Update for 2020
Only minor changes and clarifications are added compared to the 2019 version:
- Added risk adjusted performance and volatility to the portfolio goals.
- Added filter and minimum change size for Dual momentum.
- Added a re-balance rule and a new stop loss rule for Trending value.
- Added down sizing rule for Trending value and Long term.
Guiding principles
The portfolio return will likely serve as the main source of income throughout my remaining life. To the best of my judgement, the portfolio size is large enough for a life-long support of the standard of living I have got used to the last two decades, probably even with a continued capital growth. But as the size is not large enough to know this for certain, down-side protection together with diversification must be essential parts of the strategy.
Over the years I have learned that my previous investment style was ad-hoc and way too risk-willing, resulting in high volatility and a mediocre return. Starting 2013, I switched over to rules-based investments, based on diversification and recognized market anomalies, mainly value and momentum. The reward, so far, has been a better and more consistent performance. Hence the strategy should be mainly rules-based.
The strategy should be based on publicly available research and have a long successful performance history. The underlying principles should be understandable (to me) and make sense.
It should be straightforward and not too time consuming to execute the strategy. I want to execute the strategy myself, and I am willing to spend a few hours per week for evaluation, planning, execution and documentation of the trades, preferably at one occasion per week.
The portfolio can be split into several sub-portfolios following different rules. This will further increase the diversification. In order to allow for contionous development of the portfolio strategy, up to 10 per cent of the portfolio is allowed to be used for real time tests of new ideas.
Only minor changes and clarifications are added compared to the 2019 version:
- Added risk adjusted performance and volatility to the portfolio goals.
- Added filter and minimum change size for Dual momentum.
- Added a re-balance rule and a new stop loss rule for Trending value.
- Added down sizing rule for Trending value and Long term.
Guiding principles
The portfolio return will likely serve as the main source of income throughout my remaining life. To the best of my judgement, the portfolio size is large enough for a life-long support of the standard of living I have got used to the last two decades, probably even with a continued capital growth. But as the size is not large enough to know this for certain, down-side protection together with diversification must be essential parts of the strategy.
Over the years I have learned that my previous investment style was ad-hoc and way too risk-willing, resulting in high volatility and a mediocre return. Starting 2013, I switched over to rules-based investments, based on diversification and recognized market anomalies, mainly value and momentum. The reward, so far, has been a better and more consistent performance. Hence the strategy should be mainly rules-based.
The strategy should be based on publicly available research and have a long successful performance history. The underlying principles should be understandable (to me) and make sense.
It should be straightforward and not too time consuming to execute the strategy. I want to execute the strategy myself, and I am willing to spend a few hours per week for evaluation, planning, execution and documentation of the trades, preferably at one occasion per week.
The portfolio can be split into several sub-portfolios following different rules. This will further increase the diversification. In order to allow for contionous development of the portfolio strategy, up to 10 per cent of the portfolio is allowed to be used for real time tests of new ideas.
Portfolio goals
The overall goals for the Idun Portfolio are:
Evaluation
The overall goals for the Idun Portfolio are:
- to perform at least as well as the global stock market
- a better risk adjusted performance compared to the global stock market (measured by comparing Sharpe ratios)
- to do this with less yearly variations compared to the global stock market ( measured by comparing the volatility and the worst year return for the portfolio with the global stock market)
- to be able to run the portfolio using only a few hours work per week, on average max 5, (measured by keeping track of the hours spent)
Evaluation
The entire investment strategy including the goals will be evaluated and updated on a yearly basis. Changes in-between the yearly evaluations will be documented separately.
The Portfolio rules:
Dual momentum portfolio
The idea is to invest in global stock market when stock market is strong, otherwise in global bond market. Should bond market be weak as well, stay in cash or cash-equivalents.
The rationale behind this approach is the fact that stocks has historically provided the best risk reward, and bonds the second best.
| Source: Stocks for the long run |
For global stock ETFs' the following regions are used:
- US
- Europe
- Japan
- Asia Pacific ex Japan
- Emerging Markets
This spans the majority of the investable global stock universe.
