The Roller Coaster Market Ain’t Over

                                      Where did PMPT say we were in July 2018?

The graph below shows the effect of increasing equity above 60% (left graph).  The upside potential ratio for the active portfolio with a 6.2% allocation to VGT, the Vanguard Growth Technology ETF becomes negative, i.e., there would be more downside risk than upside potential. By increasing equity 10% you would incur 30% more downside risk than upside potential.  The passive portfolio (no active managers) would fair even worse, it would drop from an even trade off to 50% more downside risk than upside potential.

The question is, does the theory developed at PRI, before the tech bull market and the Trump election, still provide useful information? Has risk increased or decreased in the past decade?  PMPT said you are not getting paid to take more risk than the 60/40 market mix.  If you have exceeded that magic mix of bygone years, put some stop loss orders in to reinstate a 60% equity position.

It turns out, that was good advice then.

What Now?

As stated in the  Article below I started investing in equities again in November and increased equity to 90% in late December.  I now have a 3.5% profit in my portfolio after   I got stopped out of NVDIA for a small profit and sold CRM for a 20% profit.

What Comes Next?

Next week’s meeting with China should provide a continued rally.  I will raise my stop loss orders accordingly.  Why? the Federal debt, the corporate debt, the junk bond debt, the BBB debt that is really junk, the money market debt that is full of junk.  Proceeds have gone and will continue to go into short term treasuries.  It’s a beautiful day for a family drive in our Tesla to enjoy the good life.

About Frank Sortino

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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