Why Last Year's Best Factor Is A Bad Forecast

A friend sent me last year's factor leaderboard this week. Momentum on top, value scraping the bottom. He wanted to rotate his SIP into the winner. Reasonable instinct. It is also the single most common way people lose to a portfolio that does nothing clever.

I asked him to do one thing first. Hold last year's leaderboard up against the year before it. The top tile had moved. It almost always has.

So I ran the trade he was about to make. Every year, buy whatever factor led the year before, hold it, repeat. Over five years that compounds to roughly +58 percent. Then I ran the lazy version. Hold all five factors, equal weight, rebalance on a schedule, never look at the leaderboard. +72 percent. Same five factors. On a 10 lakh book that is about 1.4 lakh of compounding handed away for the privilege of feeling decisive.

The reason is in the rotation. Across those years, last year's number one repeated as this year's number one exactly once in five tries. Momentum led one year and sat dead last two years later. Value bottomed, led, then bottomed again. Trailing return is a baton in the middle of a handoff. Chase it and you grab it right as it leaves the hand.

The blend wins because the rebalance quietly does what you cannot make yourself do. It trims the runner and buys the laggard, on a calendar, with no opinion attached. Cliff Asness called factor timing a siren song back in 2016, and the trailing-return version is the loudest verse.

If you genuinely want to tilt, tilt on something slower than last year. How cheap a factor sits against its own history. That signal ages in years. A hot twelve months is already spent.

Five tiles, all worth owning. The only timing call that keeps working is owning every one of them: