Technical Stuff
Theory:
Basically the theory behind my allocation strategy is that history can give us some clues to the future.
I look at various economic indicators relative to subsequent asset class returns. Where the indicator has been good at predicting returns I have included it into my model. Each month I invest 1/12 of the portfolio into the asset class that I expect (based on this model) to perform the best over the next 12 months.
The strategy benefits by maintaining high levels of risk in most environments while reducing risk at times of longer term turmoil. The timing does not have to be perfect because each investment has a one year holding. You are making a new investment each month so over the course of a couple of years you will have a diversified set of investment decisions.
Practice:
Implementing the strategy can have a number of issues (fees, leftover cash, interest and dividends, withdrawals and deposits). If you are trying to implement the strategy, the below ideas may help.
Fees are minimized by only trading once per month. It will help if you find a discount broker that will process trades for you at a low cost per trade. The fee impact will also be lessened by having a bigger balance ($10 out of a $100 trade is huge but $10 out of $10,000 is nothing). If you know you will be putting cash into the account in a couple of days or you know a dividend is coming in, it may be worth waiting a day or two to make the trade so you can add the extra money into your trade. I suggest trying to not have the trade be more than 1% of the amount you are buying (so for a $7 commission I would not do a trade smaller than $700). If you want to implement the strategy with less than $10,000 you might consider adjusting your portfolio every other month or even quarterly. The move into asset classes tends to trend, so if I added to Large cap equity last month I will probably do so again next month.
Leftover cash can be minimized by trading lower priced shares last - you should always maximize the number of shares purchased (leftover cash should be less than the price of one more share). If you are buying more than one security in a day, purchasing the security with the higher share price first will usually minimize leftover cash.
Interest and dividends, withdrawals and deposits should be added into the next trade. It is best to use funds that you do not plan to withdraw but if the need arrises it will be better to do it as part of a regular reallocation (at month end). Deposits should wait to be invested in the next allocation (month end). Hopefully, over time, your monthly purchases will grow due to returns as well as interest, dividends and deposits.
Getting Started can be tricky with this system. In essence you are making a series of 1 year bets (also known as a ladder). If you put all of your money into this months allocation then you have an outsized allocation to one idea (12 times bigger than the allocation you will give to each subsequent idea). If this ends up being one of the 1/3 of ideas that do not work, it will be painful.
The best way would be to leg into the strategy by adding new money each month for the first 12 months. This takes more time to implement but it will protect you from putting too much money behind one idea.
However you decide to begin, you should be patient, it will take 12 months for you to have a diversified set of allocations working for you. Even though the track record is very good, there are still 4 out of the past 30 years when it under-performed.
Timing of trades should not be done in the evening with a buy or sell at market open. Prices often change overnight and you want to have as much invested as possible so wait until the morning after the post and then put in your trade while the market is open (this is what I am doing). You will know the price and can maximize your purchase. If the price drops you may be able to get an extra share or two, if it goes up you will not overspend your account.
Most of all you will need patience (this is true with any investment strategy). If you are worried about using real money I suggest going to a service like market watch and creating a simulated portfolio to see if this is a good fit for you.
Basically the theory behind my allocation strategy is that history can give us some clues to the future.
I look at various economic indicators relative to subsequent asset class returns. Where the indicator has been good at predicting returns I have included it into my model. Each month I invest 1/12 of the portfolio into the asset class that I expect (based on this model) to perform the best over the next 12 months.
The strategy benefits by maintaining high levels of risk in most environments while reducing risk at times of longer term turmoil. The timing does not have to be perfect because each investment has a one year holding. You are making a new investment each month so over the course of a couple of years you will have a diversified set of investment decisions.
Practice:
Implementing the strategy can have a number of issues (fees, leftover cash, interest and dividends, withdrawals and deposits). If you are trying to implement the strategy, the below ideas may help.
Fees are minimized by only trading once per month. It will help if you find a discount broker that will process trades for you at a low cost per trade. The fee impact will also be lessened by having a bigger balance ($10 out of a $100 trade is huge but $10 out of $10,000 is nothing). If you know you will be putting cash into the account in a couple of days or you know a dividend is coming in, it may be worth waiting a day or two to make the trade so you can add the extra money into your trade. I suggest trying to not have the trade be more than 1% of the amount you are buying (so for a $7 commission I would not do a trade smaller than $700). If you want to implement the strategy with less than $10,000 you might consider adjusting your portfolio every other month or even quarterly. The move into asset classes tends to trend, so if I added to Large cap equity last month I will probably do so again next month.
