Yesterday I presented the eight (8) ETF portfolio in the Aristotle review. Here are early results as to how that portfolio would have performed from 6/30/2006 through 8/14/2014 or over eight years of data. The portfolio is up over 133% while the VTI index is up over 88%. This model looks promising.
ETFs in the study were: VTI, TLT, EFA, VWO, VNQ, AGG, and RWX when sufficient data was available. EFA was substituted for VEA as I needed more historical data. The same was true for AGG as PCY does not have sufficient data.
The basic percentages were as follows:
- VTI = 40%
- TLT = 20%
- EFA = 10%
- VWO = 10%
- VNQ = 10%
- AGG = 5%
- RWX = 5%
These are the allocations when all ETFs are performing above SHY, which is not all the frequent.
The eight ETF portfolio gained 133% while the VTI index ETF returned 88% over the 8 plus years of analysis. I did make some judgments that I’ll likely clean up in another run. For example, if AGG and RWX performed below SHY, that left 10% not invested. There are multiple choices as what to do with that 10%. 1) Invest in SHY, and that is what I intend to do on the next run as it removes all judgment. 2) What I did this time was to look for ETFs that had the highest positive acceleration and I over-weighted those ETFs for the next quarter. The data was updated every quarter. I now have a workable spreadsheet that I could update rather easily every 33 days.
That is the quick summary of the eight (8) ETF portfolio. If you have questions, please ask in the Comments section.
Discover more from ITA Wealth Management
Subscribe to get the latest posts sent to your email.
I just completed the analysis where all unallocated cash goes into SHY. For example, if EFA with its 10% allocation under-performed SHY, that 10% was automatically invested in SHY.
With this model the 8 ETF portfolio still outperformed the VTI index, 111% to 88%. Even by going to SHY (cash equivalent) there were six (6) draw-downs. They were:
1 of $1500, 1 of $4000, 1 of $5,000, 1 of 8,000, 1 of $3500, and 1 of $400. Not too severe considering this includes the Great Recession.
Lowell
Lowell,
Great start to a “simple – investor/trader fixed/asset allocation/momentum portfolio” OK yes enough humor/snarky comment. Probably Hedge Hunter could pick this up but does it matter the day of the “quarter” this readjustment happens? The actual first day? April 1? July1? etc. or is it just 91 days before the start? Let’s start the experiment 1 month before the GFC. What would the results have been rebalanced quarterly? How would we know 10/01/87 would have quick bounce but 06/01/08 would not? Pass the Alka-Seltzer. Think we need an additional lifeboat. We all have been drawn and quartered : >)
Robert
Robert,
When I manufacture a head of steam, I plan to look at the 8 ETF model when reworked or reviewed every 33 days. If it looks positive compared to quarterly reviews, I’ll likely plow forward.
It does appear as if the decisions to reinvest available cash (available from under-performing ETFs) in the ETFs that are showing positive accelerations enhances return. I want to test this decision making in further detail.
Lowell
Robert,
Obviously we can’t know ahead of time (unless we have that elusive “crystal ball”) whether the market is about to bounce or plunge. However, the more frequent our reviews, the better our chance of detecting the move and making appropriate adjustments – that’s why I prefer monthly, rather than quarterly reviews/rebalancing. The particular day chosen is obviously a bit of a “crap shoot” but shouldn’t be a particularly important factor from a long term investment perspective – Lowell’s method of a 33 day cycle is a nice way to rotate through the calendar without running into potential systemic (e.g. institutional buying/selling, seasonal etc…) issues. Remember also, that, even though Lowell may review his portfolio’s on, say, 30th of the month, he doesn’t rush out to adjust/buy/sell shares on that day necessarily – he will place appropriate stop and limit orders that may take some time to get filled (if filled at all before the next review date). This is a little different from what we generally assume in backtests (although we could simply have the discipline to follow the rules on that specific day.
David
I can’t comment on the merits/weaknesses of this portfolio strategy since I don’t have enough information. However, it really isn’t a very complicated strategy and could be set up easily in the Ranking SS. It is basically a simple Strategic Asset Allocation (SAA) Plan with a SHY momentum filter and can be “automated” for periodic analysis review very easily.
The main questions are:
1. Do the 8 selected assets represent the required level of diversification?
2. Are the selected allocations appropriate?
3. How often will we analyze/adjust the portfolio?
These are all questions we should be asking for any (simple or complex) strategy so I don’t view this as a complex strategy requiring a lot of time/effort to manage.
David
David,
Number 3 is one that concerns me as there is portfolio turnover almost every quarter. The reason is that nearly every quarter there are one to three ETFs that under-perform SHY.
Lowell
Lowell,
Benchmarking to a Buy and Hold “Index” of the 7 asset (excl SHY) portfolio in the SAA proportions should help you clarify this – for greatest accuracy you will need to build in an estimate for transaction costs.
David
David,
I’m not sure where the transaction costs enter the picture as all eight ETFs are commission free. Further, if one were to buy and hold, no expenses other than the expense ratio are involved.
I’m still pondering over how one can reduce portfolio churning. One option is to hold an ETF, even if underperforming SHY, so long as it has a positive acceleration percentage.
Lowell
Lowell,
The transaction costs only referred to the “Lowell 8” Portfolio – obviously not to the “Buy-and-Hold” Benchmark.
Also if you’re lucky enough to be able to trade the ETFs commission free I don’t really see a problem with “churning” – other than an exposure to “whipsaw” effects. However, at the end of the day we can’t have everything and I think I’d rather risk the whipsaw than hold an asset that is obviously (by ranking inference/definition) going down in price (compared to SHY). A positive acceleration just means recent price movement is more favorable than long term price movement – but it could still be going down (long term) – or, at best, experiencing a bounce (short term) – buying under these conditions is essentially bottom fishing – which may be ok if an investor recognizes this and is comfortable with it. My impression from comments from the majority of members (probably the “more senior” members 🙂 ) is that they may tend to be a little more conservative.
David