Managing Portfolio Uncertainty: How Does It Work?

In an effort to improve performance results and reduce portfolio volatility, a Tactical Asset Allocation (TAA) plan has been activated for both the Maxwell and Euclid portfolios.  Checking the latest Portfolio Performance data table, we see these two portfolios are trailing the VTSMX benchmark, an unacceptable condition.  Keep in mind this is an extreme strategy, but it is based on reasonable logic.  In fact, I used a similar plan with success back in the mid-1980s.  Sites such as StockCharts did not exist in the 1980s so we were required to program our own Exponential Moving Averages.

It would be easier to take a "clean" portfolio holding only cash rather than begin working with a portfolio that is holding ETFs we do not plan to use in this TAA model.  However, we work with the assets dealt to us.  Yesterday I showed the ETFs we will using in this experimental approach.  The Maxwell currently holds ETFs other than the primary ETFs shown in the QPP analysis.  For now, we will work with the ETFs in the portfolio.

How does it work?  I'll run through one example as a model.

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Will I Run Out of Money Using the Ivy 5?

Ivy 5 Portfolio and Retirement

Following up on the quantitative approach to managing portfolio uncertainty, I'll update the Ivy 5 portfolio as referenced in Mebane T. Faber and Eric W. Richardson's book, "The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets." [Open up blog entry for book link to work properly.]  On page 75 of their book, Faber and Richardson provide a sample Ivy Portfolio using five ETFs.  They are:  Domestic Stocks (VTI), Foreign Stocks (VEU), Bonds (BND), Real Estate (VNQ), and Commodities (DBC).  Below is a QPP analysis of this five ETF portfolio and below that is a Monte Carlo analysis based on a number of assumptions.  Those assumptions are listed below.

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