Employing a Dual Momentum strategy for portfolio management works well during a bear market as one flees to less volatile securities. That special attention to risk places downward pressure on the portfolio return during bull markets. The following model increases the probability of improving portfolio return simply by increasing the number of ETFs available for inclusion in the portfolio, shortening the look-back period, and reviewing the portfolio every 33 days instead at the end of the month. The reduced look-back period from 12 months to 6 months reacts faster to market changes, while the 33-day rebalancing period reduces the problem of whipsaws. There are other benefits to using the 33-day review or rebalancing period. One major advantage is that the review date floats throughout the month and is not subject to particular "end-of-month" activities such a mutual fund portfolio dressing.
Here is how the portfolio management model works.
- Select securities one will include in a portfolio. In this model we use 10 ETFs plus SHY as SHY is the cutoff ETF - to be explained later. The ETFs are selected on the basis of low correlations and their coverage of the major asset classes. Global diversification is essential.
- Set up a method to rank the securities. In this model three metrics are used. 1) A 50% weight is assigned to the security performance over the past 91 calendar days. 2) 30% is allocated to the performance over the past 182 days. 3) 20% of the weight is set to volatility. An example ranking table is shown below. This ranking model provides a robust system, not necessarily the ultimate model.
- The securities are ranked every 33 days as that is the length of time between portfolio reviews. Selection of the 33 day interval avoids wash sales, short-term commission fees, and the review floats through
