Combining the Models … Managing Risk

Creating a Portfolio with the 3 models

The most important thing you will do with your investing will be deciding how you manage your risk. The 3 models (NDX 3-4 Day Model, Gold Stock Model, SP500 Model) each have periods when they are doing well and times when they are not doing as well. By combining them into one portfolio, it smoothes out the ups and downs and is psychologically easier to manage the portfolio.

Here are some examples of how a portfolio combining the 3 models would have performed over the past 2 years (2008 and 2009). Each example starts with a hypothetical $1000 investment on 12/31/07.
The first row shows how a portfolio evenly split (1/3 to each of the 3 models) with no leverage (leverage is = 1 for each model), would have performed. The last column shows the $1000 would be worth $4517 at the end of 2009. There was one month (yellow column) that had a negative return over the past 24 months. The worst month had a return of -8.3%, the worst drawdown that occurred from any given day was -12.5% and the average drawdown was -1.4%. The Sharpe Ratio compares the performance to a “risk-free” 5% return on investment. In general, a Sharpe above 1.0 is good, above 2.0 is very good and above 3.0 is phenomenal.

The last 3 rows show how changing the allocations and leverage affects the drawdown, number of negative months and overall return. A leverage of 3 can be obtained by trading ETF's, since there are ETF's that are leveraged up to 3x. For a leverage of 6, as in the last row, one would need to trade options or futures contracts.