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Einstein, one of two Relative Strength investing models tracked here on ITA, is up for review this morning. Nearly 60% of the portfolio is in cash so decisions as to what to do with this large amount is on the table. I’m not in a hurry to invest in equities until the debt crisis is solved. Limit orders set well below current prices is one option. When faced with this type of problem I generally “ladder down” the limit orders.
For example. Assume the Kipling LRPC model recommends investing 300 shares of VTI. The limit orders may look like the following.
- Purchase 50 shares at 3% below the current price.
- Add another 50 shares at 5% below the current price.
- Purchase the second 100 shares at 10% below the current price.
- Add the last 100 shares at 15% below the current price.
I’ve been know to break the shares down into smaller bundles and feather the percentages into smaller increments.
Einstein Investment Quiver
The current investment quiver and holdings for the Einstein is shown below. The quiver is set up to include all the basic asset classes as well as a few additional Fama-French factor ETFs from the Five-Factor Model. In several cases, the asset allocation model and Five-Factor Model overlap. Small-Cap value (VBR) is one example where one ETF incorporates both small size and value, two elements of the Five-Factor Model.
Einstein Security Recommendations
The Einstein is set up to use a one-year (252 trading days) look-back period. See the green arrow. A second variable is the maximum number of assets. I am limiting the Einstein to five securities. See the purple arrow. The third critical setting is to use the LRPC model. See the red arrow.
With these settings the five buy recommendations are: Mid-Cap Growth (VOT), Developed International Equities (VEA), Small-Cap International Equities (SCHC), Quality or one of the Five-Factor ETFs (QUAL), and International Quality (IQLT).
Einstein Manual Risk Adjustments
Moving to the manual risk adjustment worksheet found within the Kipling spreadsheet, this is where the money manager makes the Buy and Sell decisions.
TSLOs are in place to sell VOE, VBR, PCY, and QQQ. I will not sell 20 shares of IQLT but will continue to hold more than the recommended 647 shares.
After the market opens this morning I will “ladder” purchase orders for VOO, VOT, VEA, SCHC and QUAL. It is unlikely all limit orders will be struck before the next Einstein review. I don’t have a problem with waiting as the debt crisis is expected to reach new levels of angst this summer so there is ample time for the limit orders to be struck.
Keep in mind that there is also a risk with this approach. It is possible for the stock market to snap up in a major way while one is sitting on an array of limit orders. This is one reason why I prefer to set up portfolios with different approaches. Yes, it is more complicated so one may only want to take the Copernicus or Schrodinger approach. New readers may not know what this means so do a search for the Copernicus and Schrodinger portfolios. Quickly, the Copernicus and Schrodinger are two portfolio that classify as passively managed.
Einstein Performance Data
Despite holding nearly 60% in cash, the Einstein’s Internal Rate of Return (IRR) is very close to the S&P 500 over the past 15.7 months. Frankly, I am surprised to see the Einstein best Vanguard’s Total Stock Market ETF, VTI. With a bit of luck in how the limit orders are set and eventually struck, the Einstein could easily top the SPY in a few months.
Einstein Risk Ratios
Since March, the Jensen for the Einstein improved from negative six up to negative 1.4. I also watch the Information Ratio closely as that lets me know how well the portfolio is performing with respect to its benchmark.
Currently, the management of the Einstein is not adding alpha. That needs to change.
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Now that the stock market is open, I set a wide array of limit orders for all the recommended ETFs list above. In addition, I also placed a few limit orders for VTI. The limit orders range from something close to the going price down to 20% below the current price. The orders will expire in August.
One limit order to purchase 20 shares of VOO was struck.
Lowell