Since the Huygens is one of the portfolios managed using the Mosaic Model, I am breaking the analysis into two parts. This way I can illustrate to new readers how the Tranche Momentum Model works (Part I) and then how the added layer of a passively managed portfolios (Part II) results in what I call the Mosaic Model. In this blog post I focus on the Tranche Momentum Model. In Part II I will show how the portfolio migrates to the Mosaic Model.

I already have my potential list of ETFs selected for the Huygens and those include the “Rutherford 10” plus BIV and REM. BIV provides bond exposure and REM is a high yield REITs that adds income when it is one of the held securities.

**Tranche Momentum Recommendations (All cash position):** The current value of the Huygens is nearly $149,000 so we begin our analysis as if the entire portfolio is in cash. Based on 7/12/2016 data and the default settings such as 12 portfolio offsets separated by one offset period, we see the following tranche recommendations below. If we apply no risk constraints, coming later in the Position Sizing worksheet, five ETFs are recommended. The current recommendations are VNQ and REM, positioned #1 and #2 respectively. None of the ETFs are priced below their 195-Day EMA so none are quickly eliminated from consideration.

My preference is to work with blocks of shares or 100 share units. For example, I would hold 400 shares of VNQ, 100 shares of GLD, and 4200 shares of REM. This leaves two recommendations, DBC and TLT. Since TLT shows up in only one of the 12 tranches, I would likely buy 50 shares of TLT and use the remaining cash to buy shares of DBC, rounding to the nearest 100 shares. We could stop the analysis right here and wait another 33 days before we look at another tranche ranking and rebalance the portfolio. However, many of us have risk concerns so we now move down to the Position Sizing worksheet to see how we might reduce portfolio risk.

**Position Sizing Recommendations (Based on all cash position):** Within the Position Sizing worksheet we can control four variables. Personally, I leave the Volatility Period set to 63 and Fwd Days to 23. In the following example I have the SD Multiplier set to 1.5 so the Probability of Stop settles in at 13.4%. If this is too high, and for some portfolios it is, I raise the multiplier to 1.6 which pulls the percentage down to 11%. Some investors may want to pull down the risk even further.

The other critical variable is the Max Trade Position Risk percentage – set to 1.1%. I adjust this so the Maximum Portfolio Risk comes in at 6% or below. With the 1.1% setting the risk is 5.5%.

With these settings the recommended number of shares changes from the tranche worksheet shown above. For example, the Position Sizing worksheet recommends 1249 shares of DBC vs. 3286 shares recommended in the tranche momentum worksheet.

Instead of holding zero in cash, the Position Sizing worksheet recommends a cash holding of $56,000. Remember, we can lower that cash holding if we take on more risk with the Huygens. What the Position Sizing worksheet does is help the investor control risk based on changing a few variables.

In Part II I will show how to use the Manual Position Sizing worksheet as this is where you set the shares to be held in the portfolio for the next 33 days or whatever period you use to review the portfolio.

Robert Petersen says

Hi Lowell

I am trying to use this spreadsheet for Portfolio.

1. Is version 2.5.1 the latest?

2. Can you explain the statement ” the SD Multiplier set to 1.5 so the Probability of Stop settles in at 13.4%.” ? what does “stop” refer to?

HedgeHunter says

Robert,

Yes version 2.5.1 is the latest version of the Tranche workbook.

The position sizing worksheet assumes that stops, based on volatility, will be used to exit positions and manage risk. Volatility for each asset is calculated automatically within the sheet (with lookback period an adjustable variable – in the example Lowell is using the default value of 63 trading days or 3 months). However, the distance of the stop from current price is varied by selecting a value for the distance is set in relation to the Standard Deviation (volatility). Lowell is using a SD multiplier of 1.5. The probability that this stop level we be hit (and a stop loss order filled) is also calculated automatically and that probability calculates to 13.4% using Lowell’s settings. Note that this is the probability that the stop price will be touched within the Forward Day review period (23 trading days) – not the probability that the price will necessarily close below the stop level – this probability will be lower, but our stop loss will have taken us out of the position.

David

HedgeHunter says

P.S. An instruction PDF file can be found in the “Spreadsheet Instructions” folder at https://www.dropbox.com/sh/vimiajlv3359v75/AAC5Pnjaq9UAJjYpu5CwADO0a?dl=0

David

Michael Pietrusik says

quick question stock mkt has made a nice run past 2 weeks .how come no $$ in us equities? seems like a great opportunity missed . Thanks

HedgeHunter says

Michael,

VTI is currently ranked #5 in Lowell’s list – so, although momentum is OK, 4 other assets are ranked higher. Also note that short term momentum is lower than longer term momentum as denoted by the negative absolute acceleration number – i.e. momentum is slowing. Remember that the time to detect changes in trend/momentum is determined by the length of the lookback periods selected – so a 60 day lookback will require ~ 30 days to detect a change in trend and positive momentum. Prices have been in a range for most of this year and have only just broken to new highs – this will not be reflected in a system designed for long term investment – that would only be seen in a short term trading system using much shorter lookback periods,

David

Lowell Herr says

Michael,

Yes, U.S. Equities snapped back nicely. I would need to run a careful analysis to see how well other asset classes performed compared to VTI.

As HedgeHunter pointed out, we are looking for long-term returns.

Lowell