Gauss is the portfolio up for review this morning. I think of this portfolio as one of the Relative Strength or Tranche Momentum portfolios. The other two main models followed here at ITA are: Dual Momentum and Asset Allocation. These models do not include those managed by Hedgehunter. If looking for a portfolio of stocks, search for the Dirac portfolio.
The Gauss is constructed using both principles of Asset Allocation and Factor ETFs. Obviously, there is overlap between the two. Two main examples are Size and Value. Two ETFs that fit these overlaps are VOE and VBR.
Gauss Investment Quiver
Below is the investment quiver for the Gauss. Equities dominate as we are in a bull market. The Gauss holds no treasuries or bonds at this time.
Gauss BHS Recommendations
Using the Buy-Hold-Sell (BHS) model and a maximum of five assets, we see four Buy and one Hold recommendation. The two Hold? recommendations for VB and VEA require special attention. Some investors will sell these holdings out of the portfolio. To reduce portfolio churning, I’ve adopted the following strategy. Instead of selling immediately, set TSLOs at 1/2 x recommended percentage. More on this below.
Gauss Manual Risk Adjustments
There is only one outright Sell and that is to cull VWO from the portfolio. After the market opens this morning I plan to sell 10 shares of VWO and use all available cash to purchase 145 shares of VNQ and 20 shares of QUAL. QUAL is one of the Factor ETFs included in the investment quiver as it fits the Quality factor.
Since VNQ ranks higher than QUAL, I fill VNQ to its recommended value first.
There is somewhat of an oddity this morning as VO ranks #1, but only has a Score of 6. If the Gauss already held shares, VO would show up as a Hold, not a Sell.
Setting TSLOs: After all purchases are made, check the TSLO settings.
- Set TSLO to Sell 105 shares of VTI. The TSLO is set to 3/4 x 8.0% or 6.0%.
- TSLOs for VNQ, VOE, VBR and QUAL are set at the percentage indicated in the Stop Loss column.
- TSLOs for VB and VEA are set at 1/2 x Stop Loss percentage. For VB that is 1/2 x 10.3% or 5.0% if rounding down. Some brokers will not handle fractional percentages. Schwab does handle fractions.
Gauss Performance Data
The following data runs from 4/30/2019 through 4/12/2021. Since the youngest ITA portfolio began on 4/30/2019, I will gradually migrate to that starting date for all portfolios. At least it includes the Covid-19 Crash period.
With an Internal Rate of Return (IRR) of 11.8%, the Gauss comes close to matching the VTHRX benchmark.
Gauss Risk Ratios
The April data includes information from 4/30/2019 through 4/12/2021. The dip in the Jensen indicates the Gauss did not keep up with the benchmark these first two weeks of April. First quarter dividends may be a partial reason as the dividends add value at the end of the March, but then the price of the ETF diminishes in April to offset the dividend. Regardless, over the long run this all comes out in the wash.
The trend line for Jensen’s Alpha is essentially flat, but at least it is positive. The rise in the Sortino and Omega ratios indicate the value of the Gauss is increasing.
If looking for the latest Kipling spreadsheet, click on the first link below.
Comments and questions are welcome. At the bottom of each blog post is a section for readers to add comments. If this is your first comment, I need to approve so it may take a little time. Be patient.