What is Tactical Diversification?
Tactical Diversification is the sequential application of three
distinct types of diversification:
• Funds: Equity
diversification: owning multiple stocks or bonds to reduce
risks associated with individual equities.
• Strategy: Serial diversification: owning multiple funds, but
only one at a time — the one designated as trend leader.
• Portfolio: Asset class diversification: owning
multiple funds, each selected by a different asset class
strategy.
While equity diversification and asset class
diversification are well known concepts under Modern
Portfolio Theory, they are further augmented in a
portfolio by serial diversification to (a) improve
returns by selecting only the trend leader from
among multiple well-diversified candidate funds, and
(b) reduce risk of loss by inherently avoiding trend
laggards altogether. We use the terms
True Sector Rotation and
StormGuard to refer to our serial diversification algorithms
that correspondingly select trend leaders and
determine when to exit safely to cash as bear
markets approach.
Serial diversification's performance is determined
by trend signal quality. Thus, SectorSurfer was
designed to optimally extract trend signals from
noisy market data utilizing the cross-disciplinary
mathematics of electronic signal processing and
matched filter theory, the same mathematics that
enables Ethernet, Wi-Fi, and smart phones to perform
so well.
Portfolio Construction
The ETF Aggressive Portfolio (top chart) holds
four diversified asset class Strategies, rebalanced
quarterly to their assigned allocation weights. Each
Strategy selects the one, and only one,
best-of-breed fund in its class to represent the
Strategy in the overall Portfolio. The Portfolio holds
only those four funds.
Asset Class #1
— ETF Ultra Regions + Sectors — 45%
Asset Class #2
— ETF Sectors + Gold — 30%
Asset Class #3
— ETF US Asset Class —15%
Asset Class #4
— ETF World Regions — 10%
Underlying Asset Class Strategies
Each of the four underlying asset class strategies
is configured with a set of up to 12 funds, each
representing a different slice of the asset class or
fund management style. SectorSurfer's algorithms
determine which fund is designated best-of-breed
based on its trend leadership. The yellow line on
each chart plots the performance of the strategy,
which owns only the designated best-of-breed fund at
any given time. This is True Sector Rotation (or serial
diversification) and is a powerful investment ally best
appreciated through its performance.
Click a chart or:
for ETF Ultra Regions + Sectors
for ETF Sectors + Gold
for ETF US Asset Class
for ETF World Regions
SectorSurfer Strategies typically produce only about
four trades per year, and Forward-Walk-Progressive-Tuning,
the industry gold standard for backtesting, may
optionally be incorporated.
Portfolio Performance
The ETF Aggressive Portfolio chart (top) plots the
performance of each of the contributing strategies
with the portfolio's net performance in yellow and
the S&P500's performance in white.
The overall benefit of Tactical Diversification for
this portfolio, relative to the S&P500, includes:
(a) 30% higher annualized return, (b) 4.2 times
better Sharpe ratio, and (c) only 35% the maximum
drawdown.
for Portfolio
SectorSurfer Makes it Simple
This set of Strategies is easily imported into your
own account where you can use them directly or edit
them to better fit your needs. If you're
interested in other fund families or ETFs, start
with our
Strategy Hall of Fame to view powerful
Strategies built by our users. Additional background material
can be found in the resource links at the
bottom of this page, on the
Sector Rotation Theory page, and on the Advanced Topics
page .
There's a Better Way to Select Funds
SectorSurfer can put Tactical Diversification to work for you.
Our servers will do the hard work
...
... while you go
have a life.
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Overall Portfolio Holding Four Asset Class Strategies
Asset Class #1 — ETF
Ultra Regions + Sectors — 45% Weight
Asset Class #2 — ETF
Sectors + Gold — 30% Weight
Asset Class #3 — ETF
US Asset Class — 15% Weight
Asset Class #4 — ETF
World Regions — 10% Weight
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