Leftover cash can be minimized by trading lower priced shares last - you should always maximize the number of shares purchased (leftover cash should be less than the price of one more share). If you are buying more than one security in a day, purchasing the security with the higher share price first will usually minimize leftover cash.
Interest and dividends, withdrawals and deposits should be added into the next trade. It is best to use funds that you do not plan to withdraw but if the need arrises it will be better to do it as part of a regular reallocation (at month end). Deposits should wait to be invested in the next allocation (month end). Hopefully, over time, your monthly purchases will grow due to returns as well as interest, dividends and deposits.
Getting Started can be tricky with this system. In essence you are making a series of 1 year bets (also known as a ladder). If you put all of your money into this months allocation then you have an outsized allocation to one idea (12 times bigger than the allocation you will give to each subsequent idea). If this ends up being one of the 1/3 of ideas that do not work, it will be painful.
The best way would be to leg into the strategy by adding new money each month for the first 12 months. This takes more time to implement but it will protect you from putting too much money behind one idea.
However you decide to begin, you should be patient, it will take 12 months for you to have a diversified set of allocations working for you. Even though the track record is very good, there are still 4 out of the past 30 years when it under-performed.
Timing of trades should not be done in the evening with a buy or sell at market open. Prices often change overnight and you want to have as much invested as possible so wait until the morning after the post and then put in your trade while the market is open (this is what I am doing). You will know the price and can maximize your purchase. If the price drops you may be able to get an extra share or two, if it goes up you will not overspend your account.
Most of all you will need patience (this is true with any investment strategy). If you are worried about using real money I suggest going to a service like market watch and creating a simulated portfolio to see if this is a good fit for you.
Popular ETF's that could be used for the basic allocations:
Large Cap Equity: VONE or IWB
Small Cap Equity: VTWO or IWM
High Yield Debt: JNK or PHB
Inv Grade Debt: AGG or BND
The ETF's I use for my model portfolios are the first ticker listed (lowest fee). I use ETF's because they give low cost, highly diversified exposure to the asset classes. In my enhanced portfolio I may also use mutual funds, closed end funds and occasionally I may even pick an individual security or two.
What is an ETF?:
ETF stands for exchange traded fund. It is a pool or group of individual securities that fit certain criteria. For example the Russell 1000 index (used as a proxy for large cap equity) is the largest 1000 US publicly traded common stocks, weighted by the value of the companies. The ETF buys these stocks in a similar weighting and sells shares of ownership of the pool. This allows you to buy ownership of a diversified exposure to 1000 large cap US equities for a very low fee and with very little money. For more information on how ETF's work you can go to iShares website (a large provider of EFT products).
For More Details:
If you want more background on the system start with the Tactical Allocation (introduction) blog, for a deeper look check out Diversification: Myths and Mastery blog and for a statistical analysis of the past results (some actual and some backtested) see the Into The Weeds blog.
Other than that I post what I am going to do at month end and the following business day I post what my trades actually were and give a performance update.
Past performance is not a guarantee of future performance. This strategy is presented for informational purposes only and is not a solicitation to buy or sell any securities. October is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May , March, June, December, August and February. ~ Mark Twain
The ETF's I use for my model portfolios are the first ticker listed (lowest fee). I use ETF's because they give low cost, highly diversified exposure to the asset classes. In my enhanced portfolio I may also use mutual funds, closed end funds and occasionally I may even pick an individual security or two.
What is an ETF?:
ETF stands for exchange traded fund. It is a pool or group of individual securities that fit certain criteria. For example the Russell 1000 index (used as a proxy for large cap equity) is the largest 1000 US publicly traded common stocks, weighted by the value of the companies. The ETF buys these stocks in a similar weighting and sells shares of ownership of the pool. This allows you to buy ownership of a diversified exposure to 1000 large cap US equities for a very low fee and with very little money. For more information on how ETF's work you can go to iShares website (a large provider of EFT products).
For More Details:
If you want more background on the system start with the Tactical Allocation (introduction) blog, for a deeper look check out Diversification: Myths and Mastery blog and for a statistical analysis of the past results (some actual and some backtested) see the Into The Weeds blog.
Other than that I post what I am going to do at month end and the following business day I post what my trades actually were and give a performance update.
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