StumpGrinder: Moving to Cash

Posted on June 21, 2013 by

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StumpGrinder’s performance similar to other allocation funds.

related article: Why diversified portfolios lost value in May/June 2013

Overview: Our “sanity checks” are failing, so it is time to move to cash

As I said in a previous post, you should never blindly follow an investment strategy.  I’ve heard so many times “strategies work until they don’t work.” You should be prepared to exit when things seem to be headed south. But how can you tell the difference between a short term down trend and a systemic failure?

An important component of any strategy is a set of “sanity checks.”  Sanity checks are assumptions you’ve made about your portfolio’s performance, that you can check at any time to see if they are true. When they become not-true, that’s when to go to cash.

I mentioned one of the assumptions we make about StumpGrinder above, namely that we assume BOND is anti-correlated with the low-vol equity ETFs USMV and SPLV.  Those three ETFs are, together, our largest holdings, so this relationship is important.

As towards the end of May we saw many days when BOND and SPLV were both down together — becoming correlated, and not performing as they should.  In fact on the last day of May the two were exactly — not-correlated (more detail to come in another blog).  I was poised to move to cash on the June rebalance, but for the next few days saw anti-correlation creeping back.

Now by mid June, BOND and SPLV are correlated, and both moving down.

Time to step to the side and reassess

Stay tuned for a deeper analysis, and for details on how we’ll know when to step back in.

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