For First Timers (Hi Gary)

This blog was not designed to sell you anything, so it is Not easy to see what I have been up to since I retired.  If this is your first time at PMPT.ME, I suggest you start at the video at the far right with a picture of me.  That will explain my approach in 3.8 minutes.  Then go to the bottom of the “Recent Posts” column and click on “Alert”, this will give you a picture of the “Sortino Index” color code and how I propose to advise investment professionals on how cautious they should be at any point in time based on proprietary statistics developed at PRI.  Then, take a look at the graphic below:

PRI vs Schwab 11-20-15

The blue shaded area tracks the S&P 500 since this current research project started on February 1st 2015.  The Alert posting you just viewed explains why we sold all of 8 ETFs that compose the S&P 500 and most of the 9th i-Shares JKF ETF in March.  However, when the Market dropped 10% in August I did not jump in.  This is not a market timing tool!  The statistics did not change until Friday the 13th of November.  That is why I then increased equity to where the DTR 6% port folio asset allocation is and why the Sortino Index was changed from the color BLACK to the color BLUE.

The purpose of this research project is to see if I can use portfolio navigation to manage a single portfolio to maximize the potential to exceed 8% relative to the risk of falling below 8% over a 5 year planning horizon.  The asset allocation will be allowed to vary between 10% in equities to 90% in equities as the DTR calculation varies between 4% and 12%.  If you want an in-depth study of this methodology, watch the 5 minute video underneath the first video you watched.

How am I doing so far?  A lot of action and a lot of commissions and the portfolio is down a little over 3%.  The PRI Portfolio is over weighted in short term fixed income ETFs (FLOT, GSY & CSJ)  relative to the Schwab model and underweighted in Large Cap Growth.  Yes, that is the only ETF that beat the S&P 500 so far this year.  I told you this was not a sales pitch.

This research is being carried out in real time so everybody can follow each step of the project, warts and all, as I attempt to do something innovative that might help small investors retire with dignity.

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Unforeseeable Events

In keeping with my last two postings I increased the equity holdings on Friday the 13th by adding 11% in U.S. equities and 3.2 % to Foreign equities.   At that point the market was down about 500 points from its recent high.  After the close we all learned of the terrorist attack in Paris that killed or injured hundreds of innocent citizens.  Nothing in my research could have predicted that.  Nor could it have predicted the Saudi’s dumping oil on the market to drive U.S. oil companies out of business… right after I took a position in oil.  As a result, the portfolio is currently down a little less than 4% since February 2015.

What was predictable was that the market was and still is overpriced in terms of the Upside-potential ratio if you go above a DTR-6 asset allocation.  This calls for maintaining a healthy short term fixed income position.  After these purchases the PRI portfolio still has 54% in fixed income, including 3.4% in cash, which is consistent with the DTR 6% portfolio.  Eventually I intend to increase equity to the DTR 8% level.


Friday the 13th purchases



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Sortino Index Turns BLUE

I expect congress to challenge Obama early in the week in the lead up to the dead line on November 12th.  That was for the total budget.  How it can be spent must be decided by December 12th.  That will be the time to resume the DTR 6 asset allocation.  Every country is priming the pump again, so let’s join the party.

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The Learning Curve

Research involves recognizing flaws in the methodology and correcting for them.  When I saw the flaw in the Sortino ratio in the late 1990’s, it led to the development of the Upside Potential ratio that considered the entire distribution instead of just the moments: the mean and the partial moment (downside deviations).

In the previous posting (below) I made some errors that are now corrected in BOLD font.  That happened because I no longer have my colleague Lisa Leonard to look over my shoulder.  More importantly, I subjectively overrode the models which called for investing additional funds in either the DTR 6 or DTR 8 allocations.  The subsequent market rise proved the models were right and I was wrong.  Also my choice of China over the U.S. congress was wrong.  This will require me to revise the methodology to minimize subjectivity by devising a set of rules based on comparative statistics.

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Sixes and Eights

This is the name given to a crap game played in American ghettos. Do you choose 6 or 8 and roll the dice to see if you won?  Below are the updated DTR 6 and DTR 8 portfolios.  I started this research project 9 months ago with the stated goal of compounding at 8% over the next 5 years but chose the DTR 6 portfolio to begin with out of concerns for beginning this project when the market was at an all time high.  The portfolio is currently down about 3%.

Sixes & Eights

The DTR 6% portfolio shows that while the portfolio has the potential to exceed the DTR by 2.9% (a potential of 8.9%), the upside potential ratio is 9, not .9 as previously stated. In other words, the portfolio has 9 times more upside potential than downside risk.  That is if you are willing to hire active managers.  I have restricted the investments to passive ETFs, which have 2.4 times as much upside potential as downside risk.

Then why not bet on eights and construct the DTR 8 portfolio now? Because, the average downside risk more than doubles with the passive portfolio from -1.7 to -4.5 and the upside potential ratio declines from 2.4 to .9 (10% more downside risk than upside potential).

Nine months ago most active managers were unable to beat their style blends. Now, some are showing high DTR alphas; but when you put them into the portfolio optimizer they collectively only add 1.1% for the DTR 8 ACTIVE portfolio and .7% for the DTR 6 ACTIVE portfolio.  There is no DTR alpha on passive portfolios.

It’s a crap shoot and I’m not playing.  At the last posting everybody hated China and the U.S. congress was dysfunctional.  Now China is the darling and congress is united and ready to play nice.  I believe in China but not yet in congress.

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Mirror Mirror on the Wall

Who is the fairest of them all?

Mkt vs China 9-28-15

  1. China did not suffer in the financial crisis Wall Street created.  The U.S. and Europe are still trying to dig them selves out of the wreckage.
  2. The U.S. owes $Trillian’s while China has $3Trillian of foreign currency.
  3. The U.S. can’t invest in the stock market but China can and has invested $Billions.
  4. Everyone believes China will become the greatest economic power in the world by 2020.
  5. The U.S. spends billions on wars while China spends nothing.
  6. China’s leaders were trained as engineers and scientists so they don’t know how to govern and are corrupt while ours were trained as lawyers and…
  7. China’s leaders put their country above political gain.  U.S. politicians put our country _____.
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Cyber wars and Algorithms that trade $billions based on how atoms collide with one another in metals conjures up the scary world portrayed in Aldous Huxley’s “Brave New World.” Some claim that the solution is to hire your own brainless robot to pick winners from their inventory of ETFs.

This current research project is searching for a better solution. One problem with my current approach is the exclusive use of ETFs. I have known for some time that ETFs are the favorite playground of this new breed of traders with the result that the volatility is 2 or 3 times as much as the S&P 500. I have lost a few battles during the past seven months of this research project resulting in a slightly less than 5% loss in the account since February. The 9% holding in SE Asia minus Japan and the 7% in Oil are worth questioning. The 71% in short term fixed income and cash speak for themselves. The approximately 18% loss in Asia compared to the 45% decline from the peak in the Chinese market is due to the fact that it was purchased before the big run up. Do I wish I had an algorithm that would have gotten me out at the top. NO! This is a five year investment strategy, not a 20 millisecond trading scheme.

Holdings 9-23-15

I believe China is doing a better job of managing their economy than market gurus give them credit for.  If I didn’t already own SE Asia I would be a buyer.  Oil is another story.  I am watching it closely.  Eventually I will be moving toward the 70/30 asset allocation that an 8% DTR calls for.


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