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The levee that failed in New Orleans, the lack of snow moving equipment that shutdown Heathrow Airport and the triple disaster that ripped apart one of Japan's aging nuclear power plants all highlight what we all know: the cost to repair dwarfs the cost to prevent. For many years, retirees have put off really focusing on their retirement investment for -- just another year. Many are now facing a repair crisis as their portfolios have been blighted by the recent financial melt-down and they are left with a hole that they have to fill somehow.

A common experience to many investors is the feeling of being overwhelmed and shutting down. We continue to keep it simple stupid with SIBs -- a 'Simpler Is Better' portfolio to explain and understand good practices that can improve returns and lower risk compared to doing nothing and hoping.

A SIBs is built from one ETF per asset class. The ETFs we selected for these portfolios are as follows:


Asset Class

Ticker

Name

LARGE BLEND VTI Vanguard Total Stock Market ETF
Foreign Large Blend VEU Vanguard FTSE All-World ex-US ETF
DIVERSIFIED EMERGING MKTS VWO Vanguard Emerging Markets Stock ETF
REAL ESTATE VNQ Vanguard REIT Index ETF
COMMODITIES BROAD BASKET DBC PowerShares DB Commodity Idx Trking Fund
Intermediate-Term Bond BND Vanguard Total Bond Market ETF

We are going to contrast two momentum strategies -- one of the original approaches created by Goldman Sachs and the reference strategy used by MyPlanIQ.

There are many variants of the Goldman Sachs strategy and we are going to take a simplistic view:

  • At any given time there will be three asset classes in the portfolio
  • At the end of each month, all the asset classes will be ranked and the top three will be selected
  • If the selected asset class performance is below fixed income, the money moves into fixed income
  • If fixed income is performing below cash, the money moves to cash

The reference MyPlanIQ strategy is slightly different:

  • The investor decides a risk profile which sets the minimum amount of money in fixed income -- the portfolio will never have less than this amount
  • At the end of each month, all the asset classes will be ranked and the top two will be selected
  • If the selected asset class performance is below fixed income, the money moves into fixed income
  • If fixed income is performing below cash, the money moves to cash

To try and compare apples with apples, we set the risk profile at 33 so 33% of the portfolio will be in fixed income and the other two assets will also be 33% each. Therefore, the only difference is that the Goldman Sachs approach has the ability to move to all equities.

Portfolio Performance Comparison

Portfolio Name

1Yr AR

1Yr Sharpe

3Yr AR

3Yr Sharpe

5Yr AR

5Yr Sharpe

Six Asset ETF Benchmark Goldman Sachs
7% 41% 11% 66% 16% 80%
Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 9% 61% 10% 72% 14% 89%

Conclusions

  • The GS strategy clone has higher returns in the three and five year time horizons
  • The Reference strategy wins in the one year timeframe -- which is interesting as fixed income has been at the bottom of the performance table for some time
  • Note that the Sharpe ratios are lower in each case so you are paying for the returns with higher risk

It is important to note that fixed income isn't just another asset class that gets tossed in with the others and let the best person win. It has a part to play in providing balance and restraint to both the ups and downs of a portfolio.

Having said that, there can be no doubt that the GS strategy has been very successful and a number of people (including ourselves) have cloned it and it is widely used.

The purpose of this article is to expose new ideas and avenues for a wide range of investing alternatives. In the end, what matters is that you are systematic and involved with your investments.

Prevention is better than cure, which we all know. Just don't leave it -- one more year -- until you get started.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Source: Goldman Sachs's Momentum Strategy for Retirement Investors, Simplified and Analyzed