Momentum Modeling: Recommendations Today Vs. December Of 2007

by: Lowell Herr

Using a diversified global portfolio, what momentum recommendations appeared before the Great Recession?

What does that same portfolio of ETFs recommend in today's market?

How conservative should one be in this volatile market?

What recommendations showed up in March and April of 2009 or just after the Great Recession?

Is the volatile stock market of the last few weeks sufficient to justify the fear expressed in newspaper headlines? For example, in the left-hand column of The New York Times (12/16/2018), this headline appeared. "The Best Place To Put Money? Your Mattress." To check on this warning I examined the recommendations based on a spreadsheet I use to manage portfolios. While this spreadsheet did not exist in 2007, I'm able to go back and view what it was recommending just before the crash of 2008 and early 2009.

Just for interest, I'll also post what ETFs were recommended shortly after the Great Recession ended. Before checking on those recommendations, let's see what the Kipling spreadsheet was telling us at the end of 2007.

To set the stage, this portfolio is made up ten long ETFs and one short ETF. The portfolio is globally diversified as readers can see from the following asset classes.

  • U.S. Equities (VTI)
  • Developed International Equities (VEA)
  • Emerging Market Equities (VWO)
  • U.S. REITs (VNQ)
  • International REITs (RWX)
  • Commodities (DBC)
  • Gold (GLD)
  • International Bonds (BWX)
  • U.S. Treasuries (TLT)
  • U.S. Bonds (AGG)
  • Short - U.S. Equities (SH)

Recommendations on 12/31/2007: The following worksheet lays out the recommendations found in the Position column. As the portfolio is constructed below, 100 shares are held in each ETF.

Just prior to the crash of 2008, the Kipling momentum spreadsheet is recommending the money manager move to Commodities (DBC) and Gold (GLD). Since 100 shares are currently held in both International Bonds (BWX) and U.S. Treasuries (TLT), we continue to maintain those positions until a sell order is given.

Note how the Kipling recommends we move out of all equity holdings and REITs. Those asset classes were hammered in the Great Recession.

Recommendations on 12/17/2018: Now we move on to the current recommendations. The same ETFs are used and again we assume 100 shares are held in each of the eleven (11) asset classes. Recommendations are to purchase Gold (GLD) and Short Equities (SH). Since we already hold International Bonds (BWX), U.S. Treasuries (TLT), and U.S. Bonds (AGG), we will continue to maintain those positions until a Sell order is given. I review each portfolio every 33 days.

I should add that the Kipling also recommends how many shares to hold in each asset class based on the risk one wishes to take with the portfolio. I'll not go into that logic in this article.

There is a strong similarity between the recommendations of 12/31/2007 and those showing up this week. Both periods show conservative or risk averse ETF recommendations.

Recommendations on 3/31/2009: And now we come to recommendations just after the bottom of the Great Recession. At the end of March 2009, we see U.S. Equities (VTI) are recommended as a Buy. Emerging Market Equities (VWO) also shows up as a Buy. Look down the Position column and we begin to see a shift from low volatile asset classes to high volatile asset classes.

Recommendations on 4/30/2009: Moving to the end of April 2009, or a little further away from the Great Recession bottom, more equity asset classes are recommended.

I should mention that in each of these runs, the maximum number of asset classes recommended for inclusion in the portfolio is set to five (5). With a portfolio of 11 asset classes, selecting the top five ETFs provides for a "robust" return.

I'm currently using the Kipling to manage nine (9) different portfolios of various size. As of last week, all nine portfolios are outperforming the Vanguard 2030 Target Index Fund I use as a benchmark.

Disclosure: I am/we are long DBC GLD. 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.