Although alluded to in this “mistake series,” an emphasis, or special attention needs to be given to portfolio volatility or risk management. Even if we are tracking portfolio risk as identified by either the Information Ratio (IR), Sortino Ratio (SR) and/or Retirement Ratio (RR), we need to focus on protecting capital. Imagine you retired in December of 2007 or just before the Great Recession. After settling into retirement your portfolio begins to tank. What do you do to prevent that 30% to 40% draw-down? If you are invested in the market, there is no way to reduce losses to zero. What we want to do is keep losses to a manageable level and by manageable that means you don’t need to go back to work. How do we do this?
Within the Sample Allocation Sheet 7.1.3 there are several “kick-me-out-of-market” options.
- Sell the security if it is ranked below SHY. In most of our portfolios we are using ETFs so we sell them when they are ranked below SHY. Consider this your first line of defense.
- Sell the security when it is priced below its 195-Day Exponential Moving Average (EMA). There is a high correlation between this event happening and the security dropping below SHY in the rankings table.
- Sell or closely monitor any security when the “Golden Cross” turns negative (cell is coded red). The Golden Cross is the X/O column. If the price of the 13-Day EMA is above the price of the 49-Day EMA, the Golden Cross is positive and the cell is shows up as green. But when the 13-Day EMA price drops below the 49-Day EMA, the cell turns red. This is an advanced warning that a sell may be eminent.
These three simple rules will keep investors out of major trouble when the bear market strikes.
Gleason Guyette says
Good stuff. I know you use 2 to 3% TSLOs to protect profits. Do you set goals at which time you use TSLOs or just when you think the market is over extended, what ever that is? I have profits in VNQ and TLT even though I have held them only since 2 Jan 2015, but; I would hate to see those profits go away. Maybe not a fair question?
Lowell Herr says
I would not trade them before at least 30 days passed. Remember, I am more of a long-term investor vs. a short-term trader. I do not want to incur short-term trading fees.
When possible, I want to hold a security longer than one year so it is taxed at the lower rate.
John Brennan says
Should that reference to 7.3.1 be 7.1.3 ? Thanks
Lowell Herr says
Yes is should read 7.1.3 as there is no 7.3.1 version. Congratulations on your close reading skills. I made the correction.