For each of the 1-18m look-back periods, invest in the stock ETF/Fund with the best performance above safe rate, otherwise in bonds/cash.
For the part not invested in stock, invest in bond if stronger than cash, otherwise stay in cash.
Bond ETF's:
- Global Aggregate bond
- US Treasury Bond 3-7 yr
For each of the 1-18m look-back periods, if stock is not invested, invest in the best performing ETF above safe rate, otherwise stay in cash.
The portfolio tranching concept is used, and the portfolio is split into four tranches. Each tranche is rebalanced every fourth week, effectively meaning that a quarter of the portfolio is rebalanced each week.
Practical considerations:
The portfolio is scattered over four different accounts at Avanza and Degiro. At Avanza
there is a limited availability of low cost funds/ETF's, hence a smaller set of SEK-based funds/ETF's is used.
there is a limited availability of low cost funds/ETF's, hence a smaller set of SEK-based funds/ETF's is used.
This means that the Dual Momentum portfolio is split into two variations:
- Dual Momentum USD- Dual Momentum SE/Global (which is implemented in two versions in two different accounts)
ETF's/funds can be changed any time, should I find more suitable ones.
Current investment universe and signals are found here.
Trending value portfolio
The main idea is to buy stocks that appears cheap compared to recent fundamentals.
I have run this portfolio with great result since late 2013. It started out as a magic formula investment, evolved over EBIT/EV with stop loss into trending value with trailing stop loss.
Going forward I will still rely on trending value on the global stock market and hold 10-20 stocks (minimum market cap $200 million and minimum daily trading volume $75 thousands), but with some tweaks:
The main idea is to buy stocks that appears cheap compared to recent fundamentals.
I have run this portfolio with great result since late 2013. It started out as a magic formula investment, evolved over EBIT/EV with stop loss into trending value with trailing stop loss.
Trending value uses a combined measure of value, called Composite value 2, using a combination of EV/EBITDA, P/E, P/S, EV/FCF and shareholder yield. This is actually a change compared to the original CV2 and described here. Then, the best 10% are sorted in falling 6 month price momentum. The top of the list are bought and held for a year.
Going forward I will still rely on trending value on the global stock market and hold 10-20 stocks (minimum market cap $200 million and minimum daily trading volume $75 thousands), but with some tweaks:
- Filter out the 10% worst performers in earnings growth, debt to equity (inspired by this post) as well as 6m volatility. Also remove stocks with failing Beneish M-score.
- Keep the 5% best CV2 and sort in falling 3/6/12 month price momentum.
- Replace stocks evenly over the year, e.g. replace a quarter of the portfolio four times a year.
- Replace a stock if it falls 20% below the benchmark (global stock index).
During bear markets (i.e. when Dual momentum is mainly in bond/cash) the portfolio might be down sized to 5% of the total portfolio value.
Long term portfolio
This portfolio consists of 8-12 value based stocks available on the Stockholm stock exchange. The intention is to keep the holdings long term and to maintain a low portfolio turnover.
This portfolio consists of 8-12 value based stocks available on the Stockholm stock exchange. The intention is to keep the holdings long term and to maintain a low portfolio turnover.
During bear markets (i.e. when Dual momentum is mainly in bonds/cash) the portfolio might be down sized to 5% of the total portfolio value.
Opportunities portfolio
This portfolio is not necessarily rules-based. It can include new ideas and in general anything that appears to be lucrative. Historically it has been used to test spin-off investing, high-yield preferred stock, and various momentum or value based ideas.
Size
Other
Leverage is allowed up to 1.5.
Currency hedging will normally not be used.
Leverage is allowed up to 1.5.
Currency hedging will normally not be used.
Regarding Global momentum: Removed the remark about the limited price information for mutual funds.
SvaraRaderaFor Dual momentum, the cash option is removed.
SvaraRaderaClarification: Cash is still selected when both stocks and bonds are weak, but there is no switching between different currencies.
RaderaFor Dual momentum: removed the portfolio tranching concept.
SvaraRaderaFor Dual momentum: re-introduced the portfolio tranching concept
SvaraRadera