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Focused 15 Investing

Model Portfolios of ETFs for High Return and Low Variability

Model Portfolios of ETFs for High Return and Low VariabilityModel Portfolios of ETFs for High Return and Low Variability

Building Blocks of Model Portfolios (No Transcript)

Building Blocks of Model Portfolios:

  • Signal sets
  • Signal set + Specific ETFs = Sleeve
    1. Loss-Avoiding Sleeves (important in the Diamond series of model portfolios)
    2. Relative-Resilience Sleeves (important in the Pearl series)
    3. Return-Seeking Sleeves (important in the Onyx series)

  • One or more sleeves = Model portfolio 

8 minutes  

Timing of Contributions and Distributions (Text Only)

The Plant/Wait/Harvest designations are part of "Strategy Two" described in the section below and in the video at the end of this section.  


IMPORTANT NOTE:   


The strategies discussed below are for the timing of your relatively infrequent contributions and distributions to and from your accounts invested in the stock market.  The strategies are not to be confused with trades that we will make among the ETFs of the model portfolio throughout the year. For most of your time using Focused 15 Investing, the strategies below will not be needed. 


As an example of contributions and distributions, those in their early careers making major contributions to their retirement accounts should consider these strategies for determining when to invest those contributions. For retirees, the strategies can be considered when you need to take money out of your account (distributions) for living expenses. 

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Although we know that we should buy low, many people become interested in the stock market after it has appreciated dramatically. Thus, they are more likely to put money into the stock market near the peak of a price cycle. 


While the Focused 15 Investing portfolios seek to avoid losses, we don't avoid them completely. This post lists strategies for moving money into the ETF model portfolio you have selected from the Focused 15 Investing publication. These strategies can help you avoid putting all your money in the ETFs at the top of a meaningful stock price cycle. 


Likewise, there is a tendency to sell after major decline to reduce any additional pain of falling stock prices. These strategies can help you avoid taking money out of your retirement account (distribution) at low points, or bottoms, of meaningful cycles. 


Assume you plan to invest $10,000 into an account that you will trade tracking a Focused 15 Investing portfolio. Put the $10,000 into your account, and then use one of the following strategies for investing all of that $10,000.


Strategy One: One-Third Every Three Weeks (Moving In or Out)


  • For the trades for the first Friday, enter in "Box #2 Cash" on the Shares-to-Trade worksheet 66%. The worksheet will then allocate 33% of your $10,000 to the ETFs in the model portfolio you have selected. 
  • Three weeks later, change the amount in Box #2 Cash to 33%. This will allocate the next one-third of your money to the ETFs. 
  • Three weeks after that, change the amount in Box #2 Cash to 3%. This will invest the next roughly one-third of your account. It also leaves a cash buffer in your account, which I suggest should be roughly 2 to 3%. 
  • When you want to take money out of your accounts, you can increase the allocation to Box #2 Cash to sell your ETFs. You can sell the appropriate number of shares of ETFs over a period of time. 


Strategy Two: Money Moving Seasons (Moving In or Out)


I indicate three different "seasons" for moving money based largely on the Micro Market Resilience Index (MRI) cycle. The seasons are Plant, Wait, and Harvest. 

  • Plant - This is when the Micro MRI is low in its cycle and likely to move higher. It is a good time to move money into the model portfolio, if needed. During a Plant season, hold off taking money out, if practical.
  • Wait - Hold off moving money in or out. This is a time to prepare for the next Plant or Harvest season, if needed. 
  • Harvest - This is when the Micro MRI is high in its cycle and likely to move lower. It is a good time to move money out of the model portfolio, if needed. During a Harvest season, hold off putting money in, if practical.

These are also discussed in the video at the end of this section.  


Strategy Three: Hybrid


For moving money in, move one-half of your money into the model portfolio in each of two Plant seasons. Since there are roughly two Plant seasons a year, this strategy takes the longest to fully invest the desired amount. 


For moving money out, move one-half of your money out of the model portfolio in each of two Harvest seasons. Since there are roughly two Harvest seasons a year, this strategy takes the longest to fully invest the desired amount.  


Please see this video for a general discussion of the Plant/Wait/Harvest seasons.

Naming Conventions (TEXT ONLY)

The Focused 15 Investing publications each have series of model portfolios. The names can be confusing but there is a structure we follow, described below. Also, remember that each model portfolio has a sleeve group (sg) number that stays with it regardless of the name. Please refer to the sg number when in doubt.

Main "Loss-Avoidance" Signal Sets:

  • "D4:"  Loss-avoidance signals for the Dow Jones Industrial Average stock index
  • "N7:"  Loss-avoidance signals for the NASDAQ stock index


Examples of "Relative Leadership"  Signal  Sets:

  • Russell 2000 (Small Co Stocks-IWM) vs Russell 1000 (Large Company Stocks-IWB)
  • Emerging Market stocks (EEM) vs Emerging Market Bonds (EMB)
  • US 10y Treasury Bonds vs US 2y Treasury Bonds


Names of the main ETFs driving risk and return within the sleeve:

  • Diamond: Uses the D4 signal set to avoid losses in the DJIA and makes use of ETF “DDM,” which is aggressive and gives roughly two times the return of the DJIA each day. 
  • Sapphire: Uses the D4 signal set to avoid losses in the DJIA and makes use of ETF “UDOW,” which is very aggressive and gives roughly three times the return of the DJIA each day. 
  • Zircon: Uses the D4 signal set to avoid losses in the DJIA and makes use of ETF “DIA,” which is less aggressive and gives the same return as the DJIA each day. 

"Wall of Worry" (Text Only)

An investment industry adage says, “a bull market climbs a wall of worry.” We’d like to elaborate on that adage with a few additional thoughts.

  1. A bull market climbs a wall of worry - This means that during a bull market (when stock prices move higher for long periods), the path to higher stock prices is a slow climb, and is never free from worry about company growth, stock valuations, the US dollar, trade wars, military wars, politics, etc. If one were to wait until the market is worry-free, one would miss the bull market. When all the worries are gone, the stock market is probably at a peak and will soon decline.
  2. After climbing the wall of worry, the bear market jumps out the window - This means that once a bear market begins, the market moves down quickly and without regard for the specifics of the situation. Historical data validates this; bull markets (slowly climbing the wall of worry) tend to last much longer than bear markets. 
  3. Valuation tells you what floor the market is on when the bear jumps - A high stock valuation means the market is on a high floor and has farther to fall.
  4. The MRI say when the jump is likely to take place - Resilience cycles, as measured by the Market Resilience Indexes (MRI), tell us when the market is ready to climb the next wall of worry or jump out the window. 


Consistent with the image of the wall of worry, we should expect a bull market to begin while there is still bad news in the marketplace. We should not wait for all the bad news to go away before becoming more aggressive. However, we need to focus on the MRI (Macro, Exceptional Macro, and Micro) and valuation measures at key points in time to be able to take advantage of the natural tendencies of bull and bear markets.  

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