Ventures in Constructing an All-Weather Investment Portfolio

In an attempt to prepare investment portfolios for any one of a host of future economic environments we may find ourselves, consider three models:

(I) Canary in a Coal Mine investment model

In a word, this model was designed to help adjust to the future potential of a 1970’s like stagflation (slow/no growth with inflation).  This model is by no means a foolproof method of investing in all environments.  However it was one of the indicators we found that first signaled a shift out of bonds after a period of market turbulence in the mid- to late-1970s.  We know that as the 1970’s wore on, interest rates increased driving down bond prices.  The result was a period of stock out performance.  The indicator has added support as today’s fair valuations of investments suggest stocks may outperform bonds on a real basis over the next market cycle.

At the time of this post, the indicator suggests investing in stocks.

Here is a graphic depiction of the indicator from 1970-1981 compared to stock and bond index prices.

(II) Sector Selector investment model

After the canary in a coal mine indicator would suggest an investment move, look next to the sector selector.  This indicator compares different sectors of the market in order to determine whether to invest.

The three blue arrows on the chart below highlight time frames where the sector selector suggested slow growth or recessionary conditions.  Again it is not fool proof but has a respectable record of cautioning for a future recession.  The two most recent recessions are depicted on the graph as well as a current indicator that suggests slow growth/recession could be ahead.

At the time of this post, the indicator suggests recessionary conditions ahead.

(III) Flying Under the Radar investment model

A final model aims to add additional growth to the previous models when warranted.  The flying under the radar model is more volatile and therefore requires gauges to suggest when to buy and sell.  The gauge we employ is: investor confidence.

The graph depicts modeled hypothetical portfolio growth over time.  More importantly, entry and exits points are noted with an “O” when investors are believed to have maximum optimism and a “U” when they display minimum confidence (or under confidence).

At the time of this post, the model suggests holding investments; the gauge is neither at a peak nor a trough.  A trough developed on August 24, 2011 [designated by the rightmost black-colored “U” in the graph below]; a suggested date to “buy” the portfolio.  More specifically as the red investor confidence line approaches a peak, long term investors should wait to invest new funds or hold funds until a new confidence trough materializes and aggressive investors may consider selling positions until a new confidence trough appears.

Again, not perfect timing necessarily.  However by combining more than one market gauge, we submit investors are better suited to navigate whatever climate our economy should deliver.

The aforementioned material is not meant to be construed as specific investment advice for a specific investment portfolio.  That would be a foolish interpretation.  Instead, each investor should consult his/her investment advisor for advice as to how to invest based on their specific investment profile.

Moreover as each graph title implies, these results are not meant to guarantee future returns.  Rather they are the fruits of many hours of research in which we discarded over 100 other investment models/indicators as either unsuitable and/or ineffective in the present market.  The presentation of this material is a research opinion not unmistakable proof.


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