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The Rules-Based Engine that Could

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Over the past several months, we have been developing and fine-tuning a new set of rules-based investment strategies. Our proprietary investing model aims to deliver consistency across time and market cycles. Our extensive testing of the model has resulted in a high level of conviction that our new offering is going to enable our current and prospective clients to achieve their investment goals over time with fewer sleepless nights. We believe the engine behind our unique approach has advantages over what many advisors currently offer their clients, and this is particularly the case going forward as we enter a new, changed world as a result of the COVID-19 crisis.

  Without getting too far into the weeds, let’s talk a little bit about how the model works. At its core, the only variable needed to run the model is the price. Price, and how price moves and behaves, tells a story about the underlying financial instrument, whether it be a stock, ETF, mutual fund, or bond. Adding the price behavior of a group of securities together tells the story of how a portfolio performs. What we do is look backward at price history and determine what group of securities in a given universe has produced the lowest volatility over a given time period. The output is used as the go-forward portfolio. While going for low volatility may not sound all that exciting, reality suggests otherwise. The chart below shows the performance of the Invesco Low Volatility Total Return Index versus the S&P 500 between 2007 and 2019.

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One of the fundamental principles supporting the outperformance of low volatility is simple math. A 50% drawdown requires a 100% bounce back to get to even. What if there was a disciplined approach to consistently limit drawdowns while staying fully invested in accordance with your financial plan? That is where our model comes in. It increases the odds of superior performance, it smooths out your investment journey, and it gives you peace of mind.

Investing like this makes sense to us. However, it makes extra sense to us, given the uncertainty brought on by COVID-19. Passive investing in indexes makes little sense in this environment, in our opinion. Why would an investor want to own the whole S&P 500 when dozens of the constituents are facing severe existential threats? Our model will always self adjust over time into securities where the price behavior is indicative of the strong, not the weak and struggling.

You might be thinking, “Why don’t I just buy the Invesco Low Volatility ETF?” For many, that may be a great idea. However, what you don’t get with that approach is the flexibility and customization you will get working with DeWitt Capital. We will work together to customize your investment universe that we use to construct your portfolio based on your financial goals and situation. For example, if you have a portfolio of stocks that you do not want to sell, you could talk to us to see if, by merely reshuffling the deck, you can offer yourself a better chance of enhanced risk-adjusted results. If you are interested in a personalized demonstration of how our model may be able to help you, please click here.

 

 

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