Choosing A Minimum Holding
Period
Theoretically, the Cornerstone
Growth Stock Screen could be run each day and an investor
could buy the new stocks that appear on the list and sell
the stocks that are no longer on the list. Obviously, this
would create an excessive amount of commissions. Through back-testing,
we've found that a minimum holding period of one month for
the Cornerstone Growth Stock Screen resulted in the highest
returns. Rebalancing each month may have produced the highest
returns, but for various reasons (such as not having enough
time to execute the monthly trades and wanting to minimize
capital gains taxes) not all investors want to trade each
month.
Investors could choose to
hold Cornerstone Growth stocks for a month, three months,
six months, or a year. Active investors paying low
commissions may want to choose a monthly holding period
since the shorter holding periods have tended to produce higher
annualized returns. Investors who want to minimize capital
gains taxes may want to hold for a minimum of twelve months.
All holding periods are implemented the same way, but at different
intervals. To begin, an investor would simply consult the
stock
screen and make the initial purchase. Then the investor
would need to rebalance the portfolio periodically.
Rebalancing
Monthly To Create a Minimum Holding Period of One Month
For those choosing to rebalance the portfolio each month,
each time the stock screen is updated, the investor would
sell any stocks no longer appearing on the screen and purchase
any new stocks appearing on the screen. Go here for an example.
Rebalancing
Quarterly, Semi-annually, Annually
Let's assume an investor starts following the Cornerstone
Growth Stock Screen in May and chooses to hold the stocks
for a minimum of three months. The investor makes his/her
initial purchases in May and three months later (in August)
the investor checks the Cornerstone Screen to see if his/her
stocks still appear in the screen. Because the investor
has chosen to rebalance every three months, the stock screens
for June and July are ignored. Remember, just because
the stock screen is updated monthly doesn't mean you have
to implement its changes each and every month.
Following are two examples
of how to implement the screen, one for investors buying the
stocks in positions 4-6 and one for investors buying the stock
in positions 4-10.
Buying
the 4th, 5th, & 6th Stocks & Rebalancing Every Three
Months
Here is an example of how
to implement this if you were buying only the stocks in the
4th, 5th, and 6th positions:
Initial Stock Screen in May
(fictional tickers)
Position |
Ticker |
1 |
ABC |
2 |
DEF |
3 |
GHI |
4 |
JKL |
5 |
MNO |
6 |
PQR |
7 |
STU |
8 |
ATC |
9 |
BBD |
10 |
LYS |
For the initial purchase,
stocks JKL, MNO, and PQR are bought because they fall in
positions 4, 5, and 6 on the initial stock screen.
Stock Screen 3 Months Later
in August
Position |
Ticker |
1 |
DEF |
2 |
ABC |
3 |
JKL |
4 |
GHI |
5 |
ZZY |
6 |
MNO |
7 |
TUV |
8 |
YHL |
9 |
LYS |
10 |
BBD |
Because the investor has chosen
to rebalance the portfolio every three months instead of monthly,
the monthly updates for the Cornerstone Screen are ignored
for June and July. In August, three months after making the
initial purchases, the investor would sell stock JKL because
it now occupies position 3 instead of position 4, 5, or 6.
Stock MNO would not be sold because it is still in position
4, 5, or 6. Stock PQR would be sold because it no longer appears
in position 4, 5, or 6. Stocks GHI and ZZY would be purchased
because they now appear in the 4th, 5th, or 6th positions.
Therefore the investor's holding in August would be GHI, ZZY,
and MNO.
Buying the Stocks
in Positions 4-10
Suppose an investor chose
to purchase the stocks in positions 4-10 and decided on a
3-month minimum holding period. In that case, whenever the
investor checked the screen for rebalancing, the investor
would sell any stocks that no longer appear in positions 4
through 10. In the example above, ATC stock was in position
8 in May (the initial purchase), but when it was time to rebalance
three months later in August, the stock had fallen to position
11. Because the stock no longer appeared in position 4-10,
the investor would sell ATC. Furthermore, the investor would
also sell JKL, PQR, STU and then buy GHI, ZZY, TUV, YHL.
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