Einstein Portfolio Review: 3 October 2011

My calendar schedule has the Einstein portfolio up for review.  This update is appropriate as a limit order was struck for BWX was struck this morning.  BWX is an international bond ETF.  While international bonds are not new to this portfolio, the addition of BWX is new.  As readers can see from the following Dashboard, we are still under target for international bonds.  Scroll down the page to pick up the performance data which includes all September dividends and interest payments.

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StockChart Graphs for Timing Model

Platinum members following the experimental approach to improving performance of the Maxwell and Euclid portfolios will want to become familiar with the StockChart graphs we will be using for our analysis.  Below is an example of the graphs for VTI, one of the primary holdings.

In the top graph, note that the current price is well below the 195-Day EMA (green line).  The price closed at $57.72 and the 195-Day EMA is 63.46.  When the price moves from below to above the 195-Day EMA, we want to move back into the market with this ETF and remain there for a minimum of 30 days.  Then we will examine the situation again.  

To avoid both whipsaws and commissions due to frequent trading, we will only look at the ETF price – EMA relationship every 30 days.

What are the drawbacks for this method of market timing?  It can't be all positive.

  • Whipsaw problems are the main culprit.  One sells an ETF and it rebounds so fast one ends up buying back in at a higher price.
  • Whipsaw issues can cause multiple losses in a row.  This is particularly a problem in a sideways market.
  • The system requires discipline.  It is easy to forget or become discouraged.
  • It requires more time than a buy and hold strategy.

Quantitative Approach to Portfolio Management

In the experiment to improve the performance of the Maxwell and Euclid portfolios we need a basic set of ETFs to form the core for our investments.  This quantitative approach is an outlier in our portfolio management philosophy as it has the potential for more trading.  For this reason, I will be using ETFs that are part of TDAmeritrade's 100+ commission free trades.  Below is a Quantext Portfolio Planning (QPP) analysis of this basic portfolio.

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ETFs As Market Predictors

While our focus is on the long-term rather than market timing, it still makes sense to pay attention to market action.  This article is one I thought readers would find interesting.  In addition to following RSP and IYT, I recommend Platinum members also track VTI, Vanguard's total U.S. equities market and VT, Vanguard's Total World equities market.

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