Saturday, April 30, 2011

Changes to the Strategic Growth Model

As you will recall, the Strategic Growth Model (SGM) is designed to maximize returns over the full market cycle (Bull-Bear-Bull or Peak-to-Peak), and is comprised of two main elements... 1) Select stocks that are expected to outperform the market, and 2) Manage risk vs. reward by aligning capital (long vs. short) with prevailing market conditions. Rather than attempt to "predict" where the market may go in the future, the SGM uses a mechanical Thrust/Trend Model (TTM) by to determine prevailing market conditions. It then allocates capital according to the risk vs. reward profile associated with where the market is within the context of its full cycle.

re: #1) Stock Selection... Except for a 12 month period immediately following the historic market decline of 2007-09, the stock selection algorithm has performed exceedingly well since the model's inception in 2003. So the model portfolio will continue to use the same stock selection algorithm as before. The chart's "SGM long portfolio" shows that the stocks selected by the Strategic Growth Model have outperformed the benchmark S&P 500 index by nearly 3:1 for the 12 months ending 4/22.

re: #2) Managing risk vs. reward... We've seen that the stocks greatly outperformed the benchmark index over the past 12 months, yet we know that the hedged portfolio has failed to capture a significant portion of those gains. This isn't acceptable. There needs to be a better way to manage risk without allowing the hedge to put such a drag on the portfolio's peformance. This is where the improvements are focused.

More on this soon...

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