Is There an Advantage in Splitting a Portfolio into Tranches? – Part 3: REDA Groups with Heikin-Ashi Filter

In my last post in this series (https://itawealth.com/advantage-splitting-portfolio-tranches-part-2-reda-groups/) I looked at the performance of a “Rutherford” portfolio where we would equally allocate funds to assets that were classified in the top 3 groups of the REDA rankings.

In this post I will again use the REDA group classifications but will add an entry filter requiring both the 2- and 5-day Heikin-Ashi (HA) candles to be showing a positive (green) signal.

One of the consequences of restricting selection choices to the top 3 group classifications is that we may eliminate assets with the highest momentum since these assets tend to fall into the group 4 and 5 classifications due to the fact that they may be overbought and located far from the mean moving averages that justify Hi classifications in the E, D and A columns.

So, in addition to applying the HA filter , (that will reduce the number of qualifying assets significantly), I will also widen the range of possible candidates by choosing from assets in the top 4 groups rather than the top 3.

As before, allocations to qualifying assets will be equally (dollar) weighted.

Using the tranche methodology described in previous parts of this series of posts we see the following performance:

Again we see the wide variance, tranche to tranche, from 4.4% ($219) to 23% ($1,162) return over the 3+ year period. When combined we see the following (4 tranche) performance:

….resulting in a $2,189 (10.9%) profit over the period.

This 10.9% return is the best we have seen to date – however, we need to take a look at the comparative performance of the 3 allocation strategies (Rank only, Group (no additional entry filter), and Group with HA filter) to completely confuse things:

As with any strategy we see that no single strategy is obviously the best under all market conditions – we should be used to this observation by now. The reassuring feature is that all strategies show positive (and, hopefully) acceptable performance. Remember that this 3+ year period has been a tough period for investors to make a lot of progress (high returns).

As a final summary the following table shows the returns, volatility and Return/Risk (Sharpe) ratios of the 3 strategies:

In my posts over the years I have tended to use equal weighting as my “go to” benchmark and have stated “when in doubt, equal weight”. However, in my next post in this series I will apply the same asset selection strategies and tranching concepts to a Rutherford Strategic Asset Allocation (SAA) portfolio.

David