Success Factors

CPM Investing LLC - Research Publications

ETF Model Portfolios for High Return and Low Variability

1. Success Factors - Best Practices for Users

Over the years of publishing Focused 15 Investing, the following have emerged as best practices that help users achieve better performance:

Check the publication every week and trade when target weights change. Checking takes only a moment. If the change in target weights is small, say less than 2%, trades can be skipped.
Tolerate clustered trades. By clustered trades, we mean when the target weights call for buying shares of ETF "XYZ" one week, selling some of them the next, and perhaps even buying them again in a few weeks. Clustered trades don’t mean there is a problem with the computer models. Instead, it means that the market dynamics are shifting or there is some ambiguity about future direction. Our past attempts to reduce clustered trades have resulted in lower returns.
Focus on the changes in your “Total Account Value” rather than individual holdings (e.g., ETFs). When evaluating the performance of your account, focus on the entire account, particularly if you are using a portfolio with ETFs that magnify (i.e., “lever”) the daily returns (and volatility) of the underlying indexes. The ETFs “DDM,” which magnifies the return of the DJIA by two each day, and “UDOW,” which magnifies the DJIA by three. Your “Total Account Value” will typically be far less volatile than these individual levered ETFs. Be aware of the ETFs you hold but do not look at their gains and losses each week.
Strive to use all the ETFs in the model portfolio. Portfolios are engineered to produce a certain risk and return profile. Some ETFs might seem to produce no benefit for several quarters but then have strong returns when the other ETFs falter (note 1). If you find some model portfolios are difficult to implement; please let me know, perhaps I can address the issue.
Use the “Monthly Trading” portfolio when trading is inconvenient and you prefer not to be in cash. This portfolio trades just once a month (usually the Friday after the first Wednesday of the month). The Monthly Trading portfolio is a recent addition to the publications and is designed to have a low trading frequency but still produce positive long-term returns. It is often a better option than holding only cash in your portfolio or the ETFs without trading them as needed.

Note 1: There will be changes to the model portfolios over time as the markets change and as subscribers become more comfortable trading their accounts. Of all the ETFs we use, our use of bond ETFs is likely to change the most over time. Bond yields have declined for decades and they may move higher over the coming years. If they do, we may change how we use bond ETFs. Also, there are likely changes in how we use NASDAQ-linked ETFs and commodity-linked ETFs as we move through long economic cycles. Subscribers prefer model portfolios with fewer ETFs, and adding Commodities and NASDAQ temporarily to the portfolios is the most effective way to accommodate these ETFs.

ETF Model Portfolios for High Return and Low Variability

1. Success Factors - Best Practices for Users

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