As I mentioned in last week’s Derby post this will be the last weekly review of this “short term” test to compare the impact of using different selection criteria for picking assets from the same ~100 candidate list of diversified assets. The differences in selections for each portfolio result from the use (or not) of cluster analysis to force diversification into the portfolio.
Last week saw another pullback in US markets with the SPX closing down ~1.25% from last weeks close – still well within the sideways market that we’ve been in for the past 6 months and up less than 1% since the close on December 31, 2014:
Our Derby “horses” basically followed the lead of the SPX and also fell back:
As suggested in last week’s post there does not seem to be any obvious advantage in forcing diversification through cluster analysis provided the selection list is well diversified to begin with. Momentum seems to dominate. However, momentum also has its obvious weaknesses – especially in an oscillating sideways market where we may be susceptible to whipsaws and the “luck” of our check date/review dates. A 5-9% annual loss is not too impressive in a market where US equities are up ~ 7.5% in the same period. However, this weaker performance is to be expected from a diversified portfolio and, although not yet tested, the saving feature of the momentum system followed here at ITA Wealth should be in the ability of the SHY filter to keep us out of markets in a strong downturn.
I shall be providing monthly updates of this Derby going forward to check whether the above observations continue to hold.