit 1 times, last edit by sthorson at Sep 8, 2022 6:18:45 PM
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