The following questions were asked by a reader and they are of sufficient interest to justify a blog response.
In summary, here are my questions:
1. Which of the ITA portfolios stands out with regards to risk adjusted performance from the others?
2. Is there a simple portfolio that outperforms the US equities markets in good and bad time over an extended period?
3. Is the Dual Momentum concept worth pursuing or is there a clear alternative that has better performance with the same risk?
4. Do we just invest in something like MTUM and call it a day since the results appear to be close to all the ITA tracked portfolios?
Question Number One: To answer which portfolio(s) stands out with regards to risk adjustment, I would go with these three: Schrodinger, Curie, and Huygens. I come up with these three as they have the highest Sortino Ratio and the Sortino Ratio is one of the better risk measurements I have to quantify risk. I would drop off Huygens as it is a relative young portfolio. I prefer at least five years of data or what is called one business cycle before I want to draw conclusions. The Schrodinger has a slight edge over the Curie so if I had to make one single choice, it would be the Schrodinger.
Question Number Two: To outperform U.S. Equities almost demands one not invest in bonds or treasury instruments. Most investors prefer not to take this risk. I suppose one could use two ETFs, VTI and SHY. Stay 100% invested in U.S. Equities (VTI) when it is outperforming SHY, and then go to 100% in SHY when VTI drops below SHY in performance. That is about as simple as I can think of and yet have a reasonable probability of outperforming the U.S. Equities market.
Question Number Three: Here at ITA we do not have any back-tested data that outperforms the Dual Momentum Model or what we might choose to call the Rutherford 10 Model. Ernie and HedgeHunter are currently testing the Tranche Model to see if it is a viable alternative to the Dual Momentum Model. Personally, I think the Dual Momentum Model is worth pursuing, but it is still too early to know if it works going forward. I’m quite comfortable with the Strategic Asset Allocation Model, particularly if one has 30 to 40 years of investing ahead.
Question Number Four: I would not invest 100% in MTUM and “call it a day” as I prefer not to place that much confidence in active managers who have a track record that only spans a recent bull market. If I had to select only one ETF it would be either VTI or VT. Better still is to use the ETFs included in the Rutherford or Galileo portfolios. Selecting 10 to 15 commission free non-managed index ETFs that provide for global diversification, and then overlay with a momentum model appeals to me.
If these answers are incomplete, restate in the Comment section.