Kahneman-Tversky Portfolio Review: 29 July, 2022

Country Cottage on the Rhine, Germany

The Kahneman-Tversky (K-T) Portfolio is a simple Dual Momentum Portfolio with a little diversification in that it is split into 2 portions with different look-back periods.

The reason to consider different look-back periods is to get fast and slow reaction times to changes in market conditions. While longer look-back periods have the advantage of generating fewer trades/adjustments, they also react slowly to changing market conditions – thus, we might be late getting into trades and slow getting out of them – thus reducing potential profits from a trending market. Shorter look-back periods react faster to these changing conditions and might get us into or out-of positions quicker but might also lead us into “whipsaw” trades in a sideways consolidating market – that might hurt portfolio performance. The K-T Portfolio is an attempt to balance the pros and cons of these system characteristics.

At the present time, both portion of the Portfolio are invested in SHY (short-term Bonds – as a proxy for Cash). Portfolio performance looks like this:

As we can see in the above screenshot, the K-T portfolio, although in “safe” mode (SHY), is falling behind the benchmark AOR fund as equities have bounced over the past month and the systems have yet to generate any Buy signals.

Let’s take a look at the slow-reacting Kahneman portion:

where we still see no Buy recommendations.

Taking a look at the rotation graphs:

we see all assets in the bottom left quadrant with negative momentum (relative to SHY – positive absolute momentum filter) in both the long and short term (Horizontal and vertical axes).

Moving to the faster reacting Tversky portion:

we see the same recommendations. However, moving to the rotation graphs:

we note that everything has moved into the top left quadrant. Thus, everything is stronger (positive) in the shorter term and strengthening (but still negative relative to SHY) in the longer term.

This sort of behavior therefore leads me to ask the question “at what point should we be buying the asset?” Short term we are strong – but is this sustainable over the longer term of our intended holding period? I don’t yet have an answer to this – but I’m working on it 🙂 – check out my Rutherford post (https://itawealth.com/rutherford-portfolio-review-tranche-2-29-july-2022/)

Until I get a better handle on this I’ll stick with the current simple DM rules and continue to hold my shares in SHY in both portions of the portfolio.

David