About 4 years ago, I began studying an investing method advocated by Dan Wiener's Independent Advisor for Vanguard investors known as "hot hands" investing.  The concept is relatively simple:  You buy the best performing diversified Vanguard fund each year.  (The term "diversified" exclude regional funds, like Pacific Stock Index, and sector funds, like REIT Index and Healthcare.)  You sell it when it is no longer the best performing diversified fund.

I initially floated the idea of hot hands investing on the Diehard forum.  I received a lot of advice, and a number of comments comparing Dan Wiener's name to a hot dog.  However, the overwhelming response was that I shouldn't engage in such shenanigans.

Luckily, I ignored the response.  I bought the hot hands fund, International Explorer.

International Explorer then went on a run.  It has been the hot hands fun 4 years in a row.  It has returned about 91% in 4 years.  Compare this to Lifestrategy Growth, which has returned around 41.7%.  (For the record, I compare everything to Lifestrategy Growth just for a frame of reference.)

Bottom line: Think outside the box. 

Caveat:  If you buy the hot hands fund next year and it tanks, don't blame me.  You shouldn't be taking investment advice from an anonymous internet poster who adopted the name of a shortstop.
 

Your approach sounds simlair to the No Fund X newsletter's approach. They do this thing called Upgrading  that involves buying noload mutual funds that rank highly in their scoring system (based on market leadership) , and holding those funds as long as they continue to outperform their peers. When funds  fall down in their rankings, the investors sells the fund and moves on to the new winners. The newsletter doesn't focus on Vanguard although the Vanguard funds do show on their list periodically. This approach has beaten the S&P 500 for 27 years in a row.

Starmccoy:

Apparently, great minds think alike...

After using hot hands investing for a few years, I discovered the FundX newsletter.  I am a subscriber.  I am following the monthly MUP with a small portfolio, and it has done very well, although it is pretty darn volatile.

I will report on the FundX MUP "experiment" in a future blog entry.

Thanks for your post.

Petrocelli 

Petro- Congratulations on your investments. That one follows one of Newton's Universal Laws- a body in motion tends to stay in motion, or in other words, ride a winner until the wheels fall off, then jump off and get on the next one.I have good luck with it also.Hope you are recovering from your surgery and doing well.

Small-Cap International and its multi-year momentum play?

I originally bought VINEX  sometime back in 2004, but not for its momentum.  I bought it for its low R squared or low correlation to Domestic Stocks and even Large-Cap International at that time.  I think its correlation has become higher, because it doesn't seem to zig when the rest of the market zags, like it used to do.

My biggest mistake with it has been too much profit-taking.  I didn't let the winner run without giving it an occasional haircut.  Lately, I've even thought about selling out completely.  But then I ask myself:  why would I want to sell one of my best, if not the top performer, over the past 3 years?^)

Coy

...for next year? 

I'm not sure of all of the HH rules, but so far, it looks like it's going to a Growth fund.

In the Vanguard Family the top Domestic leaders,YTD, are VMGRX, Mid-Cap Growth, and VGEQX, Growth Equity, and VHCOX , Capital Opportunity.  All are Growth oriented.

In the T. Rowe Price Family the top Domestic leaders are RPMGX, Mid-Cap Growth, and PRWAX, New America Growth, and TRBCX, Blue Chip Growth.  More Growth.

Vanguard's Domestics have a slight edge on their Internationals, and VINEX does not appear to be a repeat(or is that a 3-peat or 4-peat?)

The best Internationals,YTD, are VGTSX, Total International, and VHGEX, Global Equity, and VWIGX, International Growth. (I don't think the EM - VEIEX - is eligible, correct?)  But, these are also Growth oriented.

The top TRP diversified Internationals,YTD, are PRIDX, International Explorer, and PRGSX, Global Stock.  PRIDX is a Small-Cap International, and its returns are currently being juiced by healthy allocations to Emerging Markets,i.e., India and Pacific-exJapan.

My bet is on PRGSX, Global Stock.  In fact, I've already started TRP's monthly Auto Asset Builder in a Roth last November.  It is my only really Growth oriented fund.

