Robo Mania

Drone Airlines

Hiring a robo-advisor makes as much sense as flying on Drone Airlines.  You don’t really need someone in the cockpit…until you really need someone.

This is the captain speaking: We have descended to a safer altitude by selling half of our positions in JKG & JKH

Blog JKH & JKG sales


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Do you really want to trust a Robot with your life?

The star in the following graph indicates that on 3/25/15 I increased the holdings in iShares Oil & Gas ETF (IEO) by 50%.  Also, as mentioned in the previous posting, on 4/1/15 I sold ACWX and invested the proceeds in AAXJ.  These actions are the antithesis of a Robot managed portfolio.  I would liken them more to the navigator interrupting the auto pilot setting to make adjustments based on new information from ground control.

I personally do not want to get on an airplane if no one is in the cockpit and rely on some robot to get me to my destination.  It may save me a few bucks but it is not worth the downside risk.

ps. The PRI portfolio value is currently $101,516 and therefore is temporally back on course for compounding at 8% annually.

Auto Pilot-Blog 4-6-15


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The World is Not a Safe Place, So Get Out!

There has been an earth shattering event.  No, I am not talking about a deal with Iran to play nice, I am talking about a new world banking system with head quarters in Asia and led by China.  Its latest members include our old friends, Japan and the UK. This is the biggest change since the Bretton Woods agreement established the World Bank, IMF and International Bank for Reconstruction, which provided the financial base for America to become the World Super Power.  Two books you should read to grasp what is going on in this new world order are: “The Accidental Super Power” by Peter Zeihan and, “The End of Power” by Moises Nasim.  In the old days, if America said, “Don’t do business with country X”, it was the kiss of death.  Those days are over.  We no longer have the power.  We are sharing it with some people who do not admire us and others who hold a grudge.  Below are the performance results as of March 31st.

PERFORMANCE First 2 months

We should have earned .6434% each month to compound at 8% annually.  That means the portfolio value should have been $101,290.94 on March 31st.  Instead, Graph 1 below shows it was $100,665.91, a shortfall of $625.03.  The market decline on the last day shown below did not help,  the PRI portfolio was only -.18% while the S&P was -.88%.  No, the short fall was due to Pursuing a 6% heading instead of an 8% heading; a 40% equity position instead of a 60% equity position.  However, given the fact that the world is worse off than when we started on February 2nd, with Iran supporting an insurgency against the Saudi’s, and Europe unwilling to get Greece to behave, I am content to stay the course.  The Sortino Index remains BLUE.

Graph 1

First PRI Graph 3-31-15

Graph 2 shows the performance of the PRI ALTS and Fixed income holdings.  Real Estate has been the best performer while gold has been  the worst.

Alts & Fixed 3-31-15

Graph 3 shows the performance of all PRI foreign holdings.  Asia X Japan has performed best.  We do not hold EPP but I put it in for comparison purposes.

PRI Foreign 3-31-15


The world has too many hot spots to want to hold it.  Therefore, I liquidated ACWX this morning and put the proceeds in AAXJ.

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PRI Initial Holdings

As Promised, below are the initial holdings in the PRI account for the current research project in Portfolio Navigation.  The SNI code color remains Blue.

Blog Initial Holdings


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Portfolio Navigation Update

We experienced the first air pocket on Friday, March 6th when the market closed off 278 points (1.54%).  The PRI account closed off .71%.  On March 10th the Dow was off 332 points or -1.85% while the PRI portfolio was off -.54%.   I knew we were in the clouds and I could not see where we were going but I did not know we would hit an air pocket.   However, as I explained in the previous posting, that is why I chose the alternative route of 6%.

The 7.09% cash position shown below in a clip from the Schwab account is the equivalent of saying; keep your seat belt fastened.  I am providing this update to help you understand the concept of portfolio navigation.  A recent article in the San Francisco Chronicle criticized Schwab for holding 6% in cash in their most aggressive ROBO portfolio and 30% in the most conservative.   The notion that cash is a cop out and not a useful tactical tool, is part of the old buy and hold mindset that worked so well back in the 50’s, when the NYSE and NASDAQ accounted for all of the daily trades.  They now account for less than 50%.  That is why I am testing this portfolio navigation strategy.  The good ‘ol days are gone and the strategies that worked well then are ill suited for today’s algorithm driven trading.  I believe portfolio navigation could prove superior to a Robot.  On March 29th I will tell you the asset allocation strategy this navigator started with on February 1st.

First air pocket 2-9-15

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Navigation Index 1st Month Report

On February 2nd 2015 I launched this index with funds in the PRI account at Charles Schwab and notified three trusted leaders in the industry of the following: I will test the efficacy of this index with my own money and post the results on my blog. I am purposefully starting at a very high level in the market to provide a public record of this research project. The Sortino-Index has five colored triangles that either point up, down or sideways.

