DWM Integrated Conservative
Maximum Equity Exposure = 40%
Maximum Bond Exposure = 60%
Model Investment Strategy:
This model applies a tactical strategy to the international equity, domestic equity, and bond markets. This model utilizes Sectors,1 Style Boxes,2 Internationals,3 the Money Market,4 and Long Government Bonds,5 each at the optimum time. The time is determined by integrating the overall market environment for the equity portion and the market direction of the Long Government Bonds into the model (see below for further explanation). At certain times the model will be invested in the following proportions:
• 24% in Sectors, 10% in Style Boxes, 6% in Internationals, and 10-50% in Long Government Bonds or the Money Market;
• 24% in Style Boxes, 22-72% in the Money Market, 4% in Internationals and in 0-50% Long Government Bonds
• 34-84% in the Money Market, 14% in Style Boxes, 2% in Internationals and 0-50% in Long Government Bonds.
This is Disciplined Wealth Management’s Conservative Model.
Research studies have found that certain asset classes excel more than others at different times in the domestic market cycle. When the market has terrific momentum, as it had in 1998-99, drilling down and using sector funds has the greatest portfolio punch. However, every bull market is interrupted by the inevitable bear; research has shown that building a Money Market position has the potential to protect positive returns experienced during the last bull market advance. In a trading market, Style Boxes frequently offer the greatest opportunity with reduced risk.
Determining Overall Market Environment (Equity only):
The model aggregates the signals of over 100 trend and momentum indicators of a broad array of equal-weighted sub-industry group price indices. Trend indicators are based on the direction of a sub-industry’s moving average, while the momentum indicators are based on the rate of change of the sub-industry’s price index. One of the advantages of this type of model construction is that it reflects the price action of the broad market rather than only the very large capitalization stocks that tend to dominate the S&P 500 and other indices. Additionally, by including many indicators together in the composite, you find the weight of the evidence regarding the market trends and momentum rather than relying on only one or a few indicators. The overall market environment aggregates the signals of the +100 component indicators and generates a reading between 0% and 100%, reflecting the percentage of the component indicators, which are currently giving bullish signals. Based simply on what range the model reading falls in gives a reading of three market environments: bullish, bearish and neutral.
Determining Market Direction: Long Government Bonds (Bond only):
This is a disciplined process of actively allocating between Long Government Bonds and the Money Market by applying relative strength analysis to determine the leader. While the common wisdom is to buy and hold at all times, history has shown that at times the Money Market is a preferable place to be. Through intermediate-term relative strength analysis of long-term Government Bonds vs. the Money Market, it can be determined when a change in direction is occurring and reallocate accordingly. The pre-determined maximum bond exposure will be either allocated fully to Long Government Bonds or the Money Market.
Style Boxes, Sectors, Internationals, and the Money Market (Equity only):
The overall market environment is integrated, with the pre-determined exposure rules listed above for the most appropriate exposure: the goal is to build a moderate tactical model. In the bullish market environment a diversified model is utilized, overweighting the leading sector funds, the leading Style Boxes, and the leading internationals. In a neutral market environment the diversified model switches heavily to the leading Style Boxes, while maintaining some international exposure and Money Market positions. In the bear market environment the model moves heavily to the safety of the Money Market while maintaining some Style Box and International exposure.
International Markets:
DWM believes that a portfolio limited to domestic investments might be missing out on a world of opportunity. While the U.S. does represent a slight majority of the global equity markets capitalization, this should not mean missing out on possibilities in the remaining 45%. In this model we have allocated pre-determined exposure rules depending on the overall market environment of international markets.
Conclusion:
The primary goal of the DWM Conservative Model is to out-perform the benchmark index with less risk relative to the increased return. The principles of relative strength are applied to the DWM Conservative Model, and returns compared to a blended index consisting of 40% exposure to the S&P 500 Index and 60% exposure to the Vanguard Total Bond Market. Relative strength adds value, along with the overall market environment for equities and market direction of the Long Government Bonds. This is a disciplined process to improve the risks and returns for international equity and domestic equity and bond portfolio with a moderate tactical model. While the common wisdom is for investments to be diversified across all sectors (Style Boxes, Internationals and Bonds) at all times, history has shown that major market rotation exists: this presents investment opportunities. By employing relative strength, one can add value by identifying the leader in an uptrend and avoiding the laggards in Style Boxes, Sectors, Internationals and Bonds in certain market environments. In a bear market environment it is simply best to build a position in the safety of the Money Market.
The program is available on the following platforms:
www.rydexfunds.comwww.profunds.comwww.jeffnat.com
(1) Funds that concentrate investments on one industry such as utilities, health care or technology. These funds tend to be more volatile than funds holding a diversified portfolio of securities in many industries.
(2) Funds that diversify securities in many industries, but concentrate their holding in the following six areas: Large Cap Growth, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, and Small Cap Value. A two-step process determines which of the following six categories the fund falls into. The first step determines market capitalization as Large, Mid or Small by studying the size of the companies the fund is investing in. Industry Standards are as follows: Large Cap is the top 5% of the 5,000 largest stocks, the next 15% are considered Mid Cap, and the remaining 80% are considered Small Cap. The second step is to determine growth or value. Growth investments typically have comparatively high P/E (Price to Earnings ratio) and price to book ratios. These investments are expected to have earnings that grow faster than the average investment. Value investments typically have lower P/E and price to book ratios. Value investments often represent turn-around opportunities, disappointing news or lower growth expectations. Combining the two (market capitalization and growth or value) determines the category the fund falls into.
(3) Funds that represent investment in securities of a number of countries, usually excluding securities of the United States. International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Additional risks may be associated with emerging market securities, including illiquidity and volatility.
(4) Funds that represent investments in short-term debt with an objective to earn interest while maintaining a consistent price.
(5) Funds that represent investments in bonds issued by the U.S. Government, normally with a maturity of greater than 10 years; these types of bonds seek high levels of current income.