With this high market and the bull market as old as it is, capital preservation is on my mind. What steps might one take to preserve the gains over the last 11 to 12 years. In the New York Times it was reported this morning that the average household is now $800,000 richer than they were in 2000. This figure tends to discount how the wealth was distributed over the last 20 years. For example, if Jeff Bezos, Warren Buffett, and Bill Gates all walked into the bakery where you were enjoying your morning coffee, the wealth of the bakery clients would suddenly average out to where everyone was a billionaire.
To those who are investors, your wealth most likely increased over the past 20 years. Below are four ways to use the Kipling spreadsheet to protect those gains.
The first two suggestions are found within the Tranche worksheet of the Kipling workbook.
1. Set the Target Filter to Yes. In nearly all situations, this setting will reduce the number of ETFs which in turn is likely to force the purchase of a low volatile treasury such as SHV. In the following example, we will investing only in ETFs that equal or rank higher than the score for RSP. Since RSP received a Score of 5 and it is not currently held in the portfolio, we do not invest in RSP. ETFs ranked above RSP and have a Score of 9 or 10 are on the Buy list. Setting the Target Filter to Yes restricts buying only the very top asset classes or ETFs.
2. Use the BHS model as it tends to be the most restrictive. One option is to set the model to LRPC and then count the ETFs that are recommended. Move back to the BHS model and see if there are fewer ETFs recommended. I think you will find that the BHS model is the most selective.
In most situations, the BHS model is “ETF restrictive.” By being quite selective in what ETFs to include in the portfolio, we are preserving capital or reducing potential losses.
3. In the Position Sizing (Auto) Worksheet, adjust the Maximum Trade Position Risk so that the Maximum Portfolio Risk matches the risk you wish to take with the portfolio. I generally adjust the variables so the Maximum Portfolio Risk does not exceed 6.0%.
In the following example you see that the Total Suggested Cash ends up with an amount exceeding $13,000. If this is too high, then increase the portfolio risk. Depending on the owner of the portfolio I take liberties with this risk control adjustment.
4. Set Trailing Stop Lost Orders (TSLOs) on current holdings. To know what percentage to use, select the Stop Loss percentage (8th column from the left on either Position Sizing worksheet). This last risk adjustment to protect capital is one some investors may not wish to activate. It is possible to be stopped out, only to see the market rebound. This is the risk one takes when setting TSLOs for individual securities.
Example TSLO: Take QUAL as a test where we hold 365 shares in the Kepler portfolio. The recommended Stop Loss percentage is 5% or one-half the Annualized Volatility. Set the TSLO for QUAL at 5%.
Take a second example where the Stop Loss percentage is not an integer. VTI is a good example where the Kepler holds 220 shares. The Stop Loss percentage is 4.7%. In this situation I round the percentage to the nearest whole integer or 5%. Set the TSLO for VTI at 5%.
If you have not watched the YouTube video on how to use the Kipling spreadsheet, go to this link as I walk through how I use this investment software.