Fiscal Cliff: Time to Activate ITARR Model

We hear a lot about the coming “fiscal cliff.”  If Congress does not act before taxes increase and spending cuts go into effect at the beginning of 2013, the country could go into another recession.  Rather than panic, now is the time to pay close attention to each major holding in your portfolio(s).  Instead of limiting the ITA Risk Reduction model to five portfolios, I plan to expand the number, particularly if there is a large holding in the portfolio.

My suggestion is to walk through the price/195-Day EMA relationship when the market dips and check to see if profits need to be protected.  Right now, most of the ETFs were are using are still priced above their respective 195-Day EMAs.  That is the good news.  We don’t know what might happen over the next six to seven weeks.  Just be prepared.

This article motivated me to issue a warning to ITA Platinum members.

Modified Ivy Portfolio Risk Reduction Model Working

One year ago, motivated by the writings of Faber and Richardson in their book, The Ivy Portfolio, I set up one portfolio with the expressed purpose of employing a risk reduction model similar to that outlined in the book. About the same time I expanded the experiment to include four other portfolios I was tracking for relatives and friends. How is the experiment working?

Before delving into the results, an explanation of some of the modifications of the Faber-Richardson model are in order. Instead of using the 10-month Simple Moving Average, as advocated by Faber and Richardson, I use a 195-Day Exponential Moving Average. This is a little faster moving average, but not significantly different. The details can be found using this link.

Initially, the five portfolios were analyzed once a month on a specific date, with the review periods scattered throughout the month. I’ve since changed the review period from 30 days to 32 days. The reason for doing this is to rotate the review period throughout the month. This is to remove any bias that may be attributed to a particular time in the month. This blog entry explains some of the advantages to using some type of risk reduction management system.

How well have the five portfolios performed with respect to Vanguard’s Total Market Index Fund, the VTSMX? The percentages are all annualized percentages. For example, since implementing the ITA Risk Reduction model, the Maxwell Portfolio gained 0.7% (annualized) on the VTSMX benchmark. Here are the results for the five portfolios.

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