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VALUE AVERAGING MODEL PORTFOLIOS

A Pre-requisite for following these models:  An Open Mind

The first step of any investment program is always the hardest, and individual investors taking their first steps in an investment program must also confront a sea of stock market uncertainty. Some plunge headlong into the market with all their savings. Others barely wet their feet before heading back to the safe shores of their fixed income deposits and money market funds. The problem, however, with these two approaches is one of timing — the risk of entering the market at a high point in the market cycle.

The purpose of this section of the website is to outline a framework as to how an investment portfolio can be created and implemented based on the Value Averaging (VA) investment strategy.

The model portfolios created here have been based on the portfolio construction methods outlined in The Perfect Portfolio by Leland Hevner and 7 Twelve: A Diversified Investment Portfolio with a Plan by Dr. Craig Israelson. Using the ideas put forth in these books we created our own models and then applied the Value Averaging investment methodology to the portfolios to enhance the returns and reduce the risk. The VA investment methodology is an event driven formula-based system that is mathematically calculated using computer software to determine the dollar amount to invest or sell periodically.

Discipline is the key

In the book, "What Works on WallStreet", author James O'Shaughnessy found that one of the reasons why academics adopted the flawed "random walk" hypothesis of stock movements is because of inconsistent methodologies used by fund managers themselves. Fund managers do not adopt a well defined strategy and stick to it, they tend to go with flavor of the month stocks, to adopt new paradigms when they see fit, to rebalance portfolios constantly and generally move about in a random manner. By analyzing the returns of fund managers academics were unable to find any managers who had consistently been able to get far above average results in a statistically significant manner. They erroneously concluded that it is the market that is random. In reality the market does reward certain approaches over time, but none of the market professionals studied ever stuck to any of these approaches. Rather than random stocks, it is clear that it is the investors who are random.

The one factor that unites all of the great investors is that they have a simple formula that is applied consistently over time and can be easily stated in a book. As complicated as Warren Buffett's methods are, you could write a book about him and state with great precision how he goes to work analyzing stocks, in fact many books about him have indeed been produced. Buffet states that, to be a successful investor does not require one to have a high IQ but rather it requires two things. 1. A strong intellectual framework on which to base your decisions and 2. Not letting your emotions corrode the framework.

The 80% of managed funds that fail to beat the market do so because of complicated and ever changing strategies, or lack of strategies as may be the case. To paraphrase O'Shaughnessy, "if you can't write down and explain your technique on a piece of paper, you don't have a technique".

There are approaches that consistently beat the market!

It is important to adopt an approach that works, and stick to it. The reason why most investors fail is that they go chasing better results elsewhere and tend to move out of sectors just when they are about ready to start making big gains.

Today's equities markets change fast. Factors are influencing stock and bond prices today that we could not even have conceived of just a few years ago. Yet investing concepts and resources that we have been taught to use for decades have not changed, and they no longer work. This leaves investors, stuck using increasingly obsolete methods and tools to cope with new market dynamics and challenges. This sad state of affairs was evident as tens of millions of investors lost nearly half of their life savings in late 2008 and early 2009 by heeding "conventional investing wisdom" or relying on advisers.

A "new" approach to investing is long overdue. Small changes won't help. Nothing less than an entirely new, and radically updated approach to personal investing is required to enable people to regain control of their portfolios and thus their financial futures. This is exactly what these model portfolios provide. Here you will learn a greatly simplified portfolio design and management methodology that can give you outstanding returns in any market condition, whether it is trending up, down or sideways, and with minimal risk.
 

WHY FOLLOW THESE MODELS

The majority of investors tend to prefer the complex and artificial as opposed to the simple and unadorned. Too many investors believe that stock market investing requires sophisticated strategies, the juggling of dozens of variables and complicated portfolio management. Nothing could be further from the truth. Value Averaging is simple to understand and easy to implement, requiring less than 30 minutes a month to execute.

