The new recovery portfolio version is labelled:
- Diamond-Onyx 35-65 Mix (Main) 2020 (sg218.2)
Note that the sg number for this new recovery portfolio ends in “.2” (point two) to distinguish it from the model portfolio “Diamond-Onyx 35-65 Mix (Main) - sg218” that it is based on. Also note that the portfolio name ends with “2020.”
Another feature of the new version is the omission of the ETF SHY (US Treasury 1-3 year bond ETF). Instead of trading SHY, one simply holds that same amount of money uninvested in one’s account – the amount being indicated as “Cash (no ETF)” in the weekly target weights. This omission of SHY allows the addition of the NASDAQ-linked ETF without increasing the number of ETFs.
Below is a diagram that compares Diamond-Onyx Mix (sg218) and the new 2020 recovery (sg218.2) version.
Why NASDAQ Was Not Used Earlier
A reasonable question is why NASDAQ was not included in the original Focused 15 Investing model portfolios. In the period 2007 to 2010, when the MRI approach was developed, NASDAQ’s history was just 36 years (beginning in 1971) and much of that history was dominated by the internet and technology boom of the 1990s and the following bust in 2000.
The MRI did a reasonable job navigating that boom and bust, but it was just one major cycle in the historical record, and therefore I was not able to conclude with confidence that the MRI approach was successful for NASDAQ in general. By comparison, the DJIA has usable history back to 1918 and has had many booms and busts during that time. The MRI did a good job of navigating them, which gives greater confidence in the DJIA signals.
But now, we have had additional valuable experience with the MRI and NASDAQ. Not only have the MRI handled the NASDAQ well for the period prior to the 2007-2009 financial crisis, but also the years though 2020 (thus far).
When we are well past the pandemic, we may see that the there is a place in the main portfolios for a NASDAQ ETF, or we may find that we can revert to using just DJIA. That decision, however, comes later – perhaps many quarters from now.
Additional Thoughts on SHY
In my own investing and from discussions with subscribers, I see that people favor trading fewer ETFs. As you may know, many of the model portfolios use the ETF SHY, which is for 1-3 year Treasury bonds, and is our most conservative ETF. From 2000 to 2010, SHY had an annualized return of 3.9%. This is a good return for a very low risk investment. However, from 2010 to 2020, SHY had an annualized return of 1.2%. The Fed has recently said that it will keep interest rates low for the foreseeable future and this decision means that the return of SHY may stay low. For us, it may not be worth the effort to SHY for the next few years. Thus, the new portfolio does not use SHY – instead the same amount of money is simply held in your account uninvested. This amount is indicated as “Cash (no ETF)” in the target weights. If interest rates move higher, we can switch back to using SHY.