LBP – Winning Strategy

Lazy Butt Portfolio (LBP) is launched

As we indicated in our last week blog, we have launched Lazy Butt Portfolio (LBP) today. This investment strategy was created by one of our leading associates and managed in one of the investment portfolios on our trading platform. In line with the rules of the strategy, this morning – Monday August 16, 2010, we have analyzed nine sectors of the exchange-traded funds (ETF), and purchased eight of them. The one that we skipped is the most volatile sector of all 9. In the worksheet below, volatility value is a standard deviation of daily returns for the last 60 trading days (which roughly corresponds to three calendar months). It is calculated as of Friday August 13 market close.

Table 1 ETF Structure

As we can see the volatility of XLF (Financials) is the highest and thus that ETF was skipped. At some later day we will talk more about volatility calculating procedure and why LBP cares so much about it, but today we would like to go over the mechanics of trading.

So the first step we did is we opened a brand new cash account and named it “Lazy Butt Portfolio”, under VivaTrader profile. We deposited $1,000,000 of virtual money in there. Now, this one million dollars needs to be divided equally between eight ETFs we want to buy. We also want to have a 1% of the money on this account to cover trading commissions and some other possible fees. So, the allocation of funds to each ETF can be calculated as this: $1,000,000 x 0.99 / 8 = $123,750. Where 0.9 9 is the 99% of the initial budget.

In the next step is to calculate number of shares to buy. To do that, we checked current price of each ETF on Monday, August 16 – just after Market open – and divided allocation into the price. For example, XLY was trading at 30.73, so the number of shares to buy is $123,750 / 30.73 = 4,027.01 or 4,027, if we round to an integer number. The same we calculated the rest of our ETF portfolio.

Then we proceeded with buying. In the Trading, Buy OR Sell Securities menu, we submitted eight Buy orders with order type market, respective tickers and quantities. Each order was submitted for account called “Lazy Butt Portfolio”. This is a manual procedure and it took us a few minutes. Since orders were of a type market, they were executed almost instantaneously and prices at which they were executed are presented in the Filled at Price column, in the able above.

Please note the difference between price that we used to calculate the number of shares and the prices at which orders where filled. This difference is called slippage. It happens because market is constantly moving. Slippage is always a concern of a trader. Depending on the intensity and direction of a market moves, slippage can work to your advantage or against you. In our case the market was moving moderately up so we lost a bit on a slippage in seven orders out of eight. “We lost” means we bought stocks at higher prices than we planned. But shares of XLY fund we bought at cheaper price. Slippage is another main reason why we left some cash (1%) on the account: without having a cash cushion, market could run away from us and our orders could get rejected due to insufficient funds on the account.

Another thing we have done today is we opened another account called “Straight Up Market Portfolio” with the same capitalization of $1,000,000. We used 99% of these funds to buy S&P 500 ETF with ticker SPY. SPY was trading around 103.13 and we respectively bought 9,141 shares. This is not a part of the Lazy Butt Portfolio; it is rather a benchmark portfolio. LBP is supposed to outperform S&P 500 index in the long run. We will be monitoring and commenting these two portfolios by comparing their behavior and verifying our projections.

As the name “Lazy” implies LBP, it does not require frequent trading. Next time we will re-balance it – trade some more – would be on September 12 or 13. But you will hear more from us about Lazy Butt Portfolio, even before that – stay tuned!