Kahneman-Tversky Portfolio Review: 2 December, 2022

Rainy Day in Bamberg, Germany

The Kahneman-Tversky (K-T) Portfolio is the simplest portfolio that I review on this site. It is a simple Dual Momentum (DM) portfolio with the option to allocate funds to only one asset from a quiver of three. The only slight twist is that the portfolio is split between a “slow” portion (Kahneman) with a single 252-period (12-month) look-back period to calculate momentum (as originally suggested by Gary Antonacci) and a “fast” portion (Tversky) that uses 2 shorter period (60- and 100-day) look-backs.

Prior to this review the portfolio was holding short-term bonds as non of the 3 assets in the quiver were showing positive momentum. Performance since December 2020 was looking like this:

and trailing the benchmark AOR Fund by ~14% over this period. However, most of this was lost last year as a result of using stop-loss orders in an attempt to manage risk. Timing (review-date) luck did not help this intended risk reduction effort and the use of stop-loss orders was discontinued for 2022. Maybe a more encouraging view of performance can be seen in the performance Year-To-Date (YTD):

where we can see that, although we have been holding SHY (a proxy for Cash) for the past 6 months we have avoided the volatility in the markets and are not that far behind the benchmark – although both are down ~15% YTD.

Checking on rankings and recommendations from the DM model for the Kahneman (slow) portion of the portfolio:

we do not see any Buy recommendations and no assets with positive absolute momentum (relative to SHY).

This is confirmed by a look at the rotation graphs:

where, despite an indication of positive momentum in the shorter term (upward movement), all assets lie to the left of the vertical axis (zero longer-term absolute momentum reference).

Moving to the faster reacting Tversky portion of the portfolio:

we see a more positive picture with VEU showing more strength than VTI in this time frame (behind VTI in the Kahneman time frame). This is confirmed by the rankings/recommendations:

and so, shares of VEU have been purchased for this portion of the portfolio and we will watch as we go forward. Obviously we will see a difference in performance of the Kahneman and Tversky portions.

David