At the request of a Platinum member, this blog steps out of the normal portfolio review sequence to examine the “Swensen Six.” I’ve written about constructing portfolios using these six commission free ETFs several times over on Seeking Alpha. Here are two articles on these six ETFs that readers will find of interest. Search for “Swensen Six” on this blog.
Main Menu: We begin with the settings in the Main Menu. These variables are called the default settings and they vary from Gary Antonacci’s Dual Momentum settings. For example, I use two different look-back periods whereas Antonacci uses a 12-month or 252 trading days as the look-back. Long-time ITA readers are familiar with these default settings.
I’ve set the Max Number of Assets to six (6) so we see all the Tranche Momentum Recommendations.
Dual Momentum Tranche Recommendations: The following table is the key guiding light for managing any portfolio. We begin with the assumption we have $100,000 in cash ready for investing. The first move is to look for ETFs we would sell if they were in the portfolio.
- Sell any ETF that is ranked below SHY based on absolute momentum performance. As of 3/27/2017 data we would sell VNQ if it were in the portfolio. Notice column three (3) where VNQ is coded red.
- Sell any ETF that is priced below its 195-Day Exponential Moving Average (EMA). This sell clue is found in column 11. VNQ also activates this sell signal as does TLT. Neither will be considered for purchase so we are limited to four ETFs plus SHY for buying purposes.
As for which ETFs to purchase, move over to the right-hand side of the table where we look for ETFs with Group ratings of 1, 2, or 3 plus green coded Heikin-Ashi candles. TLT and TIP are the two ETFs that meet this standard. But you will recall TLT did not pass the test when priced against its 195-Day EMA. A judgment call is needed.
VEA and VWO show a Group rating of four. If these two ETFs were already in the portfolio we would continue to hold them. This being the case, I recommend adding shares as they have absolute momentum ranks of 1 and 3 as shown in column three.
A judgment call is required for TLT. You recall it violates the 195-Day EMA pricing requirement. However, it has a Group rank of 2 (very high) and both H-A candles are positive indicating it is rising in price as U.S. Equities are dropping in price. Check out the VTI H-A candles. Should I buy shares of TLT?
Position Sizing Recommendations: Below are the recommendations that do not take into account either Group or H-A candle recommendations. These recommendations are based strictly on absolute and relative momentum results. I take these recommendations into account in combination with the Group and H-A candle recommendations. This is where the Manual Risk Adjustments worksheet comes into play. See final screenshot.
Manual Risk Adjustments: Given all the above information, how do I invest the $100,000 held in cash. It is tempting to buy at least 100 shares of VTI as it has a rare Group rating of one (1). It is also tied for first place in the relative momentum ranking competition. Priced at $120.02, I’ll likely set a buy order somewhere between $115 and $118 per share for 100 shares.
Check column thirteen (13) for other buy orders. Note that I am buying 500 shares of SHY. Another option is to leave this money in cash. Three hundred shares of VEA and VWO are added to the portfolio. For these ETFs I’ll likely set three different limit orders as the market is currently in decline.
The final purchase is to add 100 shares of TIP. Of these six ETFs, this is my least favorite as inflation is still hovering at a rather low level of 2.7% in the U.S., but rising. Based on the shares to be held in this portfolio, the New Portfolio Risk is a very low 1.39%. I try to keep this below 5% or 6%, but in this market environment, 1.4% is fine. The last judgment is whether or not to add 50 to 100 shares of TLT. This is the type of judgment call left up to the individual investor.
If readers have questions, place them in the Comments section.