Portfolio Management During Debt Crisis

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Includes: SHY
by: Lowell Herr

Portfolio management during a government shutdown and debt crisis is not significantly different than it is during less stressful times. Here are a few guiding principles for investors.

  • Diversify all over the globe.
  • Use commission free non-managed ETFs where possible.
  • Employ a ranking system and stay invested in top performing ETFs.
  • Include low correlated ETFs.

In the following example I've selected 24 ETFs, and with one exception (NYSEARCA:GLD) all are commission free from TDAmeritrade. I have no connections with TDA other than that as a client.

ETF Rankings: The following data table ranks the 24 Exchange Traded Funds (ETFs) using three factors. 1) Performance over the past three months (91 days) is assigned a 50% weight. 2) Thirty percent (30%) is allocated to the performance over the past six months (182 days). 3) The final 20% weight is assigned to volatility where low volatility is highly valued.

In addition to the rankings from 1 to 24, the table shows three exponential moving averages, a "Golden Cross" (X/O column), and several momentum calculations. The "Golden Cross" shows the relative position of the 13-Day EMA and the 49-Day EMA. If the faster moving average (13-Day) is priced above the slower moving average the cell is plus (+) and if the faster moving average is priced below the slower moving average the cell is negative (-).

Note that SHY is coded with a red background. This ETF is used as a cutoff reference. If there are fewer than four ETFs performing above SHY, the investor goes to cash. Should the market tank the middle of October, this ranking table will provide information of where to seek refuge. One option is to use the ultra-short ETF, SDS, currently ranked 24 on the following list.

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Buy-Hold-Sell Recommendations: A weighting algorithm calculates the percentage to invest in each ETF based on the Weighting Factor (WF). In the following example I set the WF to 9 so that the maximum percentage to invest in any one ETF was not much above twenty percent (20%). There is research to support enhanced returns if one concentrates or narrows the portfolio to the top four performing ETFs. Read The Feynman Study over at ITA Wealth Management.

Based on available cash and current holdings, the following table recommends how many shares of each security are to be sold and purchased. It is my practice to review each portfolio every 33 days.

Since this is time sensitive material, do not assume the current percentage recommendations are viable for any extended period. This is an example of how one might manage a portfolio over both a long time frame or during a debt crisis.

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Disclosure: I am long VTV, VOE, VBR, VUG, VOT, VBK, VNQ, RWX, BND, VEA, VEU, VSS, VWO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.