The Skeptical Investor: Should I Follow An Active or Passive Management Model?

Barn near Grand Tetons

What if you fall into the investor class who is not completely convinced of the benefits of the momentum model or active management?  Is there a middle ground where one might combine the Strategic Asset Allocation (SAA) model and the momentum model?  It is easy to be torn between active management and passive management as articulated in this article so give this idea some thought.

An option for a fence straddling investor is to keep a percentage of the total portfolio always invested in a group of asset classes as defined by the Dashboard, and use a momentum model for the remaining portion of the portfolio.  An easy way to do this is to change the percentages allocated to the different asset classes in the Dashboard worksheet found in the TLH Spreadsheet.

Sample Dashboard:  Here is a sample Dashboard were only 50% of the total portfolio is allocated to the 18 possible asset classes.  The percentages with the white background only sum to 50%, whereas 100% is normally allocated to the asset classes.  Changing the percentages in the Dashboard is then reflected in the second screenshot or the one that calculates how many shares are required to keep the asset classes in balance.

Required Strategic Asset Allocation Shares:  Based on the new allocations to the Dashboard we come up with different share recommendations.  Assume SHY is on the top of our ETF list as was the case this morning.  Looking down over the list below we would sell all shares of VTV, VOE, VBR, and VOT as we allocation 0% to each of these critical ETFs.  Since we want to keep 15% of the portfolio in Large-Cap Blend (VTI) we only sell off 156 shares, which I would round to 150.  Seventy-three (73) shares of VEA would be sold, but not all as we want to continue to always hold 10% of the total portfolio in Developed International Equities.  I would round that to 70 or 75 shares.

To bring Bonds & Income (BIV) and International REITs (RWX) up to balance we would purchase 150 shares of BIV and 60 shares of RWX.  Following this line of reasoning for every asset class, approximately 50% of the portfolio is always invested and we actively manage the remaining 50% using our momentum model.

I’ve yet to make a decision as to whether or not I want to follow a split model, but I think the idea merits consideration for someone who is not completely convinced of the worthiness of the momentum model going forward.