Creating my Retirement Portfolio – 3

First let me make a correction on a comment I made from “The Ivy Portfolio” by Faber and Richardson. The authors suggest market timing using a 10 month moving average applied instead of the 8 month that I mentioned. The authors also stated that it was not critical whether it was 8, 9 or 10 etc. Notice that a 10 month moving average is approximately a 200 day moving average on a daily chart.

If we keep our stock – anti-stock mix to an even level or perhaps even skewed a little more towards stocks, and then use market timing to manage each live stock, ETF, fund etc. then it is more likely that we will have less drawdown and a smoother equity curve. I fear drawdown, as it is the strongest force that takes us away from our game plan.

I am considering looking into getting a “portfolio back testing software” for Metastock if available. I think there is a program called Tradesim that enabled that. I will have to check. That would certainly make my work a lot easier. With Metastock, I can check individual stocks using back testing with trading systems but I am unable to check a portfolio consisting of multiple stocks where each has a trading system on it.  

Back to the portfolio. In the Ivy Portfolio the simplest version is to put money 20% each into the following

Domestic stocks, foreign stocks, Bonds, Real Estate and Commodities.

The asset is long in itself when above its 10 month moving average; otherwise the money is in T-bills. The portfolio is re-balanced monthly. The authors demonstrate a surprisingly smooth set of results when tested from 1985 to 2008 with annualized returns of 11.5% with a Sharpe Ratio of 0.79. Worst year was 1.71% in 2002. Max drawdown -9.7%. Very impressive. .

The key is “do not lose, do not lose” and I could not argue with that as it is my mantra also. But I still do not feel comfortable with even a 10% drawdown, so the search for something a little smoother. More next time.