Yesterday was another equity shattering market. How do we handle such markets, particularly in light of the gray and uncertain future ahead? Covid-19 is raising its ugly head throughout the western states and it is not going to abate for at least another year. Which model makes sense and what are the different Dual Momentum models recommending?
Instead of using a sample investment quiver, the following analysis focuses on the Millikan portfolio as it is due for an update next Monday.
Sample Investment Quiver
Below is the investment quiver for the Millikan. Readers may quibble over some of the holdings, but here it is. The last four ETFs are equity additions to provide a bit more balance to all the bond and treasury ETFs. Yes, there are overlapping stocks within many of the ETFs.
One of first levels of risk management is the Strategic or Maximum Asset Allocation percentages. For the Millikan portfolio, these are my maximum settings. In most cases, these maximums are not reached, but in the LRPC worksheet, SGOL does hit the 10% maximum. More on this later.
When it comes to risk management, the model selected will frequently play a role. In the following screenshot you see that I’ve chosen the BHS model. This model currently recommends skewing the portfolio toward equities as the recommendations are to purchase VTI, QQQ, QUAL, and MTUM. VTEB, a bond ETF, is the only non-equity security recommended for purchase. These equity ETFs have annualized volatility values in the 30% range so this is a high risk portfolio. Consider this when selecting which model to use.
There is nothing wrong with moving between investing models if the market calls for a change. Which model you select is the one that fits your level of acceptable risk. I tend to be risk averse, but I am retired. Investors in their 20s, 30s, and 40s will have a different outlook. Particularly if holding down a stable job.
The second model to consider is the LRPC where the recommendations are quite different. Instead of four equities and one bond as recommended by the BHS model, here we have gold, a bond ETF, two treasuries, and one equity. These recommendations are definitely more conservative that the recommendations that emanate from the BHS model.
Note the SGOL hit the maximum 10% level. QQQ also reached its maximum 20% asset allocation level. This is just another way to control risk.
Manual Risk Adjustments
Controlling portfolio risk is in full force when it comes to the settings within the Position Sizing worksheets. I generally prefer to hold the Maximum Portfolio Risk to something around 5% or 6%. In the following example, I’m holding it below 5%. Follow the Position Sizing guidelines, the Shares to Hold are found in the 8th column from the right and based on current holdings, the required shares to buy or sell are found in the 5th column from the right.
If these recommendations do not change before Monday, I will not buy the recommended shares for SCHP as it is too similar to SHV. Rather than sell shares of SHV to buy shares of SCHP, I’ll stick with the current SHV position. In several cases the changes are only to add a few shares to the current holdings.
Once the orders are in place I’ll set TSLOs for all the holdings. In general, I use 8% for equity ETFs and 4% for bonds and treasuries.
I just checked to see what the Dual Momentum recommendations are for the different look-back periods.
- The Franklin uses the 13-49 trading day combination and the recommendation is to buy VEU.
- The McClintock uses the 22-65 trading day combination and the recommendation is also to buy VEU.
- The Pauling uses the default 60-100 trading day combination and the recommendation is to buy AGG.
All three recommendations changed since the Wednesday market close.
Summary of Risk Controls
- Selecting the basic investment quiver is the first decision.
- Set the Maximum Asset Allocation percentage. Either use my guidelines or just set everything to 100% and let the Kipling make the decisions.
- Check what the different systems or models are recommending. I showed both BHS and LRPC in this example.
- One of the most important risk controls is the percentage selected to limit the Maximum Portfolio Risk.
- The manual adjustments as to how many shares to include for each ETFs is the final risk controlling decision.