Why Puerto Rico

Moving into a Dual Momentum Portfolio

Thu, May 4, 2017
Investing Puerto Rico

QuantCon

I attended QuantCon last week in NYC to learn about algorithmic trading. In the back of my head my goal was to come up with a way to invest and diversify my portfolio. QuantCon isn’t really about that as much as it is coming up with new algorithms for trading. But it was a good place for me to learn about investment and algorithmic investing.

One talk made a big impact on me. Gary Antonacci’s talk titled “Snake Oil, Swamp Land, and Factor-Based Investing”. Gary Antonacci is a long time investor and finance geek. His talk was an overview of his book really, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk.

The Inital Problem

In the past my approach has been to have a balanced portfolio split between stocks and bonds. In the late 1990s and early 2000s we moved into a diversified portfolio of stocks and municiple bonds. Those bonds have been maturing and I haven’t really had a lot of choice for the bonds so I’ve moved to corporate bonds but this seems too risky to me really, since it’s not diversified, it’s all companies. I’ve also moved to Puerto Rico and so the tax advantage of bonds no longer applies if you live here. (Is that true? How is bond interest taxed as a PR resident? Are they taxed at the Federal level and then also at the PR level?)

Most conservative advice is to have a mix of stocks and bonds, starting with 7030 and increasing the bonds holdings as you age. Let’s talk about the stock side of that portfolio first. How do you diversify? The easiset way is to simply buy index funds. Looking at sites like Betterment, Market Riders, and Wealth Front they will do this for you, for a fee of course. The problem with these sites is that they don’t take into account your existing portfolio with respect to taxes or diversification. They just tell you to give them cash and they’ll deal with it. If you have large gains, then their advice is to just sell and give them the cash. Sorry that just doesn’t make any sense.

So I’ve been working on slowly move our stock portfolio over to a handful of index ETFs. Broad ETFs will let you ride the market trends with very little fees. I’ve mostly been using Vanguard Total Market Index (VTI) The question then becomes how to do you move out of 50 or so stocks and into a handful of ETFs? My strategy was to simply sell anyting that didn’t have a tax consequence and then buy VTI with the proceeds.

Enter Dual Momentum

Antonacci’s approach was very appealing to me for several reasons. It’s simple, based on broad indexes, low fee, and beats the market. Basically you move between three investments, US Stocks, Non-US Stocks, and bonds. You make the moves monhtly based on annual momentum. You should read the book and his blog, but the main idea is that momentum works.

Here’s the chart for today. Note that S&P 500 (VOO) is the winner over the last year, so it has the most momentum. So if today was your reblannce day, then you would move your portfolio 100% into VOO. If you were already there, then you would stay there. That’s it, you just check this chart once per month and make the move. It should be the same time each month.

Perfchart for May 4, 2017

This sounds too easy, but Antonacci and other’s have done extensive backtesting. See his FAQ and his book for more information.

Moving to Dual Momentum

So back to my original problem. How do I move into this portfolio? Since the model is telling me that I should be in VOO right now, I’m selling my BND ETF as well as my small GLD ETF and moving those to VOO. That part is easy. What about that basket of stocks? I have a set of other individual stocks that I’m going to just let ride for now.
I’ve held most of these stocks for a long time, Warren Buffet style, so there is no reason to sell them. Since I have a Puerto Rico tax decree, if I hold them for 10 years I only pay 5% tax, so unless I think the company is going to tank, I’ll just hold them for another 8.5 years and then diversify.

Update August 7, 2017

I’ve been rebalancing for the last few months. Back in May I was in VOO but in June I switched to VEU. In July and August VEU was still ahead, so no switching. There are tax implications of switching and there is trading cost. However, if your account is a Vanguard then you can trade ETFs for free. If you have an Act 22 Tax Decree from Puerto Rico you can also avoid paying capital gains taxes when you sell your ETFs at profit during the switch. Of course you don’t pay taxes on the trades if you do them inside an IRA either.