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Backtest shows REIT investors can pocket more profits by using discount brokers

Christopher Ng
Christopher Ng

The arrival of discount brokers is a game-changer for retail investors.

Personally, I saw an immediate shift in margin trading account opening towards Interactive Brokers at the 16th batch of my Early Retirement Masterclass. This comes with little surprise since IB is offering competitive margin financing rates at ~50% cheaper than incumbent margin account providers in Singapore!

With the significant reduction in investing cost (now $2.50 per trade instead of $25 levied by traditional brokers) comes the question:

Can investment strategies could be turned-over at a much faster pace?

My original training materials suggest holding onto an investment strategy for at least a year for 2 reasons;

  • minimise brokerage expenses and
  • focus on collecting dividend income as passively as reasonably possible.

Thanks to discount brokers, students are now curious as to whether they can update their portfolios with the latest stock list on a monthly frequency instead.

Fortunately, this is an empirical question that I can now answer with Pyinvesting.com.

Blue-Chip Strategy

Batch 16 of the Early Retirement Masterclass worked with a process that shortlists blue chips with the following characteristics:

  • High Free Cash Flow Yield
  • Low Price/Earnings Ratio
  • Low Beta
  • High Profit Margins

I performed back-tests using Pyinvesting.com for this blended strategy over a five and ten-year periods.

Differences in performances between annual and monthly rebalancing are as follows:

STI Four Factors10-year Return10-year Standard Deviation5-year Return5-year Standard Deviation
Annual Rebalance8.5%10.6%9.4%12.3%
Monthly Rebalance8.4%10.3%7.2%11.9%

From these results, it is clear that shifting from annual rebalancing to monthly rebalancing does not do much for investment returns.

There is no need to review the policy of getting students to hold onto their blue-chips strategy based portfolios for at least a year.

REITs Strategy

Batch 16 of the Early Retirement Masterclass worked with a process that shortlists REITs with the following characteristics:

  • Low Debt to Equity Ratio
  • Low Price/Earnings Ratio
  • High Market Capitalisation
  • High Momentum or 180-day Relative Strength Indicator

Performing similar back-tests, we end up with the following results:

REITS Four Factors10-year Return10-year Standard Deviation5-year Return5-year Standard Deviation
Annual Rebalance11.5%10.9%13.1%12.5%
Monthly Rebalance12.5%11%13.6%12.9%

From the REITs back-test results, shifting from annual rebalancing to monthly rebalancing brought a slight advantage to the returns with a corresponding increase in downside risks.

It is highly likely that the difference in performance was because the REITs strategy is based partially on Momentum. Monthly rebalancing allows the system to update itself by taking on REITs that capture the short term attention of the investors.

At least in the case of Batch 16, monthly rebalancing of REITs may be justifiable while the ERM programme maintains a momentum-based strategy.  After that, additional trades have a meager opportunity cost as Interactive Brokers would charge $10USD anyway if trading fees fall this floor number.

Conclusion

By performing this short experiment, we can see the extent of how introducing a discount brokerage can affect the entire investment ecosystem.

Previous strategies that limit turnover due to high brokerage expenses no longer constrain the retail investor. Even a dividend strategy involving REITs can see turnover every month with minimal consequences.

This can dramatically strengthen the hand of the DIY investor and lead to a new generation of “Robin Hood” traders in Singapore.

Christopher Ng
Christopher Ng
    Juris Doctor(Cum Laude) Bachelor in Engineering from NUS (1st Class Honours) Masters in Applied Finance also from NUS. CAIA, FRM qualifications and passed all three CFA examinations. I have recently completed my Juris Doctor and have been called to the Singapore Bar. For the past 15 years I was an IT manager and I have worked in multinationals, financial exchanges, trade unions and even a government agency. I started my career as an AS/400 administrator and moved on to manage IT projects and operations. Through my personal savings and investments, I earned my financial independence at age 39 after my investment income started to exceed my monthly take home pay. One of my first acts upon retirement is to go back to Law School to reinvent myself as a legal professional. I am likely to be in the practice of corporate litigation. My three books on Personal Finance explain the processes by which I attained my financial independence. Growing your Tree of Prosperity was a local Straits Times bestseller in 2005. I was featured in Me and My Money sections in the Sunday Times twice. I also play the role of a husband and a father.
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