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December, 2018

BALANCED RISK
by LARRY

Each of the assets in this hypothetical portfolio has above average volatility within its investment category, yet when a roughly equal amount of purchase is made in each, the total portfolio winds up having lower risk of loss of principal than is true for the equity market as a whole. Backtest results are limited for these specific assets, yet as kinds of holdings, health care, emerging markets, long-term Treasury securities, S&P 500, and Small-Cap, an equal mix of each has tended to produce returns of 12% or better annually (better than the approximately 10% total return of the S&P 500 since the end of World War II), though with less downside in negative markets.


Every asset, it is suggested, would begin as 20% of the total, yet with each added only when that asset is down 10% or more from its 52-week high. (Otherwise, funds used for purchase would be kept in one or another kind of reserves, for example, in a money market account, till all the funds have been used in buying the requisite assets.) Once all five have been added with lower prices relative to their 52-week highs, the entire portfolio would be rebalanced (and restored to the original 20% of total level) annually or when any one of the five is at least 50% higher than any one or more of the other constituent parts of the portfolio, whichever first.


As of this writing (12/17/18), the following assets meet the initial buy criterion, being 10% or more below their 52-week highs: EMF; RSP; VHT; and VIOO. Historically, they should each return to breakeven within about two years or less, though that is of course based on averages. Thus, if things play out again as has usually occurred in the past, each should add about 5% or more per year to the asset's typical performance. VGLT was down over 11% from its 52-week high within the past few months, but is now only 5.80% below its top one-year closing price, so the strategy would call for keeping extra money market funds available and buying VGLT shares later, once they again meet the 10% (or more) down criterion.


FundTicker
Symbol		Recent
Price		Percentage
Down*
Invesco S&P 500 Equal Weight ETFRSP$93.6713.73%
Templeton Emerging Markets Fund, Inc.EMF$12.8328.44%
Vanguard Health Care ETFVHT$161.6110.75%
Vanguard Long-Term TreasuryVGLT$73.375.80%
Vanguard S&P Small-Cap 600VIOO$127.6722.11%
(*from 52-week high)


I would keep a core of shares in each, for instance, a minimum of 60% of the number of shares initially purchased, even if an asset has surged ahead of the others and so needs to have shares sold off to get it back closer to the ideal balance of 20% each. Similarly, I would not allow any single asset to fall to less than 60% of its beginning amount. Suppose the total portfolio totals $50,000, with $10,000 in each of the five assets, but then people become frightened of what will happen to health care in the U.S., so the market value of VHT falls to only $5500. In that case, even if a year had not yet elapsed or none of the other assets happened to be at least 50% higher than VHT, I would rebalance to bring VHT back to at least $6000.


The overall strategy assures shares are purchased when the asset is generally undervalued, thus buying low, and shares are also sold when they are relatively up in market value, thus selling high.

Another advantage to the approach is that it does not require a great deal of trading. Most of the time, the assets will tend to be in relative equilibrium, some being up while others are down or going up more slowly. Yet the combined effect is likely to be positive more often than not, and to be competitive in its total return performance with the major market indices.



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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