The SNI Color Code

Initial Sortino-Index code was: BLUE (take profits and decrease equity exposure).

The Process:
Portfolio Navigation begins by plotting a course to a financial destination based on an original discount rate (ODR) that discounts the future payout to the present value of the assets. In this case I chose an ODR of 8%, which seems to be a popular choice for most DB plans and was often used in my past research.
Next I will consider the weather conditions on this flight path. The near term forecast looks bad (see previous postings on this blog for market outlook). The world is in a mess, congress and the president are at each other’s throats, and yet, the stock market is at an all time high. We may well be heading into a financial storm front. This is similar to the problem discussed in the current issue of Pensions and Investments magazine (Feb 23rd), “Corporations weigh derisking vs. re-risking.” Graph 1 below presents the Portfolio Navigation solution to this issue. As navigator, I will investigate an alternate heading of 6% that might provide a reasonable chance of getting back on the 8% ODR course in a year or so.

Graph 1

ODR Graph 1B

The blue curves in Graph 2 below represent the distribution of returns for the totally passive PRI portfolio on the Charles Schwab platform that replicates the Sortino-Index. The black probability curves represent a combination of active and passive managers which, by my calculations, are superior to the totally passive distributions for both the ODR and AH cases. However, I do not want to confuse the active vs passive debate with the efficacy of portfolio navigation. Therefore, this research project will focus only on the passive portfolio. The Alternate Heading 6% distribution shown in graph 2 not only has a mean ( i.e. expected return) of 8.7%, it has the potential to earn 3% more than the AH of 6% (i.e., the upside potential is 3% + 6% = 9%).

Graph 2

First month SNI Graph 2

Comparing this with the 8% ODR graph (not shown) indicates I am not being compensated for taking additional risk. Therefore, I chose to make the initial investment in accordance with the 6% AH. The performance results for the first month are shown below in Graph 3 and indicate we are above the 8% ODR course at this time with 50% less equity exposure than the 60/40 mix shown in the color code index at the top of this posting. It is important to note that the PRI optimizer does not just minimize the risk of falling below 6%, as derisking would. It maximizes the potential to exceed 6% relative to the risk of falling below 6%.

Graph 3

First month SNI Graph 3

I believe performance should be measured relative to where you are on the path toward your goal, not relative to the S&P index or any other index. The goal is a specified payout. The investment objective is what you have to achieve in term of a risk-return trade off in order to accomplish your goal. Ergo, the investment objective for PRI is to maximize the potential to exceed 8% relative to the risk of falling below 8%. Graph 4 is an illustration of how performance should be presented. The star would represent the PRI portfolio’s current location. As Dr. Merton said in his HBR article (see previous Crisis posting), you need to know how you are progressing toward the pay out. If you are on or above the line, that’s good. You are fully funded.

Graph 4

1st mo-Performance-graph 4

Blog-Sortino Navigation Index-1st monthly performance report

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New Index

The SNI Color Code
I am pleased to inform you of a new research project I intend to pursue. I want to explore the possibility of developing a new index to help investors gain some insight into when it might be advisable to increase or decrease equity exposure in their portfolio. I believe the old buy &hold strategy of the 20th century are passé and that the concepts of Portfolio Navigation and PMPT might provide a better way of dealing with the increased volatility of the 21st century.
To that end, I have decided to use the funds in my PRI account at Charles Schwab to develop the “Sortino Navigation Index (SNI).”

The SNI is similar to the airport security warning system in that there are five colors to signal different perceived degrees of risk. The Black and Blue triangles point down. The black will signal 90% in fixed income. The Blue will signal somewhere between 39% and 89% in fixed income; the exact percentage will not be announced for 30 days after executed. The Green triangle faces right and will signal 60% in equities and 40% in fixed income. The Orange and Red triangles point upward. The Orange will signal between 61% and 89% in equities; the exact percentage will not be announced for 30 days after executed.
This is a research project, but unlike most research projects that only publish results if they are good, this will be conducted in real time for all to see and judge. The purpose is to see if the concepts of Post Modern Portfolio Theory and Portfolio Navigation that I developed can be employed to achieve the goal for an investor whose investment objective is to maximize the potential to exceed 8% relative to the risk of falling below 8%. If there is evidence to support this idea, I would hope the SNI might prove useful to investors.

• This is a very different strategy than that offered at Sortino Investment Advisors LLC (SIA). It will not move investors between five different portfolios as their DTR changes. Furthermore, the SNI, and therefore the PRI portfolio, will be very much different from any portfolio constructed at SIA.
• Also, no active managers will be used in this research project, although the SIA optimizer has provided evidence that active managers can add value. This will focus attention on the efficacy of portfolio navigation instead of the active versus passive debate.

The monthly account report from Charles Schwab will be used to document the original portfolio composition on 2/2/2015 but will not be disclosed for 90 days. The color chosen for the initial portfolio will be announced on March 29th (my birthday).

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