It Ain’t Over ’till it’s Over!

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Sortino Index told ya so May 15th!


What happened to the PRI Portfolio?

PRI Portfolio Monday 8-24-15.B

It was down 1.94% while the Dow was off 3.57% and the S&P was off 3.94%.  WHY is it down from the initial $100, 000 investment?  Partly because of the position we have in Asia X Japan and partly because of the costs of buying and selling all the ETFs we reported below.

                                             Table 1

  1. 4/1/15 sold ACWX and invested proceeds in AAXJ.
  2. 4/10/15 sold approximately half of JKH & JKG.
  3. 4/24/15 sold half of VWO.
  4. 5/15/15 sold remainder of VWO,JKD,JKE,JKG,JKH,JKI,JKJ,JKL

Unlike Jeb Bush, I will admit I would not have bought AAXJ in February if I knew what China was going to do last week and how the world markets were going to react.  PMPT can not predict these things.

For the previous posting cited in heading for the Sortino Index, click on the May 15th posting under the Video on the far right hand side of the screen titled: Alert.  It is the 5th recent posting under the videos.




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PRI 6 Months Performance

After 6 months the PRI portfolio should have been up 3.9%. Instead it is down 1.23%. That means for every $100,000 invested you would be down $1,233. Rebalancing would call for a return to the original portfolio designed to return 8% for the year. Portfolio navigation started out with a portfolio designed to return 6% and steadily increased the fixed income component to 77% as of today.  Given the big picture below, what should the navigator do?

Navigation 5 yr performance

If the planning horizon was 1 year he would increase equity to try to earn 9.3% in the next 6 months. But the planning horizon is 5 years, not one year. Therefore, there is no need to panic. We did reduce the large cash holdings from the sale of equities in April and May (see below) and took a 5% position in a high yielding REIT on July 31st. The color coding for the Sortino Index is still black. Time will tell if Portfolio Navigation is superior to rebalancing (see second video at the far right of the screen) and if reducing equity for the reasons explained below makes sense.

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Portfolio Changes up to 6/1/2015

Below are the initial holdings in the PRI account for the current research project to test the efficacy of using PMPT to manage a single portfolio.  The investment objective is to maximize the potential to exceed an 8% DTR relative to the risk of falling below 8%:

Initial Positions

As market conditions deteriorated and the proprietary PRI statistics caused the Sortino Index to turn black on our May 15th posting we became increasingly defensive by reducing equity exposure:

                                                         Table 1

  1. 4/1/15 sold ACWX and invested proceeds in AAXJ.
  2. 4/10/15 sold approximately half of JKH & JKG.
  3. 4/24/15 sold half of VWO.
  4. 5/15/15 sold remainder of VWO,JKD,JKE,JKG,JKH,JKI,JKJ,JKL

The result was to move from approximately 45% in fixed income (CSJ,GSY and FLOT) and 6.7% cash to an additional 15% in cash by June 1st.

Blog posting 7-8-15

What was happening during this period to U.S. Equities ?

(See Table 1 above for corresponding numbers on Graph)

PRI US Equity

What was happening to Foreign Investments

PRI Foreign & Fixed

Note:  While we purposefully avoided holdings in EPP and ACWX we did invest in AAXJ and added to it at #1.  We did sell all of VWO near the highs for this period.  I have tried to document the reason for these changes in previous postings.  The best holding during this period was the fixed income positions constituting 45% of holdings.

It is worth noting that ADRA has far outperformed Asian stocks and FGFLX has far outperformed European stocks but I have chosen not to invest in mutual funds that I recommended elsewhere because I do not want to introduce the active manager abilities of PMPT into this research project.

I believe these actions have been the antithesis of a Robot or a buy and hold strategy.  However, performance should not be measured relative to either of these strategies.  Performance should be measured relative to the DTR of 8% and we are currently slightly below that line .








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I regret to inform you that I have found it necessary to dissolve Sortino Investment Advisors LLC.  I will continue to work on my research project at PRI and will keep you informed as work progresses.  I intend to license Jim Kaffen and Ron Surz, as well as Lisa Leonard, to use the PRI software to construct and manage portfolios.


