The Feynman Study

Lowell has invited me to author a series of posts on the ITA Wealth Management website that may be of interest to Platinum members interested in learning more about the practical application of some of the strategies, tactics and analysis tools that Lowell uses on the site and how these might be expected to perform under a variety of market conditions.

I plan to do this by back testing the performance of a diversified portfolio of assets over a 6-year period from mid-2007 to mid-2013 (present). The period is chosen to include the (major) bear market of 2008 and the subsequent (major) bull market from March 2009 to the present time. Of course, there are also minor rallies and retracements throughout this 6-year period.

The assets included in the portfolio will be Exchange Traded Funds (ETFs) that have a sufficient historical record to cover the chosen time period. This imposes some limitations on the ETFs that can be used but the assets chosen are considered to be unbiased in terms of reflecting the overall structure of the total global market and the asset groups contained within that market. Thus, from a straightforward performance perspective, it should not matter whether the issuer of the ETF is iShares, ProShares, Vanguard or any other issuer with an offering covering the same market segment. In keeping with Lowell’s tradition of recognizing famous physicists we are naming this the “Feynman” Portfolio.

The arguments for the use of ETFs in the construction of a diversified investment portfolio, and considerations to be made in choosing which ETFs to include in a personalized portfolio, including management and commission costs, can be found elsewhere on this site. ETFs chosen for this study are not recommendations or endorsements for the selection of those particular assets for personal portfolios but rather an unbiased choice based on their relevance to represent a specific market segment and provide appropriate diversification. The fact that I will not be including individual stocks in the portfolio does not mean that I feel that there is no benefit in doing so, merely that I want to keep the study as clean and concise as possible while allowing for the inclusion of all asset classes. Again, check out other posts on this site for the pros and cons of adding individual stocks to your portfolio.

Platinum members may agree or disagree with the ETFs chosen and with some of the constraints that will be imposed during the course of the analyses to be performed. Each investor will have their own (hopefully reasonable) expectations for return and income and their own appetite (or lack thereof) for risk – these are personal choices determined by personal needs, temperament and personality. It is hoped that any discretionary limits imposed will be sufficiently wide to encompass the interests of the majority of members.

The hope is that the analyses will help members better understand the strengths and weaknesses of different strategies, tactics and tools that can be used to implement these methods, and that they will get a better feeling of what to expect from the market and their chosen strategy.

Some of the planned analyses are very time consuming, so do not expect to see posts every day – it will be days, maybe even weeks, between posts. I will attempt to provide a summary post that will highlight the significant aspects of each analysis but the details will be too lengthy to post directly so I will provide a Word file that can be downloaded.

Some of the topics to be covered will be:

  • Diversification
  • Optimization
    • The Efficient Frontier
  • Momentum
  • Risk Management
    • Filters
      • Moving Averages
      • Momentum
      • Options
  • Synergies – Putting it all together

If members have interests not included in the above list they are welcome to suggest additions – if I feel I can usefully expand the study (within reason) I shall be pleased to do so – otherwise, Lowell and/or I may respond outside of the scope of this study.