Understanding Conservative Formula Investing: A Comprehensive Guide

Conservative Formula Investing is a low-risk investment strategy that focuses on steady returns over time. It's perfect for those who want to grow their wealth without taking on too much risk.

This approach involves investing in a mix of low-risk assets, such as bonds and dividend-paying stocks, to generate regular income and long-term growth. By diversifying your portfolio, you can minimize losses and maximize returns.

A key principle of Conservative Formula Investing is to keep your investment horizon long, typically five years or more. This allows you to ride out market fluctuations and avoid making emotional decisions based on short-term market volatility.

By adopting a conservative investment approach, you can create a stable financial foundation and achieve your long-term financial goals.

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Conservative investing prioritizes the preservation of capital over growth or market returns.

A conservative investing strategy involves investing in lower-risk securities, such as blue chip stocks, fixed-income securities, the money market, and cash or cash equivalents.

More than half of a portfolio in a conservative investing strategy will generally be held in debt securities and cash equivalents rather than equities or other risky assets.

Conservative investing can be contrasted with aggressive investing, which focuses on growth and market returns.

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Conservative Formula Investing is a great strategy that can be used anywhere in the world, as it's not limited to a specific region or market. It's a big universe of investment ideas at your disposal.

To implement the Conservative Strategy in your portfolio, you can break it down into easy-to-follow steps. First, create a template with the necessary output columns, including Name, Country, ISIN, Ticker, Close Price, Volatility 36m, Price Index 12-1m, Shareholder Yield, Market Value (USD), and Dividend Yield.

At the end of each quarter, select the 1,000 largest stocks in your investment universe. Then, rank these companies by historical 36-month volatility from low to high, and choose the 500 stocks with the lowest 36-month volatility. Next, rank these companies first by 12-1-month price momentum from high to low, and then by Shareholder Yield from high to low.

To calculate the average rank of the Momentum and Shareholder Yield ranking of every one of the 500 companies, simply add the two rankings together and divide by 2. Finally, sort the 500 companies by the average rank from low to high, and buy the same amount (equal weight) of the top 100 companies.

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Conservative investing prioritizes preserving the purchasing power of one's capital with the least amount of risk. This can be achieved by investing in low-risk securities such as Treasuries, high-quality bonds, money markets, and cash equivalents.

Here are some key characteristics of conservative investing strategies:

Preserving capital and current income are popular conservative investing strategies. A capital preservation strategy incorporates safe, short-term instruments, such as Treasury bills (T-bills) and certificates of deposit (CDs). A current income strategy can be appropriate for older investors with a lower risk tolerance, who are looking for a way to continue to earn a steady flow of money post-retirement and without their usual salary.

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The research team behind the conservative formula investing strategy proposed a simple formula that combines low return volatility, high net payout yield, and strong price momentum to give investors exposure to the most important factor premiums in one easy-to-implement investment strategy.

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The team developed their model of investment criteria based on three factors: low return volatility, high net payout yield, and strong price momentum. They utilized CRSP data going back to 1926 and built a portfolio of 100 companies using the largest 1000 stocks in the market at each point in time.

The conservative formula had similar return characteristics to several other single factors on a simple return basis, but once risk was taken into account, it had much lower volatility and a higher Sharpe ratio than its competitors. The formula handily beats on return when compared to the risk-free asset.

Here are the key findings from the research:

The research team behind the conservative investment formula developed their model based on three key factors: low return volatility, high net payout yield, and strong price momentum. These factors are designed to give investors exposure to the most important factor premiums in one easy-to-implement investment strategy.

The team utilized CRSP data going back to 1926 to validate their model. They built a portfolio of 100 companies using the largest 1000 stocks in the market at each point in time. This approach allowed them to test the robustness of their model across different regions, including the US, Europe, Japan, and emerging markets.

The process to narrow down the 1000 stocks to 100 involved sorting them into two groups based on their historical 36-month stock return volatility. This yielded a high volatility group and a low volatility group. The low volatility group was then ranked on its 12-1 month price momentum and total net payout yield.

Here's a summary of the key factors that make up the conservative investment formula:

The team's approach to building the portfolio was designed to minimize risk while maximizing returns. By using a simple formula based on these three factors, investors can potentially beat more complicated factor models.

In a global analysis, it's essential to consider the data available for your strategy. Even if you have a winning strategy, it won't be effective without data.

The data should be available in a format that can be easily loaded and processed. A set of CSV files containing ohlcv monthly data with an extra field for the Net Payout Yield (npy) is assumed to be available.

The format of the CSV data will look like one row per month, with the npy field added to the ohlcv data stream. This makes it easy to add fundamental data to the ohlcv data stream.

To load the data, the expression lines=('npy',) is used, along with the params = dict(npy=6) to indicate the loading position. The other fields have a predefined position.

Here's a summary of the data loader engine parameters:

The timeframe has also been updated in the parameters to reflect the monthly nature of the data, making it easier to analyze and process.

The Conservative Formula Investing strategy is a great approach to investing, and its performance is a key factor to consider.

This strategy can be applied anywhere in the world, making it a versatile and effective investment approach.

The charts show that it's a great investment strategy to follow, regardless of where you invest, giving you a big universe of investment ideas to work with.

By using this strategy worldwide, you can tap into a vast pool of investment opportunities, increasing your chances of success.

It's essential to understand the performance of the strategy to make informed investment decisions and achieve your financial goals.

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To implement the Conservative Formula in your portfolio, you'll need to create a template with specific output columns, including Name, Country, ISIN, Ticker, Close Price, Volatility 36m, Price Index 12-1m, Shareholder Yield, Market Value (USD), and Dividend Yield.

The first step is to select the 1,000 largest stocks in your investment universe at the end of each quarter. This will give you a solid foundation for your portfolio.

You'll then need to rank these 1,000 companies by historical 36-month volatility from low to high. From there, choose the 500 stocks with the lowest 36-month volatility.

Next, rank these 500 companies first by 12-1-month price momentum from high to low, and then by Shareholder Yield from high to low. Calculate an average rank of the Momentum and Shareholder Yield ranking for each company.

Finally, sort the 500 companies by the average rank from low to high, and buy an equal amount of the top 100 companies.

Here's a step-by-step summary:

The Magic Formula, which involves a specific step-by-step process, generates significant raw and risk-adjusted returns by providing efficient exposure to well-established style factors.

While the Magic Formula is effective, other investing formulas like the Piotroski F-Score, Acquirer’s Multiple, and Conservative Formula also generate notable returns. The Acquirer’s Multiple achieves the highest returns for top decile portfolios.

In comparison, the Magic Formula exhibits the highest remaining alpha after adjusting for common factors, making it a promising approach for investors. A 2024 study evaluates the formula for the U.S. market from 1963 to 2022 and compares it with the performance of other formulas.

To give you a better idea, here's a quick comparison of the formulas:

Keep in mind that no single formula consistently outperforms across all performance metrics, so it's essential to consider multiple approaches when investing.

The Magic Formula has been compared to other investing formulas, and the results are fascinating. A 2024 study found that all four formulas, including the Magic Formula, generate significant raw and risk-adjusted returns by providing efficient exposure to well-established style factors.

The study evaluated the performance of the Magic Formula, Piotroski F-Score, Acquirer’s Multiple, and Conservative Formula on the U.S. market from 1963 to 2022. It's interesting to note that no single formula consistently outperforms across all performance metrics.

The Acquirer’s Multiple achieved the highest returns for top decile portfolios, while the Conservative Formula led in CAPM alpha and return spread. The Magic Formula, however, exhibited the highest remaining alpha after adjusting for common factors.

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Now that we've narrowed down our list of companies, it's time to decide which ones to invest in.

The next step is to buy the top 100 companies from the sorted list, with each company receiving an equal weight in our investment portfolio.

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To determine the top 100 companies, we need to sort the list by the SH Yield + Momentum column from low to high.

This column is calculated by taking the average of the Momentum and SH Yield values for each company.

The Momentum value is determined by the company's ranking in the Price Index 12-1m column, with the highest value getting a ranking of 1 and the next 2 until 500.

The SH Yield value is determined by the company's ranking in the Shareholder Yield column, with the highest value getting a ranking of 1 and the next 2 until 500.

Here is the list of the top 100 companies, sorted by the SH Yield + Momentum column: