Managing A $1,000,000 Portfolio

by: Lowell Herr

Summary

Divide the portfolio into four separate portfolios using different management models.

Model One: Strategic Asset Allocation Model.

Model Two: Dual Momentum Model.

Model Three: Tranche Momentum Model.

Model Four: Dividend Aristocrat Model.

What if you found yourself the owner of a $1,000,000 portfolio and a desire to grow the portfolio while providing aggressive risk controls? The following plan lays out four different investment models where one-fourth of the portfolio is invested in each of these four models.

Each of the four portfolios are reviewed and updated every 33 days using the guidelines laid out below. The reviews are scattered throughout the month rather than reviewing all four on the same day. The reasons for the 33-day period is four fold.

  • Reviews are rotated throughout the month so end-of-month window dressing on the part of mutual funds has minimum impact.
  • Short-term trading fees are avoided on commission-free ETFs.
  • The wash-sale rule is skirted.
  • Whipsaws are minimized.

Strategic Asset Allocation Model: This first strategy is essentially a buy and hold model or what one might call a passive portfolio model. To manage this model the investor first needs to determine what asset classes to use and then populate those asset classes with index funds or low-cost non-managed ETFs. Here is a screen-shot of an asset allocation plan for this model. The target percentages have a white background, and the actual holdings have a light green background. This slide provides guidelines as to what percentage to use to in each asset class. The basic model is to invest 70% in equities and 30% in bonds. Investors will set up the stock/bond ratio to fit their own requirements.

The following Dashboard is the business plan for a portfolio managed using the Strategic Asset Allocation Model. Once the asset classes and critical ETFs have been identified, all the money manager needs to do is keep the various asset class within the target ranges. I use 15% to 25% for target ranges. This model does not have risk protections other than what is provided through the stock/bond ratio. The last three models have risk protections built into the strategy.

Below is a list of ETFs that can be used to populate various asset classes in the above Dashboard.

Dual Momentum Model: The second of the four portfolios is managed using the Dual Momentum Model. For more details on the Dual Momentum Model, check out this Seeking Alpha article. The Dual Momentum rules are quite simple.

  • Select three ETFs to cover U.S. Equities (NYSEARCA:VTI), International Equities (NYSEARCA:VEU), and Bonds (NYSEARCA:BIV). SHY is the fourth ETF and it is used as a performance cutoff or circuit breaker ETF. This is where portfolio risk is taken into account.
  • Rank the ETFs based on a one-year or 252 trading days look-back period.
  • If VTI and/or VEU rank above SHY, the cutoff ETF, place 100% of the portfolio in that ETF. Currently, 100% of the portfolio is in VTI. See the following screen-shot.
  • If neither VTI or VEU rank above SHY, invest 100% of the portfolio in BIV. This is our risk protection.

Tranche Momentum Model: The third model, Tranche Momentum Model (NYSE:TMM) is slightly more complicated than the Dual Momentum model. In the following example, the 13 ETFs selected for possible purchase provide global diversification. Many of the securities carry low correlations with each other. From this list, the ETF with the highest expectation for return going forward is DBC, with a Group rating of two (2). That recommendation is found in the right-hand column.

The worksheet shown below is an example of how the Tranche Momentum Model works rather than putting forth a recommendation. Do your own research. A completely different quiver of ETFs can be used with the Tranche Momentum Model.

Dividend Aristocrat Model: The following screen shot looks very much like that used for the Tranche Momentum Model - and it is similar. The major difference is that the ETFs selected for this model are chosen for their yield. The same requirements for purchase are present. The security must be outperforming SHY, and we follow the recommendations found in the Required column.

Dividend-oriented investors could easily substitute their own group of Dividend Aristocrat stocks in place of the ETFs I've selected for this example.

With the above four portfolio management models, we have a tried and true passive portfolio, a Dual Momentum Model, the Tranche Momentum Model, and a Dividend Aristocrat Model to generate income.

Consider this a skeleton of instructions as to how to manage each portfolio. Post comments if you have any questions on any of these four portfolio management models.

Disclosure: I am/we are long VTI.

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.

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