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Portfolio Management: Two Models

|About: SPDR Portfolio Total Stock Market ETF (SPTM), Includes: SPAB

How to manage a Dual Momentum portfolio.

How to manage a Factor portfolio.

Diversification and risk management of a portfolio.

In this blog post I'll walk readers through two portfolio management models I use with numerous portfolios.  The first model is the Dual Momentum strategy as discussed in several Seeking Alpha article.  Here is the link to one such article.

The Kipling spreadsheet is used to manage both Dual Momentum and Factor portfolios.  What is the Dual Momentum model recommending at the moment?

Dual Momentum Recommendations:  Only three ETFs are used in this portfolio and they are:  U.S. Equities (SPTM), International Equities (SPDW), and U.S. Bonds (SPAB).  These are low-cost commission free securities if one is a client at TDAmeritrade.  One can easily find mirror ETFs at Schwab, Vanguard, Fidelity or other discount brokers.  Keep costs low by using commission free ETFs.

With the Kipling spreadsheet available, all one needs to do after entering the three ETFs is to download the data and look at the recommendation in the fourth column from the right.  The current recommendation is to hold 100% of the portfolio in U.S. Bonds (SPAB).

Wait another month to 33 days and go through the process again.  Download prices and check the Position column for the recommendation.  That is it.  This is how I manage four Dual Momentum portfolios.  It does not get much easier than this.

The second model is what I call the Factor model.  It is more complex than the Dual Momentum model.  More ETFs are involved and it requires some judgment on the part of the portfolio manager.  Here is the link to a Seeking Alpha article on the Factor model.

In the following example I use low-cost ETFs from Schwab.  In the table below we have the current recommendations that emerge from the Factor model.

Factor Portfolio Recommendations:  The Factor model calls into action all the power of the Kipling spreadsheet.  Factor investing incorporates more ETFs providing greater diversification while taking advantage of market anomalies (Factors).  In the following portfolio readers will find ETFs that focus on Size, Value, Momentum, Quality plus domestic and international Real Estate.  A variety of bond and treasury ETFs are available to take advantage of periods when ETFs are out of favor.  Such is the case right now.

With an "investment quiver" as large as this one (23 ETFs plus SHV as a cutoff), the Maximum Number of Assets to hold in the Factor portfolio is set to ten (10).  This variable is controlled by the portfolio manager.

Once more, click on the table to expand and check the Position column for recommendations.  This table also recommends how many shares to invest in each ETF.  Before that decision is made, we need to analyze the portfolio in more detail.

Manual Risk Adjustments:  The Kipling spreadsheet includes several additional worksheets designed to aid the money manager in portfolio risk control. 

  1. We need to establish how much risk (what percentage) to take with the portfolio as a whole.  I generally set this to something between 5% and 8%.
  2. Once the portfolio risk is established, how many share are recommended for each security?  The following worksheet provides this important guidance. 

In the Position Sizing (Automatic) worksheet (not shown) I set the portfolio risk to be 6%.  With that setting, the recommended number of shares for each recommended ETF is transferred to the worksheet shown below.  You will find those recommendations in the 9th column from the right.  It is the Recommended Shares from Auto.

We are now at the point where the money manager of the portfolio needs to make decisions as to how many shares to hold in the recommended ETFs.  See the judgments I made in the salmon colored column, or the 8th column from the right.  I tend to round the shares to the nearest five shares.

The New Portfolio Risk is a conservative 3.37% or 3.4%.  This leaves a little over $2,000 in cash.  If this is too high, then purchase a few more shares of a recommended ETF.

While the Factor model is a little more complicated than the Dual Momentum model, it is not too much more difficult to manage if one is using the Kipling spreadsheet.  The Kipling leads the user through the complex calculations and makes recommendations that are straight forward.

There are times when ten ETFs are not recommended.  This happened during the Great Recession when the recommendation was to be in cash.

Questions related to these portfolio management models are welcome.  If something is not clear, just ask and I will attempt to answer your questions.

Disclosure: I am/we are long SPAB.