DECISION MOOSE & GLOBAL MARKETS
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Investment Strategies: Asset Type

Investment strategies can incorporate a variety of asset types-- stocks, bonds, mutual funds, commodities, options, futures, and so on. Our focus is on the following exchange-traded funds or ETFs. They provide a globally diversified portfolio of equity and income assets, but they are certainly not the only game in town-- just the game here. 

Cash or Money Market Fund (3 month Treasury) 
Long-term zero-coupon Treasury bonds (EDV) 
Large cap US stocks (SPY) 
Small cap US stocks (IWM) 
Gold Bullion (GLD) 
Europe 350 stocks (IEV) 
Latin America 40 stocks (ILF) 
Japan stocks (EWJ) 
Asia Pacific ex-Japan stocks (AXJL)


Investment Strategies: Three Flavors

It may seem that there are more investment strategies out there than there are investors. Maybe, but strategies only come in three basic flavors-- passive, activeand combinations of the two (active/passive). Our three basic investment strategies are called— passive diversification, active targetingand dynamic diversification. 


Passive Diversification

Passive diversification is known as "The Prudent Man Theory", or "buy-and-hold". It refers to portfolios comprised of several non-correlated equity and income index ETFs. The percent attributed to each ETF in the portfolio is fixed and is determined by the investor’s willingness and ability to accept risk. Stocks are riskier than bonds and cash, so the higher the percentage of stocks in a portfolio, the riskier it is. The more risk, the greater the opportunity for gain-- or loss. Generally, an aggressive growth portfolio is 80% stocks, a growth portfolio is 60% stocks, a conservative growth portfolio is 40% stocks, and an income portfolio is 20% stocks (mostly dividend producing.) In general, passive strategies require less time, effort, cost, and expertise than active strategies. They are best employed when the time horizon is greater than 5 years, however. Click here for additional info on Passive Diversification.

Active Targeting

Active targeting is the opposite of passive diversification. It refers to the market timing methodology promoted on this site for over twenty years. It relies on a mechanical model to evaluate nine index funds and pick the one ETF that currently provides the greatest opportunity for gain. The model's underlying assumption is that global finance is a closed system, and that investment capital, when it leaves one class of assets, has to go somewhere else. The model tracks the relative momentum in each ETF, targeting the top performer, to which it allocates 100% of the portfolio. Purely active strategies are more appropriate for investors at the aggressive end of the risk spectrum. For more detail on the active targeting strategy on this site see the FAQs.

Dynamic Diversification

Dynamic Diversification is an amalgam of active and passive strategies. It uses a mechanical model to apply active management principles to a diversified portfolio in real time to reduce exposure to the weakest assets while maintaining exposure to the strongest. Dynamic diversification is the most prevalent strategy among mutual fund and institutional portfolio managers. Dynamic Diversification is more attractive to those at the conservative end of the spectrum. Click here for additional detail on Dynamic Diversification.

So Which Strategy Is Right For You Now? 

The two questions you need to ask yourself before picking a strategy are (1) Do I really want to do this? and (2) Can I do this? If the answer to either question is "no", hire someone to manage your money. If the answer to both is "yes", start by understanding that no one strategy is right for everyone all the time. Indeed, over time, there is not necessarily a 'best" investment strategy. Success or failure depends on the time period and on the financial back-drop. Just because you find something that appears to work for you now, doesn't mean it always will. Personal situations change, and exogenous conditions change. Ideally, one should pay attention to both and not be afraid to adapt.

Personal & Portfolio Issues

Now that you've scored your questionnaire and have quantified your personal and portfolio issues-- like interest, experience, education, type of account, relative size/importance of account time for maintenance, investment time horizon, etc., use the table below to gauge which strategy provides the best fit.

CRITERIA

Active Targeting

Passive Diversification

Dynamic Diversification

Experience Required

Moderate/High

Low/Moderate

High

Maintenance Required

Moderate

Low

High

Time Horizon

Short/Medium

Long/Medium

Long/Medium

Taxable Account

Moderate trading costs

Low trading costs

Very high trading costs

Tax-Deferred Account

Low trading costs

Minimal trading costs

Moderate trading costs

Account % of Total Assets

Low/Moderate

Moderate

High/Moderate



Ability & Willingness to Accept Risk

Now that you've scored your questionnaire and have and idea about your ability and willingness to accept risk, use the table below to gauge which strategy provides the best fit.


CRITERIA

Active Targeting

Passive Diversification

Dynamic Diversification

Risk Profile

Aggressive/ Moderate

Moderate

Conservative/ Moderate

Asset Volatility

Moderate

Moderate

Moderate

Portfolio Volatility

High

Moderate

Low/ Moderate


Click here for more on selecting your own personal investment strategy.

What Works and When?

Face it, the first thing investors look for in a strategy is performance. Some strategies outperform in bear markets and others in bull markets. In addition, relative strategic performance can vary as different exogenous forces come to bear on the financial markets. 

Investors can get impatient, wondering “What has my strategy done for me lately.” The answer is not solely about current performance, it is also about what can happen at the extremes. How a strategy behaves in secular (long term) bull and bear markets is just as relevant as what it is doing at the moment.

CRITERIA

Active Targeting

Passive Diversification

Dynamic Diversification

Bear Market: Loss Risk

Low

Moderate/High

Low/Moderate

Bull Market: Gains

Low/High

Moderate/High

Low/Moderate

Recent Performance

Poor

Moderate

Moderate

Click here for more detail on relative strategic performance.

What’s Working Now?

Performance of six alternative investment strategies will be presented for free on the this site.

CUMULATIVE GAIN

1 Yr

3 Yr

5Yr

10Yr

15Yr

3Y Sharpe

SPY

12%

26%

72%

69%

158%

1.97

6040static

3%

14%

26%

68%

199%

1.99

6040sma

3%

10%

22%

58%

128%

3.57

6040rs

2%

13%

32%

67%

139%

2.35

8020static

6%

10%

23%

49%

212%

1.27

8020sma

5%

8%

20%

54%

161%

2.60

8020rs

6%

12%

24%

59%

170%

2.63

Momentum

1%

-13%

-9%

25%

268%

-1.11

Six basic (and highly simplified) alternative strategies are monitored in addition to the momentum model on this site—three growth strategies and three aggressive growth strategies. The growth strategies are based on a 60-40 risk-asset-to-income-asset ratio. The aggressive growth strategies are based on an 80-20 ratio.

The growth and aggressive growth strategies each include one static, and two dynamic models. Static models have a fixed asset allocation (60-40 or 80-20) that does not change. Dynamic models alter the basic allocation by adding a technical indicator into the mix. The indicators used here are the 40-week (200-day) moving average, and 26-week relative strength. If the weekly closing price of an individual ETF becomes bearish per its technical indicator, the dynamic model reduces its allocation to zero, and adds that allocation to cash. 

These strategies are examples, not necessarily recommendations. They are intended to help investors see how different approaches may compare to each other and to the momentum model in today’s investment environment. For more information, including the author's observations on the most productive strategy, and weekly updates of the dynamic model allocations, see the newsletter.

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