Over the last couple of months, we have repeatedly discussed increasing our equity allocations in all models as we head into the seasonally strong phase of the year. While there is a high probability of some “choppiness” over the next 45-days, with a vast majority of hedge and mutual fund managers lagging their respective benchmarks year-to-date, we will likely see a push for performance through the end of the year.
As I noted earlier this week, the trend of the market remains very positive currently. That momentum combined with high levels of investor confidence, earnings and economic growth still rising, and Central Banks still remaining accommodative globally, the likelihood of a continued advance is favorable.
This past week we added equity exposure to both the Equity and the Equity-ETF portfolio. The additions were:
- CVS Health (CVS)
- Johnson & Johnson (JNJ)
- Duke Energy (DUK)
- Federal Experess (FDX)
- Pepsi (PEP)
- Nike (NKE)
- Walmart (WMT)
Portfolio Assumptions
All three portfolios were launched on the website on May 11, 2018. Each portfolio has the same following parameters:
- $1 million starting value
- Capital appreciation only (we will add total return in the future)
- All cost basis includes a transaction fee of $4.95.
- A 60/40 model allocation (our client portfolios use actual bonds but for tracking purposes, we are using funds/etfs only on the website due to pricing issues and availability.)
Important Note: The models found under the RIA PRO tab are a direct reflection of what we are doing for our clients at Clarity Financial. Therefore, all model changes are posted a couple of days post-execution but the actual execution date and cost basis is listed.
Equity Portfolio
The Equity portfolio has a maximum number of 30-equity holdings at a target weight of 2% each. The focus is primarily on dividend-yielding equities to increase total returns in portfolios but is not a strict requirement. Stop losses are trailed behind each position. If a position triggers a stop-loss it goes on “alert” status and is sold on a bounce which does not negate the stop-loss level.
During a market decline, equities are liquidated down to the core as trailing stop loss levels are triggered. If the decline changes the overall trend of the market from bullish to bearish, then the portfolio become net-short depending on the severity of the decline and the overall trend.
Equity-ETF Portfolio
The Equity-ETF portfolio uses the same 30-equity holdings as the equity model but target weights are reduced to 1.33% each. The remaining portion of the equity holdings are held in a “core” of index-based ETF’s. This core allows us to overweight/underweight sectors to provide a better return over time relative to the underlying 60/40 benchmark. Again, stop losses are trailed behind each position. If a position triggers a stop-loss it goes on “alert” status and is sold on a bounce which does not negate the stop-loss level.
During a market decline, equities are liquidated down to the core as trailing stop loss levels are triggered. If the decline changes the overall trend of the market from bullish to bearish, then the core is shorted against to take the portfolio to market neutral. The portfolio can also become net-short depending on the severity of the decline and the overall trend.
ETF Portfolio
The ETF portfolio uses a “core” and “tactical” approach to the overall portfolio structure. The tactical portion of the portfolio can have weights up to 5% each. The “core,” which is essentially a bench against the S&P 500 index, can have weights up to 12%. If a position in the model has a current weighting below its target allocation level, AND the portfolio is targeted to have 100% equity exposure, the difference is swept into an S&P index ETF. The core allows us to overweight/underweight sectors to provide a better return over time relative to the underlying 60/40 benchmark. Again, stop losses are trailed behind each position. If a position triggers a stop-loss it goes on “alert” status and is sold on a bounce which does not negate the stop-loss level.
During a market decline, tactical ETF’s are liquidated down to the core as trailing stop loss levels are triggered. If the decline changes the overall trend of the market from bullish to bearish, then the core is shorted against to take the portfolio to market neutral. The portfolio can also become net-short depending on the severity of the decline and the overall trend.
If you have any questions relating to the portfolios feel free to contact me. I will be happy to include my answer in the next update or add relevant data.
With the portfolios fully built, we will now provide specific reports on transactions occurring within each portfolio to keep you informed on why we are making changes. While the goal of the portfolio is long-term growth, it is also carefully managed against the risk of catastrophic loss.
If you are interested in our portfolio management services – click here.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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