My readers are likely open to the possibility of cultivating a portfolio that betters indexing when it comes to risk and long-term returns. Some may even be familiar with popular asset allocation systems like dual momentum and risk parity. But how much work is required to actually maintain such a portfolio and keep it in line with the chosen plan?
It depends. A non-tactical global portfolio is simple to run, as it only requires allocating generously to foreign stocks, REITs, and gold (in addition to US stocks and bonds) and rebalancing periodically. Such a portfolio as the 5-asset buy-and-hold benchmark on page 13 will likely produce solid returns with less downside per unit of upside relative to 60/40.
Value is easy, momentum is harder
A tactical value portfolio like that on page 14 is almost as simple. You just need to find a source for reliable valuation data, create a country ranking, and invest in the cheapest group each year. Our universal value system (the one demonstrated on each of the individual markets we track) is almost as simple, but requires checking-in monthly to see if changes are required.
Tactical momentum is the most difficult and labor intensive of the methodologies here, but by far the most rewarding. For that, you’ll need data and a spreadsheet or specialized software. The momentum systems in this letter are as simple they get, only requiring that you track dividend-adjusted ETFs prices and calculate their simple moving averages. However, this must be done every month after the close and no later than the next trading day. There are excellent online services that will run the calculations for you, such as portfoliovisualizer.com, ETFreplay.com, and allocatesmartly.com, but even this commitment that may take more discipline than you think, as you may be ill, travelling, or have other commitments at the crucial time. Remember, orders must be executed on the close of the month or the next trading day, exactly as prescribed.
By far the most reliable solution, potentially offering a far better portfolio, is to outsource the whole thing to a professional asset manager. A good tactical manager will use many asset classes, multiple parameters, and hopefully multiple tranches to reduce “timing luck,” all of which are free sources of improved risk-adjusted returns. Unfortunately for most investors, but not for our little club, exceedingly few professionals use systematic tactical allocation. In contradiction to the theory that a winning system becomes useless once it is public knowledge, the incentives of the asset management industry discourage breaking from the herd. Career risk as a “meta-factor” delivers a premium to the investor commensurate with the compensation foregone to the advisor or fund manager who deviates too widely from popular benchmarks.
Whether to DIY or not is a personal decision. If you enjoy technical work and have the grit to learn this craft over many years, it may be worth the risk of errors and eluded gains while you up your game. Maybe you don’t even care about advancing beyond a beginner portfolio like those here, but you value simplicity and control. In these cases, I would say to go for it, so long as you can stick to the plan as though contractually bound. Otherwise, managers like myself and a handful of others would be glad to have a fellow traveler as a client.