Weekly Update

How to diversify

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Published December 16, 2016


Diversification is a key tenet of the Trend Timing risk management discipline and should be part of every investor’s strategy. The simple definition of diversification is to include an assortment of investments in a portfolio in order to limit the exposure to any one of them going bad. There are however many types of diversification:

Asset diversification. This is the theory that one should place their financial assets in diverse areas such as real estate, stock market, collectibles, precious metals, etc. TimingCube does not offer specific recommendations along these lines. However, if you are interested by this type of diversification we can recommend our sister company ETFTide which has a momentum-based fund ranking system seeking at identifying the best performing and overall strongest ETFs, regardless of asset class, geography or industry sectors.

Strategy diversification. Since no system is perfect, this seems like a wise proposition. We frequently get asked “how much of my money should I invest according to the TimingCube Model?” The answer is highly personal, and since it depends on your specific circumstances, your style and risk tolerance, and your level of trust in our system, we cannot answer the question for you. For our own investments, we refuse to risk any money on strategies that have poor track records, such as Buy and Hold. Instead, we follow our own signal with the majority of our moneys using a blend of strategies described in the “Our Service” page.

Portfolio diversification. The conventional wisdom that evolved in tandem with Buy and Hold is that you should spread your portfolio amongst negatively correlated (i.e. which move in opposite directions) investment vehicles, so that when one goes down – like your stocks during a bear market – others will go up. We reject any method which guarantees mediocre returns by watering-down the best performers with losers.

Instead we advocate the Trend Timing Model which enables us to commit substantially all of our serious money to the stock market, and benefit in both up or down markets. For diversification we favor index-tracking investment vehicles which represent broad baskets of stocks, a method that is significantly less risky than the individual stock picking approach. We also favor the diversification towards the best performing foreign markets through the use of our World ETF ranking system. Our research has verified the high correlation between major stock market indices – both U.S. and international – when applying our Trend Timing Model. While the indices move in unison, they represent different facets or segments of the broad market and exhibit changing relative strength over time.

For a well-diversified approach for conservative investors, we can recommend the combination of TimingCube (including its World ETF ranking strategy) along with a wider asset allocation model like the above mentioned ETFTide system. Though both are trend-following strategies seeking at maximizing profits through the identification of best performing investment candidates, they react differently, invest differently, and do not always follow the same path. Their occasional lack of correlation makes them good companions in an overall portfolio strategy.

When should I rebalance?

To make sure everyone follows this topic, when we talk about rebalancing, it is in the context of the World ETF Ranking 4-week upgrade cycle. There are a couple of answers to this question, depending on which strategy you implement.

For a Buy and Rebalance investor who remains invested in the World ETF Ranking top 5 regardless of the TimingCube signals, it does not matter when to start, as long as you rebalance faithfully every 4 weeks from your start date. The World ETF Ranking is updated weekly to make sure that you always have the most recent data to get started. The results we show on the “Results” page are for our sample 5-ETF portfolio which was started on December 15, 2000, and is rebalanced every 4 weeks since. Our testing has shown that variations in results from one start date to another are not statistically meaningful.

For the Long Only and Long and Short strategies, the beginning of a cycle is always dictated by the TimingCube Buy signal. On the Trade Date, the day after the signal is issued, we take positions in the current top 5 of the World ETF Ranking, and then rebalance every 4 weeks from that day on.

Market Update

Investors finally arrived at the long-awaited and much-anticipated Federal Reserve meeting where interest rates were certain to be raised. It would be the first rate hike in almost a year. Prior to that Wednesday event, markets digested more oil news Monday with oil nations broadening an agreement to reduce output. The agreement boosted energy shares which offset weakness elsewhere in the market to leave the broad market index roughly flat. News was slim Tuesday but buying was solid with energy shares moving higher once again; this time joined by the market overall en route to a +0.6% rise. The Wednesday Fed announcement brought the expected rise in rates.
However, markets took Fed Chair Yellen’s comments to suggest a greater number of projected rate hikes in 2017. This pushed market rates higher pressuring stocks by -0.8%. Stock investors looked at the positive of rate hikes one day later with financial shares pushing further upward while stock indexes reclaimed half of their Wednesday Fed-induced decline. A quiet close to the week with a -0.2% slip as interest rates halted their climb and rate-sensitive sectors like real estate and utilities showed some rare relative strength.

Warm wishes and until next week.