Optimizing The "Ivy 20" Portfolio

by: Lowell Herr

The original "Ivy 20" portfolio laid out an asset allocation where equal percentages (5%) were allocated to each of 20 ETFs. What would such a portfolio look like if it were optimized? The following three slides help readers through the optimizing process and what ETFs to buy, hold, or sell.

Efficient Frontier: The Return/Volatility ratio for the equally allocated "Ivy 20" is shown by the diamond dot. Higher up the Efficient Frontier curve is the optimized portfolio where the Return is 2% points higher with an increase in Volatility from a little over 6% to slightly under 9%. There is quite a separation between the two portfolios. The optimized portfolio carries a higher Return/Volatility ratio, as one might expect since we are pushing for a higher return.

ETF Rankings: The following data is extracted from optimization software and the output is laid out in the following manner. Calculations within the following table examine ETF performance over the past three and six months. A third factor, ETF volatility, is part of the ranking system with a 20% weight. This last 20% weight is to hold down portfolio risk. In the following example a 50% weight is given to the performance over the most recent three months and 30% is applied to the six month performance.

The last two columns show the current ranking of the "Ivy 20" and a measurement of momentum or relative strength.

Buy-Hold-Sell Recommendations: Several factors and questions go into the Buy-Hold-Sell recommendations. 1) What is the optimal number of shares to hold in a particular ETF compared to the shares currently held in the portfolio? 2) What is the performance-risk rank that comes out of the above table? 3) What is the momentum factor based on performance over the last 91 and 182 days?

From these three factors, Buy, Hold, and Sell recommendations are made with respect to current holdings in the "Ivy 20." Based on this analysis, approximately 250 shares of VTI would be purchased. To raise cash one would sell 250 shares of DBB. A close examination of the table below shows other buy and sell recommendations.

Judgment needs to be made rather than following these calculations blindly. For example, VWO is dealing with so few shares (difference of 2) that one would not make any changes with that holding.

There are two benefits to using such a model for portfolio management. 1) One can test how close the current asset allocation matches an optimized allocation. 2) By ranking investments and using a ranking filter, one can easily determine what investments to buy, hold, or sell.

Here are a few links that speak to some of the positive aspects of momentum investing.

Relative Strength Astounds the Skeptics Again

Value Investing vs. Momentum Investing

52-Week High Momentum Investing ETF Portfolio Shows Promise

This is not the Holy Grail of investing so look for articles that point out the problems associated with active management.

Disclosure: I am long VTI, VEU, VWO, BND, VNQ, RWX, TIP, BWX. 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.