The goal of WIJOPA’s trading strategies is, first and foremost, to minimize drawdowns. We strongly believe that if you minimize drawdowns, the profits will come, as long as you’re in uptrending market sectors. Thus our analysis of the markets is two pronged: first, find and allocate the tradable uptrending sectors into combined portfolios, and second, devise computerized and visual timing signals to reduce drawdowns in those sectors and portfolios while capturing the bulk of the uptrend.
1. We construct mutual fund portfolios containing different asset classes to minimize “downside risk,” that is, portfolio losses or drawdowns.
Our low volatility portfolios should not be confused with the so called “diversified” portfolios promoted by many big brokerage firms. These "diversified" portfolios are usually collections of mutual funds from various sectors (large cap, bonds, foreign or smallcap) with little or no thought given to how well the individual funds perform together. The purveyors of these “diversified” portfolios look on diversification as an end in itself. They imagine that having several different sectors represented in a portfolio will automatically or inherently reduce portfolio risk. Not necessarily so. In fact, the “diversified” portfolios sometimes have higher drawdowns than some of the individual mutual funds making up the portfolios.
At WIJOPA, we go several steps beyond “diversification.” Yes, we have different sectors in our portfolios, just like the brokerages, but it is the overall portfolio performance that dictates fund selection, not blind adherence to diversification. For example, it is dogma at brokerages that a “diversified” portfolio must contain a substantial dose of large cap mutual funds (or stocks). Yet our research of historical performance shows that large cap funds generally add volatility to a portfolio without proportionally increasing the return. For this reason, our portfolios will not hold large cap funds without a compelling reason.
The “diversified” portfolios at brokerages are also seldom weighted to match the volatilities of the component funds. For example, a smallcap fund might be twice as volatile (i.e., go up or down twice as fast) as a midcap fund. It makes little sense, then, to weight a smallcap and a midcap fund as if they had equal volatility, yet that is often the case at brokerages. The result is that the portfolio has greater volatility that necessary for a given return.
At WIJOPA, our focus on overall portfolio performance avoids this error. We accomplish this through rigorous backtesting of portfolio performance, with special emphasis on metrics relating performance to volatility (Sharpe Ratio and Ulcer Performance Index).
2. We trade our portfolios when conditions warrant, reducing downside risk even further, all the while providing an acceptable rate of return.
WIJOPA’s willingness and expertise to trade our portfolios also sets us apart. The general philosophy at brokerages is “fix it and forget it.” That is, brokerages recommend “buy and hold” investing to their retail clients, keeping them 100% invested no matter what the markets are doing. This can have disastrous consequences in a bear market, with losses of 20%, 40% or more.
At WIJOPA, we limit losses in bear markets by moving clients’ positions to cash or short term bonds. When the markets head back up, we re-enter equity positions. In this manner we can capture a large percentage of stock market gains without incurring much of the loss. This strategy generally beats “buy and hold” by a large margin on a risk adjusted basis.
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