Lowell Herr
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Lowell Herr

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988 Comments

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## Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]

Steps 2 and 3 implement the Dual Momentum process.

No, we are not comparing 12-month returns of the three ETFs. The second momentum measure is the absolute momentum of a security.

Dual momentum combines relative strength momentum and absolute momentum. Antonacci uses the S&P 500, ACWI, and treasury bills for his three securities and that is where the relative strength comes in as he runs a comparison each month. The S&P 500 is compared with ACWI over the past year and the better performer is selected. The better performer of the two is then compared with a T-Bill. If the better performing index is performing above the T-bill, then buy and hold the index. If not, invest in the T-bill.

Over a 40-year test period GEM had an average annual return of 17.4% with a 12.6% standard deviation, a 0.87 Sharpe ratio, and a maximum drawdown of 22.7%.

Lowell

http://itawealth.com

## Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]

Bunny2010,

Exactly. That is where the negative absolute momentum and/or SHY cutoff come into play.

Lowell

## Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]

Antonacci mentions he uses other models. "Although I have developed and use more sophisticated momentum models, the simple GEM model shown in Chapter 8 is a very good model for most investors."

I understand why he did not go into details of his other models, but it would have enhanced the book to see at least one expanded in more detail. To include SHY as a cutoff and add other low correlated securities would move one toward a more sophisticated model. The same basic principles of Dual Momentum still apply.

I'm testing variations of the GEM model and so far the trends are positive.

Lowell

## Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]

I'll let you dig that material out of the book.

Lowell

## Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]

It differs in that Antonacci does not use SHY as a cutoff ETF. My three ETFs (VTI, VEU or VEA, and TLT) differ from the author, but the asset classes represented are the same.

One other difference, and I should have made this clear, if an ETF has a negative absolute momentum, then one goes to TLT or an equivalent security.

I do recommend the book as it provides a lot of background material not available elsewhere.

Lowell

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

As I continue to test the model I will have additional information to contribute.

I should mention that the ETFs were not selected to better "curve fit" the market action over the past eight years. The ETFs (with exception of VOE and VBR) were selected as they provide global diversification and they have low correlations.

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

All asset classes (all ETFs) moving down in a major bear market is always a concern. To help with this problem here are possible solutions.

1. The portfolio is reviewed every 33 days so it is only the sudden hits that are likely to impact the portfolio.

2. After making any portfolio changes, set limit orders on the two ETFs that are in play over the next 33 days.

3. If no ETF is performing above SHY when the portfolio is reviewed, then all money is concentrated in SHY.

Numbers 2 and 3 will prevent major draw-downs.

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

So do I. The Baker's Dozen are ETFs I have been using in portfolios since Vanguard launched their stable of ETFs.

Lowell

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

http://bit.ly/1paeSf7

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

I'm preparing a blog post that will show why one does not want to over concentrate asset classes as it has a negative impact on returns.

Lowell

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

An analysis of the "Magic Seven" you suggest in your comment shows a $100,000 rising to approximately $250,000 over an eight-year period while the VTTVX benchmark moves up to a little below $150,000. That is a big difference.

However, the portfolio constructed of VTI, VEA, VWO, VNQ, RWX, TLT, TIP, PCY, DBC, GLD, and SHY (leave out VOE and VBR for now) nearly doubles the "Magic Seven" portfolio as it closes at nearly $500,000 over the same period when one uses the Inverse Sortino 2 algorithm or model.

Combining low correlated ETFs into a fewer number, as suggested above, definitely puts a crimp in the portfolio returns.

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

Without going into the programming coding, first think of volatility as a normal standard deviation calculation. That is one of the options within the spreadsheet used to generate the rankings as shown in the article. But mean-variance or the standard deviation calculation penalizes the money manger for volatility both above and below the data set. However, as a money manager we desire volatility to the upside and deplore volatility to the downside. The semi-variance calculation takes care of this as volatility to the upside is ignored and only volatility to the downside enters into the calculation. If you check the second slide carefully you will see that I selected the semi-var option to come up with volatility. This method of calculation volatility is the big difference between the Sharpe Ratio and the Sortino Ratio. In my opinion, the Sortino Ratio is superior, but infrequently used.

Hope this helps.

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

The data shown in the article demonstrates that one can do much better than the "normal" portfolios by applying the SHY cutoff model. The "SHY model" is particularly effective during major bear markets like the two we experienced already in this century.

The more difficult problem is to create a portfolio that will continue to add alpha during bull markets. That is where the Inverse Sortino 2 comes into play. The Rob Arnott article helps explain how this works. The trick is then to convert this research into a working Excel spreadsheet and that is what you see in the two articles I reference at the bottom of my article.

Lowell

http://itawealth.com

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

While the PP worked well over the past 40 years there are now several factors that likely will not soon be repeated. 1) Interest rates dropped from very high levels to very low levels and that was a "tailwind" to bonds. 2) Gold also had a good run over that period. I doubt this will be repeated. 3) Cash is currently a drag on the portfolio.

I answered this same request some months ago. Here is the link.

http://seekingalpha.co...

This is not to say the PP will not have another good run. I just don't see it happening over the next decade.

Lowell

## Baker's Dozen Portfolio: Improve Return And Reduce Risk [View article]

All good points. The Baker's Dozen model requires a fair amount of trading and funds such as VXUS, VNQI and VAW are not commission free - at least with the discount broker I use. The savings from lower expense ratios may well be wiped out by higher commissions. This is a function of the size of the portfolio.

The next step is to run a back-test over the same time frame to see how the "magic seven" perform vs. the performance record of the Baker's Dozen.

Thank you for your thoughtful analysis.

Lowell

http://itawealth.com