A Place to Hide in a Market Regime
Modern portfolio theory states that implementing a diversified portfolio leads to significantly higher returns while minimizing risk. To put theory into practice, the negative relationship between asset classes is often a fundamental building block of a “so-called” diversified portfolio. The problem is that this assumption is based on market regimes with declining interest rates. In market regimes with rising interest rates:
- The diversification benefit of bonds is literally collapsing.
- Asset class correlations are constantly on the rise (especially in times of stress) due to globalization.
- Market cap-weighted indices are heavily concentrated on a relatively small scale of stocks, reducing the diversification benefits.
That raises the question of whether traditional portfolios are still sufficiently diversified to act as core investment in fast changing market regimes. If not answered today, it will get answered by the market tomorrow.
For those investors who are proactively re-thinking ways to adjust their asset allocation in consideration of the “ending era of negative correlations”, we offer a highly diversified ETF model portfolio (WSC Model Portfolio Composite) designed to achieve maximum diversification across all market regimes beyond traditional approaches.
Focused on Maximizing Diversification Across All Market Regimes
Receive precise percentage allocation recommendations plus a weekly-updated performance factsheet in our members area.
The chart above shows you the growth of $10,000 invested in the WSC ETF Model Portfolio Composite (red line) and in a comparable traditionally balanced portfolio (blue line) with the same volatility since 1999. As the chart is updated on a weekly basis, you can see the performance until the most recent date.
Given its high degree of diversification, the WSC ETF Model Portfolio Composite provides significantly higher downside protection compared to a traditionally balanced portfolio. As a result, its performance is remarkably stable and robust, enabling the power of compound interest to grow your wealth over time. Not surprisingly, our WSC Model Portfolio Composite has demonstrated outstanding risk-adjusted returns across all market regimes and has, therefore, strongly outperformed its benchmark.
The Strategies Behind the WSC ETF Model Portfolio Composite
The Philosophy: Diversification Based on Non-Correlated Investment Strategies
The performance of the WSC Model Portfolio Composite is the aggregated result of investing 25% (on a yearly basis) in each of the four ETF Model Portfolios offered by WallStreetCourier. Although each of the four model portfolios can be effectively used on a stand-alone basis, the aim is to incorporate them all on an equal-weighted basis with a yearly rebalancing mode. Since each model portfolio has its own investment objective (ranging from achieving superior stable returns to exceptionally high absolute and relative returns, or is simply designed as a hedge for a certain market environment), the correlation to one another is extremely low.
As a result, following all of the model portfolios ensures maximum diversification based on well selected investment strategies rather than using increasingly correlated asset classes.
Strategy 1: Stable Returns Over a Three-Year Time Horizon
The WSC All Weather Model Portfolio (AWP) is designed to achieve absolute positive and stable returns over a three-year investment horizon (by exploiting the diversification premia in a very systematic way).
The portfolio allocation is updated on the last Friday of every month. Subscribers will additionally receive a factsheet with detailed risk and performance figures updated on a weekly basis.
Strategy 2: High Annualized Returns Over a Full Market Cycle
The WSC Dynamic Variance ETF Model Portfolio (DVP) is designed to achieve high positive returns in strong up-trending global markets and to cap losses during volatile market regimes (by exploiting the time-series momentum in a very systematic way).
The portfolio allocation is updated on the last Friday of every month. Subscribers will additionally receive a factsheet with detailed risk and performance figures updated on a weekly basis.
Strategy 3: Equity-Like Returns With Lower Volatility
The WSC Sector Rotation Investment Strategy (SERO) is designed to limit the downside potential during bear markets and to perform at least as good as the S&P 500 during bull markets. The model portfolio is exploiting time-series- and cross-sectional momentum by selecting the strongest trending sectors in the S&P 500 in a very systematic way. The aim is to achieve equity-like returns with lower volatility, leading to higher risk-adjusted returns over a full market cycle.
The portfolio allocation changes every two months on average. Apart from precise allocation recommendations, subscribers will receive a weekly updated factsheet with detailed risk and performance figures.
Strategy 4: Enhanced and Stable Returns Above the Average Inflation Rate
The WSC Inflation Proof Retirement Portfolio (IPRP) is designed to perform reasonably well during a high inflationary market environment (by exploiting the diversification premia in a very systematic way). The aim is to generate enhanced and stable returns above the average inflation rate and to minimize potential losses in times when the overall inflation expectations remain quite low.
The portfolio allocation is updated on the last Friday of every month. Subscribers will additionally receive a factsheet with detailed risk and performance figures updated on a weekly basis.
All Strategies: Maximum Diversification Across All Market Regimes
The WSC Model Portfolio Composite is designed to achieve outstanding risk-adjusted returns across all market regimes with little correlation to common asset classes by exploiting the diversification premium in a very systematic way. The performance of the WSC Model Portfolio Composite is the aggregated result of investing 25% (on a yearly basis) in each of the four ETF Model Portfolio offered by WallStreetCourier.com.
The portfolio allocation is updated on the last Friday of every month. Subscribers will additionally receive a factsheet with detailed risk and performance figures updated on a weekly basis.
Escaping the Correlation Dilemma
Diversification gets increasingly difficult in the “ending market regime of negative correlations”. In particular, traditionally balanced portfolios are currently affected the most and, therefore, might not be sufficiently diversified to act as core investment anymore. We believe that an efficient way to tackle the correlation dilemma is to diversify risk amongst well-selected investment strategies. That ensures maximum diversification and, therefore, stable returns across all market regimes.
Relevant Research Papers Published by WallStreetCourier
Our practical approach is underpinned by deep theoretical as well as empirical research. Please visit our Seeking Alpha blog or read our award-winning research papers here:
- “Modern Portfolio Theory 2.0 – The Most Diversified Portfolio”. Our research paper, published and awarded as Editor’s Pick on Seeking Alpha, reviews a portfolio construction technique, called “Maximum Diversification,” which maximizes the asset class diversification within a portfolio. The article refers to the WSC All Weather Portfolio which is regularly updated in our members area.
- “The Most Diversified Inflation-Proof Retirement Portfolio”. In our research paper, published on Seeking Alpha, we introduce an effective way for conservative investors at or near retirement to allocate their capital in an inflationary market environment. The article refers to the WSC Inflation-Proof Retirement ETF Model Portfolio which is regularly updated in our members area.
- “Risk Parity – Why Correlations and Classifications Can Be a Huge Stumbling Block”. Our research paper, published on Seeking Alpha, identifies the impact of rising correlations on risk parity-based portfolio construction techniques.
- “Diversification: Failure or Free Lunch During Market Turbulence?” Our research paper, published on Seeking Alpha analyzes the stress correlation behavior of single stocks.
- “The Most Rewarding Portfolio Construction Techniques: An Unbiased Evaluation”. Our research paper, published and awarded as Editor’s Pick on Seeking Alpha, analyzes and compares ten modern portfolio construction techniques by applying an advanced Monte Carlo Simulation. This enables an unbiased view of the pros and cons of each single portfolio construction technique.
Market Regime Based Investing for the Lazy Investor
More information and related content:
- Actionable Market Regime Outlook: Evaluates the Sustainability of the Current Market Regime & Red-flags Shifts!
- Market Indicators: Measure Trend, Trend Quality and Market Sentiment to Identify Major Inflection Points
- The Big Picture Indicator: Know When To Buy The Dip & When To Trade Trends.
- Uncover Shifts in Major Futures Markets: CoT Indicators for 45 Futures Markets to Identify Major Shifts.
- The Smart Money Flow Index: The Official Source for Bloomberg Professional.
