Monday, December 2, 2013

Testing Weekly Update Update

All right, so here it is, this is my updated weekly moving average chart.

So, the 50 SMA and price action will act as leading indicator for me.

The 200 SMA and price action will determine 50% of my asset class allocation. If it's above, buy and hold. If it is below, sell and wait.

The 50/200 SMA Golden Cross will be my second trigger, which the other 50% of my asset class allocation will be based on. Same rules as the 200 SMA price trigger, just a different independent method.

Lastly, the slope of the 200 SMA will be my guide in the tell me what the longer term trend is saying. If it has a high gradient, I might give my triggers more breadth before execution. If the gradient is very flat, then I will respect the triggers very closely.

Now, let me move on to explain why I have expanded my asset classes, shown below:

So, as you can see, I have 4 main groups of equities. US and EAFE equities are quite weird, because it is split between 2 global equity dividend funds. However, I find that both these funds are dissimilar enough from each other, while having a nice geographical spread amongst the world's developed economies. USA is under 40% for both of these funds, which I like, because I think people give the US markets way too much credit, and I don't particularly see fantastic returns for the market in the near future.

Asia ex Japan and EM equities also engage in dividend strategies. The reason for this is, I've written a few posts before. I'd just like to point out that I have an 8% allocation in each of these 4 geographical equity groups, accounting for 24% of my allocation.

After that, I have real estate in the form of REITs. I have also written about why I see REITs as a form of real estate before. I have decided to split up the weightage of this asset class, and give 4% to a global REITs fund, and 4% to the local REITs industry. Honestly, save for a few select cities in the world, I find that property prices in Singapore very much stable, and the REITs market being grossly undervalued compared to global counterparts.

Following that, I have the credit sensitive bonds. Global HY bonds comes in 2 flavours as well, mainly because of the geographical split within the funds. The Legg Mason fund is quite heavily US weighted, while the Templeton fund has no holdings in the US at all. Although the Legg Mason fund seems to be outperforming the Templeton fund now, the Templeton fund has lower interest rate risk, and I believe it will hold up much better than the Legg Mason fund, since it is less closely tied to the US economy.

Global Corporate bonds has been switched out from Schroder to JPM mainly due to the lower subsequent rebalancing amount. The 2 funds are actually very similar. However, I feel more comfortable with the added flexibility of a smaller top-up sum required. These bonds although investment grade, will likely still be affected by economic cycles. More research has to be done before I decide if I will time this asset class like the rest. EM bonds are wildly volatile, and regardless of what the macro factors say, I will simply just be following the technical moving average rules that I have set for myself above.

Finally, we have commodities, which are 8% in a basket, and 4% in gold miners. Although these 2 asset classes seem to be the most hated now, it is very strange to me that I find both of these as the 2 most attractive classes to me. For both these asset classes, I have a strong belief that the downside risk are largely muted, with very highly upsides. In fact, these 2 asset classes maybe make me break my rules and over allocate in them, because that is just how much of a conviction I have for them.

The last 3 funds, US bonds, Foreign bonds and TIPS, they are all relatively stable asset classes. Not much volatility, so not much benefit of timing the market. For these 3 asset classes, I will either be diligently topping them up to the correct portfolio weight, or I might actually time the entries to make it more favourable, though like I said, the differences should be quite muted.

All in all, I find that this exercise has helped me reevaluate a lot of my processes, improved it, and will help me in the future. I am quite adamant now on NOT adding anymore asset classes or funds at all into my portfolio. I personally feel that what I currently have is a pretty robust mix of asset classes, with clear defined rules. If I follow these rules, I will actually be quite happy to be able to clock in yearly returns of 6% with the utmost minimum in total portfolio drawdown. However, given the fact that seemingly a large portion of the portfolio may be sitting in cash waiting for a signal, this might actually be a drag to true overall portfolio returns.

I am currently toying with the idea not to hold so much dry powder in cash. Specifically, not to fund all the asset classes with available cash to take advantage of the market. Instead of having up to 13 cash pools, I think cash pools will be only up to the current top 8 asset classes, since on average, only 70% of the asset classes should be signalling an invested position. This will reduce the amount of redundant cash just sitting idle in the portfolio, thus optimizing returns. However, until I can figure out a proper, mathematical and systematic way to do so, it does no actual harm to my overall returns on all my assets to hold cash, since I do not have any other productive forms of investment.

The only other investment that I have now is still in the works, which is to follow the S&P market signals on a leverage of 2. I am now building up a significant cash fund, adding into the fund monthly, waiting for the next signal to be given. Once the signal is given, I will be putting all the money in the fund into this and continue building another cash position to be deployed with the signal changes.

So, currently I have 2 investment strategies, though I am thinking of a third. The first will of course be my hedge fund, which is going on a diversified, equal weighted mix of asset classes timed with moving averages. The second is my levered S&P market timing system. Lastly, I am thinking of long-only contrarian funds that have a high chance of producing significant upsides within the next 2-3 years, so that I can liquidate these performing investments, and use them to buy undervalued investments then. Like I have said, I personally find that gold miners and commodities are in a extremely promising position now.

All right, enough with the rambling. To cheer myself up, here is the Nov update from the Capital Spectator with the performance reviews of his major asset classes. After seeing that his GMI-EW has only performed 3.3% YTD, I don't feel too bad about how my current portolio is doing, which is about down less than 2%. Actually, when I only had 2 funds, I was down a massive 4% then. I think this just shows how effective diversification is in reducing portfolio volatility. Now, just gonna get them returns!

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