I’m working on some new features for the Sage Investment Strategies Timing Model (SISTM):

–Expanding the reporting period from 1 year to 3 years
–Developing new SIS portfolios based on risk selection

Take a look at the sample chart and table below which contain six new SIS portfolios and 3 years of performance data. I like the 3-year look-back because it provides a better performance comparison with benchmarks over a longer time period. One of the challenges I faced with the 3-year look-back is that some of the ETFs in the portfolios (particularly some of the bond ETFs) were either not around 3 years ago or there was not enough data for the model to evaluate. The model allocates a higher proportion to a money market fund until enough data is available in those cases. 

I addded a few new data points including 3-Year Return and 3-Year Compounded Annual Growth Rate (CAGR) to the tables. In addition, Maximum Drawdown, Standard Deviation and Sharpe Ratio are all based on 3 years of data instead of just the most recent year’s data.

I decided to provide a range of SIS portfolios based on risk as measured by standard deviation and maximum drawdown. I decided to keep the original SIS Basic Portfolio (with the same 5 asset classes but different investment vehicles than our current SIS Basic Portfolio) and to develop a series of 5 new portfolios based loosely on the current SIS Long & Short portfolio. The key benefit provided by the new portfolios is that subscribers will be able to easily choose the most appropriate portfolio based on their risk comfort level.

The 5 new portfolios are aptly named Conservative, Moderately Conservative, Moderate, Moderately Aggressive and Aggressive. The maximum expected drawdown for the 5 new portfolios are calculated roughly as 5%, 10%, 15%, 20% and 25% respectively. I base those expected maximum drawdown numbers on how the new portfolios would have fared under the tumultuous market conditions of the last 3 years. In comparison, the S&P 500 Index fell as much as 67% and a typical investor’s portfolio of 60% stocks and 40% bonds fell as much as 41% during the same period.

The chart and tables below show a good comparison of risk and reward for the new portfolios as well as the same 2 benchmarks we currently use. The 3-year returns of the 6 new SIS model portfolios ranged from +15.8% to +29.1%, whicle CAGRs ranged from 5.0%-8.9% annually. In contrast, the S&P 500 Index is 21.5% lower than where it stood 3 years ago which translates into a CAGR of negative 7.8%.

The chart provides a great snapshot of how the benchmarks outperformed the SIS portfolios from August 2006 until October 2007 when the market peaked, and the reversal of fortune that occurred since then.

I’m still working on the model for the new portfolios and plan to roll it out to subscribers later this year. Stay tuned!

Stocks climbed the proverbial “wall of worry” last week, with the S&P 500 Index climbing 2.2%. Everyone is waiting for the big pullback to happen. Funny thing about the market - it doesn’t do what we expect it to do. See Mebane Faber’s blog: “Sitting, Waiting.”

Despite the 54% rise in the S&P 500 Index since its March 2009 lows, the index still needs to rise another 53.6% just to get back to the lofty, pre-crash levels of October 2007. What are the chances of that happening?

Is the 5-month long stock market rally over? Should we prepare ourselves for a rough ride downhill? After a 50% run-up since March, the market appears to be sputtering. Why aren’t those consumers, who drive two-thirds of the economy, consuming more? For one thing, it’s hard to consume more when you’re unemployed. Consider that the “official” U.S. unemployment rate stands at 9.4% while the ”real” unemployment rate, which includes unemployed people who have not looked for work in the past month because they got discouraged and gave up, is in the range of 16-17%. Meanwhile, more than 550,000 new people per week are filing unemployment claims. Moreover, as housing prices continue downward, over-extended and highly leveraged homeowners have little or no home equity to tap. But politicians are trying their best to encourage even more consumer borrowing and spending with programs like “Cash for Clunkers” and homebuyer incentives.

Meanwhile, prices are rising (even though official government data says they are falling) and hitting consumers in the pocketbook. For example, since bottomming out in December 2008, gasoline prices have risen an average of $1.00 per gallon nationwide — up more than 60 percent! Utilities are jacking up their rates. My electric utility recently announced a 23 percent rate increase. State and municipal governments are raising taxes to cover huge budget deficits. For example. California enacted a $12.5 billion tax hike to cover part of their $40 billion deficit. It’s no wonder that Friday’s Reuters/University of Michigan consumer sentiment index registered a decline for the second month in a row.