Tag Archives: lowell-herr

Current Recommendations For Dual Momentum Portfolio

How to construct a dual momentum portfolio using a few simple rules. Applying absolute and relative momentum to build a portfolio. Current recommendation is to invest 100% of the portfolio in U.S. Equites. Gary Antonacci’s popular book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk is used as a template for the following analysis. The primary deviation from Antonacci’s logic is the choice of securities used to populate the portfolio. To hold down trading costs, the following commission free ETFs from TDAmeritrade are used. They are: VTI – Vanguard Total Stock Market ETF VEU – Vanguard FTSE All-World ex-US ETF BIV – Vanguard Intermediate – Term Bond ETF SHY – iShares 1-3 Year Treasury Bond SHY is not used as a potential investment, but rather serves as a cutoff or “circuit breaker” ETF. The dual momentum rules are quite simple as they make use of absolute and relative momentum principles. Absolute momentum is where the investor examines the performance of the security with respect to its own past. Relative momentum is where the investor compares the trend or past performance with respect to other securities. Dual momentum makes use of both concepts. Antonacci recommends a look-back period of one year or 252 trading days with a monthly review. Think of this as one of those monthly reviews. With the ETFs selected for possible purchase, the cutoff ETF ((NYSEARCA: SHY ))) identified, and the look-back period settled, here are the few rules for portfolio management. This is a simplification of the diagram shown on page 101 of the dual momentum text. Rank VTI and VEU with respect to SHY. If both VTI and VEU rank above SHY, invest 100% of the portfolio in the highest ranked ETF. VTI is that ETF in this review. If neither VTI or VEU rank above SHY, invest 100% in the bond ETF, BIV. Other options for bonds are AGG or BND. I selected BIV for this example as I expect interest rates will rise so I am reluctant to use long-term bond ETFs. Wait a month for the next review. Current Recommendations: Based on 11/23/2015 data and a look-back period of 252 trading days, the highest ranking ETF on an absolute scale is VTI. Since it is ranked higher than VEU and is performing above SHY, we invest 100% of the portfolio in VTI. Had VEU ranked above VTI and SHY, 100% would have been invested in VEU. If neither VTI or VEU ranked above SHY, 100% of the portfolio would go to BIV. (click to enlarge) The above worksheet is designed for a more complex portfolio, but still works for a dual momentum portfolio with very minor adjustments.

Tranche Model Applied To The ‘Swensen Six’ Portfolio

Diversify globally using six ETFs. Reduce portfolio risk through the use of a tranching model. Minimize the “luck-of-review-day.”. Rebalancing a portfolio, whether it is done monthly, quarterly, or annually, inserts a variable known as the “luck-of-review-day.” This problem is examined in a recent white paper readers can find at the end of this introductory blog post . The paper is titled, Minimizing Timing Luck with Portfolio Tranching . What is portfolio tranching and how can it be applied to the ” Swensen Six ” portfolio? While the “Swensen Six” is an example portfolio, the Tranche Model can be used with any group of securities. There is an advantage to including low correlated securities and the “Swensen Six” meets this requirement. The spreadsheet used for the following tranche analysis includes four critical worksheets. 1) A main menu where assumptions are set up for the analysis. 2) A portfolio worksheet for listing securities and number of shares held in each security. Available cash is also included. 3) Data worksheet for automatically downloading data. 4) Tranche recommendations based on the assumptions and securities used for portfolio construction. A few of the assumptions include the following. The Number of Offset Portfolios can be set from one (1) through twelve (12). I generally use eight (8) as this takes into account eight different portfolios ranging over the past sixteen (16) trading days. The second variable is to determine the Periods between Offsets and I generally use two (2). If the portfolio is updated after the market closes on a Friday, the data for the first portfolio offset is Friday, the second portfolio offset is the prior Wednesday and the third portfolio offset is the prior Monday. If one selects three (3) for the offset periods we jump back by three-day intervals. Look-back periods of 60 and 100 trading days are based on extensive research. Weights of 50% for the shorter look-back period and 30% for the longer look-back period are applied to ROC1 and ROC2 respectively. See the following screen-shot. For this example, two (2) ETFs are the maximum permitted for any offset portfolio. (click to enlarge) After the assumptions or variables are set in the Main Menu and the latest data is downloaded, we move to the Tranche Recommendations as shown in the following screen-shot. Based on the recommendations from the 10/23/2015 portfolio, 50% is invested in VNQ and 50% in TLT. The same was true two days prior of 10/21/2015. However, the recommendation ten trading days ago was to invest 50% in SHY and 50% in TLT. The seventh offset portfolio recommended investing 50% in TLT and 50% in TIP. Based on the eight portfolio offsets, the required number of shares is listed in the Required column. What these different offset portfolios are telling us is that we would have come up with different recommendations had the portfolio review come up on a different day or what is known as “luck-of-review-day.” (click to enlarge) For a $100,000 portfolio an investor, using this tranche model, would invest 75 shares in SHY, 450 shares in VNQ, 400 shares in TLT, and 50 shares in TIP. Rounding the number of shares is a personal judgment. Back-testing research shows tranching reduces portfolio volatility. There is a penalty to be paid for lowering risk as the return is also reduced. Portfolio turnover is another issue. I prefer to review portfolios every 33 days and depending on how one rounds the number of shares held in the various ETFs, one has some control over the portfolio turn over. All the ETFs using in the “Swensen Six” are commission free through certain discount brokers so commissions are not an issue. Note to readers: This tranche model differs from the model explained in the white paper referenced above.

