Dual Momentum Management: Is It Worth The Effort?

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Includes: SCHB, SCHF, SCHH, SCHZ
by: Lowell Herr

Summary

Performance results are encouraging.

Management effort is minimal.

Cost is minimal.

Downside protection is a major advantage.

Slight tweaks can enhance performance.

Dual Momentum, as articulated by Gary Antonacci in his book by the same name, is both easy to understand and implement. I was immediately attracted to this investing model after reading Antonacci's book and shortly thereafter, began testing the model with a few portfolios. Although my in-sample-testing with real portfolios is short in duration, I've found the Dual Momentum model productive. In a few cases, I've slightly modified Antonacci's instructions.

For a quick overview of the Dual Momentum (DM) model, check this Seeking Article I wrote a little over three years ago.

Momentum Ranking: The following DM portfolio uses low-cost Schwab ETFs. The original DM model recommends using three asset classes. Here are my examples or ones I use with a real portfolio.

  • U.S. Equities (SCHB)
  • International Equities (SCHF)
  • Bonds (SCHZ)

I've added real estate (SCHH) as it provides another low correlated option. One problem I have with the basic DM model is that U.S. Equities and International Equities are highly correlated. It makes sense to add additional low correlated asset classes so different options are available in different market conditions. In most DM portfolios I've added a number of optional low correlated ETFs to the investment quiver.

In the following table, 100% of the portfolio is invested in U.S. Equities (SCHB).

Downside Protection: When working with DM portfolios, I apply two critical sell rules.

  1. Sell if the ETF ranks below SHY, the cutoff ETF.
  2. Sell if the price of the ETF lies below its 195-Day Exponential Moving Average.

These two rules provide downside protection.

Low Cost: The expense ratio for the four ETFs used with this portfolio run from 3 to 7 basis points. It is difficult to find lower cost securities to implement the Dual Momentum or any other portfolio where ETFs are used.

DM Tweaks: As mentioned above, I follow two critical sell rules in an effort to protect capital. Another tweak to the original DM model is to shorten the look-back period from one-year or 252 trading days to a combination of look-back periods. You can see these in the above table.

With the market at an all-time high, I want faster responding look-back periods so I use a combination of 60 and 100 trading days with weights assigned as you can read in the above table. A 20% weight is assigned to volatility as low volatile ETFs are highly valued.

Dual Momentum Performance Data: The following data is a summary of four portfolios managed using the Dual Momentum (with tweaks) model. Depending when a portfolio was reviewed, the recommendation could have been U.S. Equities, while for at least one portfolio it was International Equities.

In the following screen-shot you see the annualized Internal Rate of Return (NYSE:IRR) for six benchmarks and the summary IRR for these four portfolios. An IRR value of 18.4% compared to 21.0% for the VTSMX index fund over the same period is close to acceptable. The real test will come when the market dips and the response of these DM portfolios is to go into a defensive posture.

There has not been a bear market since I began using the DM model. While one can back-test to see how the model worked in 2008 and early 2009, it is not the same as having a finger on the buy-sell management key.

To answer the original question, so far the effort to follow the basic rules of DM have been worth the effort.

Disclosure: I am/we are long SCHB.

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.