Frank Sortino

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ALERT! Sortino Index is Now Black

  • All high flying domestic ETFs return to base!

The SNI Color CodeThis morning all domestic equity ETFs flying higher than the S&P 500 were liquidated in the PRI account at Schwab.  Why?  The Upside Potential statistic Dr. Hal Forsey and I developed with Professor Robert van der Meer at Groningen University, The Netherlands, is forecasting an average downside return of -10% or more for all 9 Surz U.S. equity indexes There are also these reasons for concern:

  1.  China has started a competitive financial system to the one the U.S developed at Bretton Woods after WW II. It is called The Asian Infrastructure Investment Bank (AIIB).  Now that Japan, the UK , Brazil, Russia, India and 50 other nations have joined the AIIB against America’s specific instructions, the AIIB may become the tool that will eventually force us to live within our means. Former Secretary of the Treasury, Larry Summers says on, “This may well be remembered as the moment the U.S. lost its role as the underwriter of the global economic system.” He goes on to say, “We cannot expect to maintain the dollars primary role in the international system.” That does not bode well for America’s future.
  2. Governments around the world are debasing their currencies in an effort to bring their economies back to life and the patient is not off of life support after seven years. We’ve stopped talking about our spendthrift government but the problem is now $18 trillion and growing. Professor John Taylor at Stanford University in his blog, Economics One, says “The Fed’s policy of holding the fed funds rate at 1% in 2003 when inflation was 2% was a key factor in the 2008 financial crisis.” Here we are again. Only this time the Fed funds rate is 0%. On May 6th,, Federal Reserve Chair Janet Yellen said, “even though risks to financial stability are moderated, stock prices are still quite high right now”. We believe these warnings should be taken seriously.
  3. ETFs are a great innovation for investors but John Bogle says they are being misused by speculators and high speed day traders. Many have developed computer programs that few if any understand. Off board trades already account for more than 50% of the daily volume of trading and are feeding the current investment frenzy for ETFs. According to the Investment News Editorial, April 27, 2015, the 2010 “flash crash” may have been initiated by Mr Sarao’s spoof trades in the S&P 500 futures contracts but were “worsened by computerized high frequency trading programs.“ This may be an unrecognized risk of ETFs.
  4. Yale University’s Robert Shiller, who called the 2007 top in high tech stocks, says his adjusted price-earnings ratio for stocks is again way too high at 27 times earnings. He now believes the stock, bond and real estate markets may be a bubble waiting to pop. However, there are those like Matt O’Brian at the Washington Post who say, “sure, stock prices are elevated but so are earnings and really, where else are you going to put your money?” Mr. O’Brian’s kind of reasoning scares me!

I close with these words of wisdom from Professor Robert Schiller: “Those who predict avalanches look at snowfall patterns and temperature patterns over long periods of time before an actual avalanche event, even though they know that there may be no sudden change in these patterns at the time of an avalanche. It may never be possible to say why an actual avalanche occurred at the precise moment that it did. It is the same with the dramatic movements of stock markets and other speculative markets.”




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PRI 1st Quarter Performance

This is the way we believe performance should be shown.  The graph shows where the fund is relative to the investment objective of compounding at 8%.  My thanks to Ron Surz, President of for creating this graphic for me.

Performance 3

If an investor started when the fund began on February 1st they would be down $58. 55 for every $100,000 invested.  The asset allocation at the end of the 1st 3 months of operation was 54.8% in short term fixed income.  The fund invests only in ETFs.  Where the fund is relative to the S&P 500 or any other index is irrelevant.  The goal is not to beat the market.  The goal is to achieve a payout of 8% compounded.  The investment objective that supports that goal is to maximize the potential to exceed 8% relative to the risk of falling below 8%.  The investment policy is to solve for the optimal asset allocation of active and passive managers based on current market conditions.

Our quantitative statistics indicate the stock market is over due for a correction.  If and when that happens we intend to employ portfolio navigation to increase equity exposure.

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