Lighthouse on Oregon Coast
When well into this update of the Kepler I realized the portfolio was reviewed only a few days ago. Since all the screenshots are uploaded I’ll proceed with the update. Little has changed other than the addition of new cash and the purchase of a few asset classes still out of balance.
Kepler Asset Allocation Quiver & Holdings
Below is the current Asset Allocation information for the Kepler. VOO and QQQ are wildly out of balance. Normally I would not make any moves to sell these asset classes that are out of whack. However, with the incoming administration bent on destroying the government I placed TSLOs under both VOO and QQQ for a dual purpose. 1) Bring the portfolio back into balance. 2) Protect capital in case of a market crash. As readers may have gathered, I don’t trust a sick felon.
Kepler Rebalancing Recommendations
Assuming the stock market is not disrupted the rebalancing model is shown below. Limit orders are in place to pick up shares shown in the 6th column from the right.
If new cash is added to the Kepler more orders will be placed for BND, VNQ, TLT, and VWO as those are ETFs (asset classes) well under target. When placing limit orders I am increasing the percent below the current price. The limit orders range from 3% to 10% below the current price. For equities I increase the percentage. Since bonds are not as volatile I use lower percentages. If you want a mechanical guideline, cut the volatility in half.
Kepler Performance Data
The Kepler has been operating under the Asset Allocation model for 7.5 months so we need to check the Jensen Performance Index to see if there is growth based on the underlying risk. Since 12/31/2021 the Kepler lags the AOR benchmark by nearly two percentage points. It will take months to make up the difference even if the AA model works as expected.
Kepler Risk Ratios
Since August the Kepler made some gains vs. the benchmark. The same holds true for the Information Ratio. Readers may recall that money was withdrawn from the Kepler at a critical time as the owner needed cash for other purposes including education.
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Protecting capital in case of a crash is a timely and significant theme. Given what appears to be two “black swans,” (a) War in Ukraine and (b) new, anti-US Federal Reserve administration, what is a prudent method for using volatility in adjusting TSLO settings? Thank you.
Lee,
Take the Sell side as the first example. Using William O’Neil recommendation from years ago, set a TSLO of 8% for all equities and 4% for bonds ETFs. If the volatility is greater than 10% consider it as an equity. While I don’t think of TLT as an equity, it has a high volatility percentage throwing it into the equities bucket. One might set TSLOs at 1/2 x volatility percentage. Just another guideline.
Now for the Buy side rule-of-thumb, if one is not in a hurry to invest cash, use volatility. Using Kepler data for VOO and the second screenshot, the volatility is 12.2%. Schwab permits orders to the tenth so one might set a buy order at 6.1% below the current price. Multiply .939 x current price to determine the Buy price.
For a bond such as BND where the volatility is 5.7%, divide it in halve and round down. 0.971 x price of BND = buy price or limit order price for BND.
Use these ideas as guidelines rather than hard and fast rules.
Lowell
Lee,
In upcoming portfolio reviews I will be more explicit as to what I am doing with Buy and Sell settings. Again, I am not telling readers what to do, but rather explaining what I am doing with the various portfolios.
Lowell