Kahneman-Tversky Portfolio Review: 2 September, 2022

Grape Harvesting, Stellenbosch, South Africa

The Kahneman-Tversky (K-T) Portfolio is a simple Dual Momentum Portfolio with options to invest in only one of 3 assets in each portion of the portfolio that are differentiated only by the different look-back periods used to measure momentum.

For the past 3 months both portions of the portfolio have been invested in SHY (short-term treasuries), as a proxy for Cash, since none of the assets in the K-T quiver were showing positive absolute momentum.

Portfolio Performance looks like this:

… so we haven’t been affected by the ups and downs of the markets in this period.

Let’s check current recommendations – first for the slower reacting Kahneman portion of the portfolio that uses a single 252-day (12-month) lookback period as suggested by Gary Antonacci who made Dual Momentum strategies popular:

Here, we see that there are still no assets showing positive absolute momentum (relative to SHY) so we will continue to hold the shares already allocated to SHY.9

A Look at the rotation graphs:

confirms this decision since all assets lie to the left of the vertical axis (negative relative long-term strength) and below the horizontal axis (negative relative short-term strength).

Moving to the faster reacting Tversky portion (that uses 60- and 100-day lookbacks) we see a different reco7mmendation:

i.e. a recommendation to Buy shares in VTI. Note that TLT also shows positive momentum relative to SHY but, since we only pick one asset in which to invest, we take the asset with the stronger relative momentum – VTI.

Checking the rotation graphs:we see that VTI and AOR (the benchmark) are both sitting in the top right quadrant with positive long- and short-term momentum. TLT has positive short-term momentum but negative longer-term momentum.

Our decision here is therefore to buy shares in VTI:

Due to my decision to set maximum risk to 8% only 41 shares will be purchased (rather than allocating 100% of available funds) and the balance will be kept in SHY.

David