Our model portfolios are designed :

  • to simplify the entire investing process

  • to be responsive to changing market conditions

  • to be easy to understand and to implement; anyone with money to invest can use it

  • to have the potential to provide extraordinary returns in all market conditions and with limited risk

  • to not require a significant amount of your time to monitor

  • to enable you to design a portfolio that meets your exact investing profile in terms of goals and risk tolerance

  • to remove emotions from the investing equation

These model portfolio's can represent the "core" of any portfolio. Each investment asset adds an important dimension to the portfolio because each asset behaves differently.  The performance of a diversified portfolio is more important than the performance of any individual stock or fund.

 

PORTFOLIO MODEL 

The investment vehicle you choose is far more important than the mechanical rules you follow to invest in it. To that end, it is best to use VA with very diversified investments. We use primarily ETF’s, Index Funds and a few select stocks for the portfolios.  Indexing is a great way to achieve very good investment results because it sidesteps flawed decision making and psychological traps. The S&P 500 beats 80% of managed funds in long term returns.

Each model portfolio is based on the following:

         Target portfolio growth of  X% annually

         Use primarily Exchange Traded Funds (ETF's) and/or Index Funds

         Maximum of 9 asset classes and 16 securities (sub assets)

         Trades done Monthly – not daily

         Broad based sectors lowers risk and higher volatility increases returns

 

FRAMEWORK

The framework for the models are as follows:

  1. Determine Portfolio Objective and Model

  2. Identify the Market Sectors - Portfolio restricted to maximum of 9 sectors

  3. Identify Securities in each sector for the Portfolio - Portfolio restricted to maximum of 16 securities

  4. Determine Asset Allocation and Weight Portfolio to Maximize Returns and Yield - Target sectors provide high return   potential and provide portfolio diversification

  5. Back-test each security using the Value Averaging software system - Each security must have at least 3 years of history

  6. Use Value Averaging to implement the Trading Plan

  7. Monitor and adjust to meet the Portfolios' target return

 

ASSET ALLOCATION

Our Model Portfolio strategy utilizes multiple asset classes to enhance performance and reduce risk. There are 9 asset classes sub-divided into a maximum of 16 separate sub-assets made up of ETF's and/or Index funds.

These asset classes were selected based on research showing that they provide the greatest range of diversity possible. In other words, each tends to act differently in response to the same market catalysts and there should always be at least one, or more likely, several, that perform well in any market condition.

By using ETFs and Index funds you will not be subjected to the agony of searching for and analyzing individual securities or fund styles. Through total-market investment vehicles you will own hundreds of stocks and bonds in your portfolio even though you will only ever have a maximum of 16 securities. Company risk and fund manager risk is virtually eliminated and the entire investing process becomes exponentially simpler!

 

MODEL PORTFOLIO TRACKING AND RESULTS

We utilize the services of Marketocracy.com to manage our virtual portfolios. Marketocracy is a financial website where you can simulate running a mutual fund and accurately compare your investing skill to professionally managed mutual funds and other investors. At Marketocracy, you can manage a $1 million virtual portfolio and make trades in an environment that mirrors the trading activity of the real stock market. The portfolio management tools allows managers to discover their investing strengths and weaknesses and helps them become a better investors. Marketocracy provides access to exclusive tools to build investment skills and gauge success using virtual money while adhering to very real federal compliance rules and marketplace trading constraints. Each portfolio is allocated with a virtual $1 million – enough buying power to make lots of trades and to put together a diversified model portfolio. Managers can try different investment strategies and styles to see what works best  in a virtual environment first, before investing real money. In addition, portfolios are carefully monitored for compliance with S.E.C. rules for mutual fund managers so we can see how they respond when they are out of compliance,  and every trade is tracked for investment performance.

Once implemented, it takes us about half an hour to make the trades and update each portfolio monthly. Value Averaging is such a simple and easy system that anyone can learn how to do it. Each month we will publish our data, so that investors can see how we are doing.

The whole beauty of Value Averaging is that we don’t have to think about whether it’s getting the timing right or wrong. We just have to follow it, secure in the knowledge that come hot or cold weather the portfolio will keep growing at whatever target rate of return we have selected.
 