Momentum Model Of ‘Swensen Six’ Portfolio Recommends 100% In Cash

Momentum Model called for move to cash back on August 10th. A three metric model is used to drive the momentum model. The “Swensen Six” portfolio covers six asset classes, depending on how asset class is defined. Example ETFs are provided to populate the recommended asset classes. David Swensen, in his book, Unconventional Success: A Fundamental Approach to Personal Investment , lays out what he calls “The Science of Portfolio Structure.” The following bullet points lay out the basic points of Swensen’s logic for constructing what I call the “Swensen Six” portfolio. Basic financial principles require the portfolio exhibit diversification and equity orientation. The “Swensen Six” is well diversified in that it covers the globe by using U.S. Equities (NYSEARCA: VTI ), Developed International Equities (NYSEARCA: VEA ), and Emerging Market Equities (NYSEARCA: VWO ). By equity orientation Swensen skews a portfolio toward stocks instead of bonds. The equity Exchange Traded Funds (ETFs) in the “Swensen Six” are: VTI, VEA, VWO, and VNQ . High expected return types of securities dominate the portfolio as 70% is allocated to equity investments. The specific percentages are listed below. Use six asset classes to provide portfolio diversification. Domestic equities comprise 30% of the portfolio or invest 30% in VTI. Swensen is not specific about the individual securities so I am recommending particular ETFs for each asset class. The percentages are Swensen recommendations. Determining what percentage to invest in what asset class is one of the most difficult decisions individual investors face when it comes to portfolio construction so Swensen’s percentage recommendations are most helpful. Developed international equities carry a recommendation of 10% so invest 10% in VEA. Originally, Swensen recommended 15% be allocated to developed international equities, but in a more recent paper lowered the percentage to 10%. One could stay with the original 15% recommendation. Emerging markets make up 10% of the portfolio so invest 10% in VWO. Originally, Swensen recommended 5% be assigned to emerging markets, but he later shifted 5% from developed international equities to emerging markets. One could stay with the original 5% recommendation. Domestic Real Estate makes up 20% of the total portfolio so invest 20% in VNQ. Another option is to invest 15% in VNQ and 5% in RWX , an international REIT ETF. This is my preference as it adds more diversification by adding a seventh asset class, International Real Estate. Investors wishing to keep life simple will stick to the “Swensen Six” rather than expand to include RWX. U.S. Treasury Bonds make up another 15% of the portfolio so invest 15% of the total in TLT . U.S. Treasury Inflation-Protected Securities is the last asset class and we invest 15% in TIP . In my Dashboards worksheet, I classify both TLT and TIP in the Bonds and Income asset class, but for purposes of following Swensen, I’ll break the two into separate asset classes. With only six ETFs, Swensen covers the globe so diversification is accomplished. The equity orientation is in place as 70% of the portfolio is tilted in that direction. Swensen provides interesting logic behind his recommendations. Two paragraphs from page 83 of his book state it very well so I quote below: “Investors achieve equity orientation by investing a preponderance of assets in the high-expected-return asset classes of domestic equity, foreign developed equity, emerging market equity, and real estate. The return-generating power of equity positions drives the results of long-term investment portfolios. Investors give up expected return to defend portfolios against unanticipated inflationary or deflationary economic conditions. U.S. Treasury Inflation-Protected Securities protect against inflation with certainty, while real estate holding guard against inflation with reasonable assurance. In the long run domestic equities add to the inflation-hedging characteristics of a portfolio, but in the short run domestic equities prove notoriously unreliable as inflation hedges.” This six ETF portfolio has an equity emphasis, provides some protection against inflation and is broadly diversified. By keeping these six assets in balance, the passive investor is well served. If you are a momentum style investor, what does the “Swensen Six” look like in the current market environment? Below is the ranking for these six ETFs and as readers can see, all monies are investing in SHY or cash. None of the critical ETFs are ranked above SHY. ETF Rankings of “Swensen Six”: The following ranking is built upon three metrics. Fifty percent (50%) of the weight is allocated to the performance of each ETF over the past 91 calendar days. Thirty percent (30%) of the weight is assigned to the performance over the most recent 182 calendar days and the final 20% is a volatility measurement where low volatility is highly valued. SHY is the cutoff or “circuit breaker” ETF. When the ETFs rank below SHY, as is currently the case, 100% of the portfolio is invested in SHY or cash. The portfolio is reviewed every 33 days as the ETFs are ranked again to see if any show up for potential investment. This portfolio has been in cash for nearly two months. (click to enlarge)