Coy

 

Yes we can prognosticate, and if we are wrong, who cares?

Like you, I am betting on growth coming back in to fashion.  If you look at the past decade, we have had hot hands funds in growth, then value, then international.  It looks like growth will come back.

My 401(k) has 3 large/mid growth funds:  Growth Index, Primecap and Cap. Opp.  This may be the first year since moving to Vanguard that the hot hands fund is not in my 401(k) plan.  If that's the case, I'll use one of the funds above as a substitute.

Petrocelli 

I have been a VINEX holder for some time as well, with periodic rebalancing and a thought towards eliminating it in favor of global funds...

 

My question is, how can a fund be a HOT HAND when it underperforms its benchmark?  I thought having a HOT HAND meant that you exceeded not only your benchmark, but the entirety of the investing cosmos!  But if you look at the VINEX reports for the past year or so you get a lot of excuses from Dobbs and Co and then you look at the numbers and there is very little here that you cant cover with one of the new Intl Small Cap ETFs... and when you look at the test portfolios that Kenster has run over the years you see how a basic Global fund like VHGEX, even without significant small cap exposure, destroys slice and dice portfolios even with large doses of VINEX... and thats during a period in which this asset class shone... imagine how it will be over the next five to ten years?

 

VINEX is an ok fund but no on should kid themselves that they own a world beater just because Mr Weiner says their hands are hot... what he means is their asset class is hot... and you can bet that asset classes that are hot should be sold, not bought

 

Ajw 

I've been having the same thoughts about VINEX also, maybe sell it or maybe keep holding it.  It's been the Hot Hand for the past few years, and that aspect appears to be over for it.  It's 1-year and less percentile numbers are the pits.  That under-performance could only be temporary, as that happens with practically all active and especially value oriented funds.  And if I did sell, it would probably recover, and blow the lights out. 

But, I'm questioning whether it's providing a unique diversification, which was also so appealing when I first bought it.  If it isn't, I could probably find another Global fund to compliment my other two(PRGSX & PGVFX).  Besides VHGEX, a likely candidate could be one of the Utopia funds - UTGRX or UTCRX.

Coy  

For 2006 I screwed up the momentum approach by using ETFs and technical indicators and got stopped out for a loss early in the year. For 2007 I was more impressed by Jim Lowell's approach to hot hands and spread out my bets. Jim maintains his system works with Fidelity so I picked Fecax with fair success, Jaosx worked well with Schwab Fund Supermarket, ILF in a brokerage account and plain International in an Annuity.  All the picks were international of various flavors. Collectively they did better than Vinex (closed) coming in at about +20% for the year. I'm having problems coming up with good candidates for 2008.

Well, here we are with only a couple weeks to go before Dan, The Man, makes it official for next year's choice for Vanguard's Hot Hands fund.

The contenders have not changed much from 3 months ago.  On the domestic front Growth Equity(+22.8% YTD), Mid-Cap Growth(15.8), and Primecap(13.2) are still the top three.

On the International front International Growth(+19.3 YTD) is still ahead of International Value(16.5).

The Indexes show Total International(+19.6) just ahead of Mid-Cap Growth Index(16.9).

At T.Rowe Price it's Mid-Cap Growth(+17.9 YTD), New America Growth(+15.0) and Blue Chip Growth(13.7), with Spectrum International(18.7) and International Discovery(17.8).

My pick is still TRP Global Stock - PRGSX -  which is clocking in at 23.0% YTD.

I didn't know that Jim Lowell was doing a system with Fidelity funds.  That would add some more choices.

Janus(hold your nose) does have another likely candidate, Contrarian - JSVAX (+22.5% YTD)

Which one will it be? 

Is it too early to start the Jeopardy theme?

Coy

Why is EM never considered for HOT HANDS? It's broad based and has lately been a large component in many active international funds.  d

So what is the updated list of Hot Hands candidates as of today? 

 Is it still the same order as it was on 12/13/2007?

Growth Equity

Total Intl

Intl Growth

Mid-cap Growth

Intl Value

Primecap

Is there any website that can provide info about Vanguard funds and their YTD returns?

Thanks,