For a detailed explanation of the Value Averaging Portfolio Methodology outlined above please click here.
 


DISCLAIMER

The mention of products by name in these website/documents (mutual funds, exchange traded funds, index funds etc) does not represent an endorsement or guarantee of future performance. Determining investment suitability of individual products, portfolio design, and asset allocation is the sole responsibility of each investor and his/her financial advisor. VA Investment Software and/or Bruce Ramsey is not a licensed investment advisor. The information presented here is for teaching and demonstration purposes only.

Backtesting is the process of evaluating a core strategy by applying it to historical data. Backtested performance results are provided for purposes of illustrating historical performance had a core strategy had been available during the relevant period. Backtested performance results are hypothetical and have inherent limitations. We make no representation that the Value Averaging strategy will achieve performance similar to any backtested performance results. Actual results could differ materially from backtested performance and future results could differ materially from backtested performance. Past performance is no indication or guarantee of future results.

Backtested performance results: (i) do not reflect the deduction of any management fees or trading commissions; (ii) are not based on actual trading and do not reflect any market impact of buying and selling securities, trade timing and security liquidity; (iii) reflect prices that are fully adjusted for dividends and corporate actions (e.g., stock splits).

We do not represent that backtested performance information is accurate, complete or current, and we have no liability with respect thereto. The strategies outlined are subject to change without notice and we have no obligation to update you as to any such changes. The information provided herein comes from what we believes to be reliable sources however we makes no representations as to its reliability or accuracy, and you should undertake independent analysis to ensure the accuracy of the information

 

Model Portfolios

Inception: July/12

Target return: 10%

 

The Value Averaging Growth Strategy seeks to enhance investment returns by capitalizing on the volatility of securities in the target sectors. Securities are carefully selected and back-tested for long term performance using the Value Averaging investment methodology.

This model portfolio is intended to demonstrate that Value Averaging is particularly valuable during times of high volatility. Investment trades are done on a monthly basis.     

Click Here for the model

Inception: Dec/11

Target return: 15%

 

The Value Averaging Internet Strategy - The objective of this model is to apply the Value Averaging investment methodology to the largest companies primarily engaged in the internet industry.

This model portfolio is designed for investors seeking aggressive capital growth with significant volatility. Investment trades are done on a monthly basis.   

Click Here for the model

 

Inception: July/12

Target return: 12%

 

The Value Averaging Small Cap Strategy seeks to allow investors to cover a large breadth of small-cap and emerging markets securities using carefully selected Exchange Traded Funds (ETF) or Index Funds that have been back tested using the Value Averaging investment strategy for long term performance.

This model portfolio is intended for investors seeking long term capital appreciation with volatility. Investment trades are done on a monthly basis.   

 Click Here for the model

Inception: Aug/12

Target return: 10%

 

The Value Averaging Market Sectors Strategy seeks to invest across numerous market sectors such as energy, financials, technology, health care etc. Sector investing offers a way to invest in industries that may have prospects for above average long term growth. Certain sectors can even provide a hedge during market downturns.

This model portfolio is intended for investors with long term growth objectives.

Click Here for the model 

 

Inception: July/12

Target return: 10%

 

The Value Averaging Market Indexes Strategy seeks to enhance investment returns by offering investors broad exposure to different major equity market indices in order to capture broad market movement.         

 

Click Here for the model 

 

Inception: Jan/13

Target return: 15%

 

The Value Averaging Technology Growth Strategy seeks to enhance investment returns by capitalizing on the volatility of securities in the technology sector

This model portfolio is intended to demonstrate that Value Averaging is particularly valuable during times of high volatility.

Click Here for the model 

 

   

Click on the picture to read or purchase the book

Click on the picture to read or purchase the book

 

Article: 7 Twelve: The Core of “Core and Explore”

Video: Asset Allocation Building a Better Balanced Portfolio

 

Value Averaging

“It’s about as close to ‘buy low, sell high’ as you’re going to get without a crystal ball”.    Michael Edleson

 

 

 

 

 

 

 

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