Disciplined Wealth Management - DWM

Integrated Aggressive

Maximum Equity Exposure = 100%

Model Investment Strategy:

 

This model applies a tactical strategy to the international equity, and domestic equity markets. This model utilizes Sectors, Style Boxes, Internationals, and the Money Market, each at the optimum time. At times this model can be 100% invested for the maximum pre-determined equity exposure in the S&P 500 Index Fund. It also as the ability to utilize leverage. The time is determined by integrating the overall market environment indicator (MEI) and individual fund signal (IFS) (see below for further explanation). At certain times the model will be invested in the following proportions:

 

• 0-60% in Sectors, 0-25% in Style Boxes, and 0-15% in Internationals, and 0-100% in Money Markets

 

• 0-40% in Sectors, 0-20% in Style Boxes, 0-10% in Internationals, and 30-100% in Money Markets

 

• 0-26% in Sectors, 0-16% in Style Boxes, 0-7% in Internationals, and 51-100% in Money Markets.

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* At times the model can be 100% invested for the maximum pre-determined equity exposure in the S&P 500 Index Fund. It also has the ability to utilize leverage.

 

This is Disciplined Wealth Management’s Aggressive 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.

 

Determining Overall Market Environment Indicator (MEI):

 

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 Individual Fund Signal (IFS):

 

Each asset class, sector or country specific fund/ETF marches to a different drummer. The goal of the IFS signal is to identify the trend for an individual asset class, sector, country specific, or bond fund. Also the math (quantitative analysis) behind each IFS can be quite different between asset classes, etc. As an example a broader based fund/ETF like Technology or S&P 500 Index will have a longer-term signal than a more targeted fund/ETF like Internet or Large Value. The IFS signal is tailor made and time tested for each asset class.

 

Style Boxes, Sectors, Internationals, and the Money Market:

 

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 Aggressive 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 Aggressive Model, and returns compared to the returns of the S&P 500. Relative strength adds value, along with the overall market environment indicator and individual fund signal. This is a disciplined process to improve the risks and returns for international equity and domestic equity with a aggressive tactical model. While the common wisdom is for investments to be diversified across all Style Boxes, Internationals and Sectors 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, and Internationals in certain market environments. In a bear market environment it is simply best to build a position in the safety of the Money Markets.

The program is available on the following platforms:
www.rydexfunds.com
www.profunds.com
www.jeffnat.com