Building Blocks for Model Portfolios

Building Blocks for Model Portfolios

Focused 15 Investing model portfolios consists of one or more sleeves. A sleeve is made up of a) a set of loss-avoidance or relative leadership signals, and b) a set of ETFs to implement those signals.  See diagram at the bottom of the page.

I use the sleeves to create different model portfolios.  Diamond is based on two signal sets.

  Diamond
D5 Loss-avoiding signals for the DJIA, using ETF "DDM."                        Max wt: 70%
Relative leadership for US 10y and 2y Bonds, ETFs "UST" and "SHY."       Min wt:  30%
      When the D5 signal set indicates market is vulnerable, money moves to UST/SHY

I can use the same signal sets to create another model portfolio.  Ultra Diamond has a higher allocation to the D5 signal set.

  Ultra Diamond
D5 Loss-avoiding signals for the DJIA, using ETF "DDM."                        Max wt: 100%
Relative leadership for US 10y and 2y Bonds, ETFs "UST" and "SHY."       Min wt: 0%
      When the D5 signal set indicates market is vulnerable, money moves to UST/SHY

Loss Avoiding Sets
The D5 loss-avoiding signal set for the DJIA is the main signal set used for loss avoidance in the model portfolios. For a few portfolios, I use a loss avoiding signal set for commodities.

Relative Leadership Sets
I run a number of different relative leadership signal sets and sleeves. The relative leadership sleeves tend to perform better in trending market, and more specifically in the late stages of an ascending market. I use these sleeves to manage the degree of relative performance desired in the model portfolio.

While these sleeves do a good job of identifying which of the two investments will do better over the next few months, there is nothing in the signal set that avoids absolute losses. Thus, I use a stop-loss rule in the model portfolio to determine when the pair of assets is losing money on an absolute basis. Money is then taken from the relative leadership sleeve and placed in a low risk sleeve designed for this purpose.
  • US Large Company Stocks (Russell 1000) vs. US Small Company Stocks (Russell 2000) 
  • NASDAQ vs. US Small Company Stocks (Russell 2000) 
  • US Industrial Stocks (DJ Indu) vs. US Transportation Stocks (DJ Trans) 
  • US 7-10y Treasury Bonds vs. US 1-3y Treasury Bonds 
  • Emerging Equities vs. Emerging Bonds (USD) 
  • Rotation among S&P cyclical growth sectors: Info Tech, Cons Disc, Financial 
  • Rotation among S&P defensive sectors: Telecom, Cons Staples, Healthcare 
All of these signal sets and sleeves are updated each week and have track records. They can be used in model portfolios as needed.