Portfolio Management Guidelines
Inflation and rising interest rates are throwing sand in the gears of the equities market all over the globe. Bonds are not doing much better so what is an investor to do in this uncertain market? While I don’t have a clear crystal ball, I have a plan having lived through severe bear markets numerous times in my investing career. The worst times were from the late 1960s to August of 1982. This was a fifteen-year period where the Dow Jones Industrial Average, after topped 1000, was still below 800 in the summer of 1982. Another hit to the equities market took place in the early 2000s. This is known as the Technology Bubble. The Great Recession of 2008 through March of 2009 is one most readers of this blog will recall. Then the pandemic of 2019 and 2020 caused the market to plummet, only to quickly rebound in 2021. And now the decline of equities here in 2022. These major dips seem to be coming at shorter time frames. How does an investor negotiate such troubled times? That is what I’ll explain in this blog post.
One of the first things to consider is this. Are you in a savings mode or have you retired and are in the capital preservation period of your life? If you are young and are still saving, get on your hands and knees and pray the market will go lower so you can purchase more shares with the dollars you are saving each month. That was the benefit of the long bear market of the 1970s. Retirees have a very different outlook on market behavor.
What is the plan in this uncertain market? Portfolio diversification is where I begin. If you are using a single investing model, then you are likely to pick one of the six models I lay out below. I describe them as follows.
- The Robo Advisor or computer managed model. This is the Schrodinger portfolio and it is a Buy-Hold-Rebalance portfolio where there is minimal rebalancing.
- The Dual Momentum™ model. There are four examples of this model tracked here at ITA and they are: Franklin, Pauling, Galileo, and McClintock. I’ll write more about how I am working with these portfolios.
- Relative Strength or Relative Momentum portfolios. Examples are: Gauss, Kepler, Einstein, Millikan and the Carson Trio. More explanation is required when working with these portfolios. With the Carson Trio, we are testing the BHS, HA, and LRPC models. Readers who have Lifetime and Platinum levels can follow how the Carson portfolios are managed.
- The fourth model is a blend of Relative Momentum and Income. Examples are the Bohr and Bethe portfolios.
- The fifth model is the Income model where Closed End Funds are used to generate income. These portfolios are set up similar to the Hawking portfolio, managed by Hedgehunter. The portfolio I manage using this model is the Huygens.
- The final model, launched early this year, is also a Buy & Hold portfolio were no selling is anticipated. This is the Copernicus portfolio and it is one I recommend for young investors or those who have at least 20 years before retirement. This portfolio holds only U.S. Equities and is very single minded.
Model #1: By far the simplest approach to investing that I know is to use a Robo Advisor. All one does is save and specify the stock/bond ratio. Investors interested or using this model can follow the Schrodinger, a portfolio housed with Schwab. Schwab calls it their Intelligent Portfolio. There is no cost to operating this portfolio. There is no downside protection to this portfolio so it will move up and down with the global markets. I highly recommend this model be at least one of the sub-portfolios in the larger “family” portfolio. The Schrodinger also serves as a good benchmark for other portfolio models.
When the market rebounds, as will eventually happen, the Schrodinger is positioned to take advantage of quick upward movements.
Model #2: The second model is known as the Dual Momentum™ model. ITA readers are very familiar with this model as I use it with four different portfolios. With this model one is invested in either U.S. Equities, International Equities, or Bonds/Treasuries. This is an all or nothing approach, depending on specific parameters programmed into the Kipling spreadsheet. Dual Momentum portfolios are extremely easy to manage if one is using the Kipling spreadsheet. I do employ some variations that I’ll explain when these portfolios come up for review.
There are times when I will override the DM recommendations and here is an example. Assume the model recommends selling U.S. Equities (VTI) and moving into Bond/Treasuries or Cash. Instead of selling immediately, I’ll set a Trailing Stop Loss Order (TSLO) at a percentage between 5% and 8% and then wait for the sell price to be triggered. This approach is not for everyone. If you don’t wish to use the TSLO approach, then follow the DM recommendation from the Kipling spreadsheet.
Model #3: Relative Strength or Relative Momentum (RM) models use the market anomaly momentum as a core driver. The main difference between RM and DM portfolios is the number of securities in the investment quiver and how one works with the manual risk adjustment worksheet found within the Kipling spreadsheet. There is a bit more control over portfolio risk management with RM portfolios. They require more attention than DM portfolios as there are more variables at work within the Kipling spreadsheet. To learn how to employ this model, follow Gauss, Kepler, Einstein, or Millikan.
While one can follow the Kipling recommendations to the letter when working with a Relative Strength or Relative Momentum (RM) portfolio, I’ll frequently set a TSLO instead of selling immediately when a Sell signal is generated. If and when the security is sold, I’ll then begin to use the available cash to set Buy limit orders at different percentages beneath the current price.
Model #4: The Bohr and Bethe portfolios are examples where a combination of growth and income is used. The income side of the portfolio is built around Closed-End-Funds (CEFs). These two portfolios are a hybrid of Relative Momentum and Income models. The CEFs are rarely traded and the growth ETFs follow recommendations that come out of the Kipling spreadsheet.
Model #5: Income portfolio are a relatively new investing model. This model is best suited for Standard IRA or Roth IRA accounts. Taxes are higher on dividends than capital gains so this investing model is best reserved for tax-deferred accounts. Follow the Huygens if interested in this model. I use this approach with two other portfolios not reviewed here at ITA as the owners prefer them not be available for public observation.
Model #6: The last investing model is a buy only approach. Follow the Copernicus if you are a young investor with almost no time to devote to investing. Save and invest only in VTI or ESGV. ESGV is a socially responsible ETF and the one I favor for this investing model. When cash becomes available, purchase as many shares of ESGV as possible and do nothing else. When possible, buy on market dips and build up cash when the market is high.
When the next Portfolio Performance blog is posted, the Copernicus will not look good as it was launched just as the market began to decline. Don’t worry about the poor Internal Rate of Return (IRR) numbers. This is a long term approach and we should begin to see positive IRR values within five years.
Conclusion: To learn more about the various models, follow the individual portfolios when they are reviewed. When you have questions, I encourage readers to post them in the Comment section provided with each post.
The primary deviation from the recommendations that emerge from the Kipling spreadsheet is to use TSLOs and when sold, turn around and set multiple buy orders at different percentages below the current price. I start with a few shares at 3% to 5% below the current price. The next order, if cash is available, is to purchase more shares than the first order and set the limit order to be 7% to 10% below the current price. Continue this procedure until all available cash is used.
If any parts of this post are unclear, ask your questions in the comment section provided below.
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