Support this site! Clicking on my books below takes you to Amazon.com. If you buy ANYTHING, they pay for the referral.

Bulkowski’s Mutual Fund (Losers) Test Portfolio

Written and copyright © 2008 by Thomas N. Bulkowski. All rights reserved.

This page shows a test portfolio based on trading Vanguard index mutual funds showing the worst performance. You can find background information and what my tests revealed in Trading Mutual Funds.

Overview

As mentioned previously, for full details on the historical experiments used to test this trading setup, see Trading Mutual Funds.

The idea for this portfolio came not from my head or from a book, but from test results. I discovered that trading the worst performing Vanguard index mutual funds resulted in performance better than trading other mutual funds. This portfolio is a product of that testing.

Why this portfolio works is a mystery. Based on industry relative strength tests for stocks, I know that the worst performing stocks (not mutual funds) tend to stay lousy performers (but not necessarily in last place. How long they remain "lousy" is unknown, so it is possible that poorly performing stocks show greater improvement over time than the best performing ones for the same time period). Since the minimum hold time is 9 months for index funds, that gives the worst performing fund the chance to improve enough before it is swapped out for another lousy fund.

Portfolio Construction Rules

I used the following guidelines to construct and maintain the portfolio.

• Use only Vanguard funds.
• Use only Index funds (any fund with the word Index in its name).
• No commissions or fees are charged (so any fund having a buy/sell fee is excluded).
• Fractional shares are allowed.
• Funds with a minimum hold time over 2 months are excluded (such as a 1 year minimum hold time).
• All trades occur at the net asset value (NAV) the next trading day after a signal.
• No duplicates allowed (each fund held is different).
• The portfolio begins with $100,000, split evenly between the two funds ($50,000 each).
• Proceeds from sales are used to buy the next fund without any redistribution of cash. That means if a sale has a value of $65,000, the full $65k is used to buy the next fund, not split between the funds.
• Rank the index funds for performance over the prior month.
• Buy the two worst performing funds in the list.
• Hold each fund for a minimum (no maximum) of 9 months.
• After holding for 9 months, check monthly (the first trading day of each month) if the prior month’s performance of a held fund is better than the worst performing fund in the list of available funds. If so, then replace the best performer with the worst.

Trading Tips

The historical performance of this portfolio is not as good as the one based on trading the best performing funds.

Index funds work better than non-index funds, and better than the combination of index and non-index funds from the Vanguard family.

The Portfolio

In the table, the Buy/Sell columns show the dates when shares were purchased/sold at the NAV. The Net Change column is the profit or loss of the trade, expressed as a percentage (shares x sell price) - (shares x buy price). If the trade is still open, the closing price as of the date the list was created is used as the sale price. The S&P Change column is the change in the S&P 500 index between the Buy and Sell dates, using the opening prices. The Max Loss column shows the largest drop below the buy price during the time the fund was held.