Connors Research Traders Journal (Volume 62): Here’s A Better Way To Build Your Portfolio
In this issue of the Connors Research Traders Journal, we want to share with you a great podcast from AQR, the second-largest hedge fund in the world.
In it, they discuss the importance of combining multiple strategies (professionally known as “factors”) to increase your investment results.
This podcast especially focuses on the implementation of these factors. AQR goes on to state that minor changes to the design of your portfolio can have a huge effect on bottom-line performance.
The most important takeaway from this podcast is AQR’s conclusion that an “integrated” approach (a combined approach) to investing is better than a portfolio “mix” approach. Let us exactly explain what this means.
Let’s take two well known and established factors – say value and momentum.
With a “mixed” approach, you would take a portion of your capital and buy stocks with strong momentum and take a separate portion of your capital and buy stocks that are considered value stocks.
In this approach, a portion of your portfolio is allocated to “momentum” and a portion is allocated to “value”.
AQR has found this approach to be less than ideal. Based on the historical data, we agree with AQR and have found the same.
An “Integrated” Approach – A Better WayTo Build Portfolios
In contrast, in what AQR calls an “integrated” approach, you would instead combine, or “stack” these factors together.
AQR found that this combined approach offers great benefits, including improved performance. Our own research comes to the exact same conclusion.
One example we’ve found to be successful is combining stocks that are both cheap in value and have strong momentum.
Notice what we’re doing here, We’re now identifying stocks that have both value and momentum characteristics. This is opposed to applying each factor separately.
As another example of an integrated approach that we’ve found has had long-term outperformance is to first identify stocks that are cheap (inexpensive) in value, then take that basket of inexpensive stocks and buy the ones with the greatest momentum.
This technique stacks multiple factors in your favor, increasing your probability of success.
Stacking Fundamental, Technical, and Quant Edges In Your Favor = “Quantamentals”!
If you are interested in learning how to combine technical, fundamental and quant edges into trading and investing strategies, you can learn to do so in our upcoming course Quantamentals – The Next Forefront of Trading and Investing.
You will learn how to “stack” technical and fundamental and quantitative factors together into a combined approach, with the objective of achieving significantly higher returns.
You can learn more by listening to this webinar we held on Monday (or if you’d like to attend a live webinar, please click here).
Combining “factors” as AQR suggests, is the next generation of building high performing strategies. We’ll continue to share this knowledge with you because we, along with many others, believe it’s the next forefront of trading and investing.
More Knowledge To Improve Your Trading
- Quantamentals Webinar – Are you looking to learn more on how to apply Quantamentals to your trading and investing?
We’re conducting a 45-minute webinar on Thursday, October 3 at 1 pm ET to teach you more about Quantamental Trading and to introduce you to the course we’ll be holding. If you’d like to join the free webinar, please click here to register.
- Become a Master Swing Trader in 10 Weeks… click here for more information
The passive investment industry states there is no Alpha in the markets. This book proves them wrong!
The Alpha Formula – Beat The Market With Less Risk teaches you strategies and portfolios with historical Alpha in Stocks, ETFs, and Fixed Income.
Backed by many quantified, systematic strategies, dozens of academic studies and combining behavioral finance with Ray Dalio’s correlation research, this book will teach you new, easy to understand quant strategies you can apply immediately.
Larry Connors & Chris Cain, CMT