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:
-
Determine Portfolio Objective
and Model
-
Identify the Market Sectors
-
Portfolio restricted to maximum of 9 sectors
-
Identify Securities in each
sector for the Portfolio
- Portfolio restricted to maximum of 16 securities
-
Determine Asset Allocation and
Weight Portfolio to Maximize Returns and Yield
- Target
sectors provide high return potential and
provide portfolio diversification
-
Back-test each security using
the Value Averaging software system -
Each
security must have at least 3 years of history
-
Use Value Averaging to
implement the Trading Plan
-
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!
The most disconcerting fact about asset allocation (diversification) is that it leads to the following paradox: A well-diversified portfolio will always be invested in something that does not do well! Put
differently, such a portfolio will almost always have both winners and
losers. In many ways, that’s the whole idea. Even so, it requires a lot
of financial discipline to stay diversified when some portion of your
portfolio seems to be doing poorly. The payoff is that, over the long
run, a well-diversified portfolio should provide much steadier returns
and be much less prone to abrupt changes in value.
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 |
