What is the specificities of the algorythm?
The specificity of the algorithm lies in its dual momentum approach, combined with a proprietary drawdown protection mechanism. It operates as follows:
Stock Selection: The algorithm identifies the 5 best-performing stocks from the S&P 500 using relative momentum (top past performers) and filters out stocks with negative returns using absolute momentum.
Drawdown Protection: This monthly optimization mechanism adjusts the allocation percentage for each selected stock and determines the optimal cash position to mitigate downside risk. For Pro subscribers, it includes daily monitoring with stop-loss and take-profit alerts, allowing dynamic intervention to lock in gains or limit losses in real-time.
Dynamic Adaptation: By integrating momentum and active risk management, the algorithm ensures consistent performance, minimizes drawdowns, and enhances client control in varying market conditions.
Why only 5 stocks per month ?
By working with only 5 stocks, the algorithm leverages concentrated high-performance opportunities. The drawdown protection mechanism effectively smooths volatility, resulting in levels comparable to the Nasdaq 100, while capturing higher potential returns through targeted stock selection.
This streamlined approach simplifies tracking and portfolio rebalancing.
What type of broker do you use ?
We primarily use online brokers.
They allow us to perform very low-cost arbitrage on the one hand and are designed to be extremely user-friendly on the other.
In Europe, Trade Republic, Degiro, Interactive Brokers, eToro, Bux seems like an obvious choice for us, as the values in our portfolio universe are listed in EUR, which helps us avoid currency exchange fees that are often too expensive and lead to performance losses.
Outside of Europe, there are many low-cost and highly efficient brokers available : Interactive Brokers, Robinhood, Fidelity Investment, Questrade, Charles Schwab, eTrade, Trade Station…
How many rebalancings should be expected ?
Fewer than 10 per month. In the worst-case scenario, the algorithm will execute up to 5 sales and 5 purchases.
Has the method been tested in real-life conditions ?
Yes, the developer of the method managed an Active Managed Certificate (AMC) based on the same algorithm at Rothschild & Co Wealth Management Europe. The AMC operated with ETFs. While this version was designed to outperform the S&P 500, the AMC aimed to replace actively managed funds of the Flexible International type.
What is a broker ?
A broker is a financial intermediary that facilitates the buying and selling of financial instruments, such as stocks, bonds, ETFs, or other assets, on behalf of individuals or institutions. Brokers provide access to financial markets, offer trading platforms, and may also provide additional services like market analysis, research, and portfolio management. They typically charge a commission, fee, or spread for their services. Online brokers, in particular, have become popular for their low fees and user-friendly platforms.
What is a rebalancing ?
Rebalancing is the process of adjusting the weights of assets in a portfolio to maintain a desired allocation. This involves buying or selling assets to bring the portfolio back in line with its target distribution. Rebalancing is often done periodically (e.g., monthly or quarterly) or when asset values drift significantly from the target allocation due to market fluctuations.
Example with 5 Stocks and Cash
Suppose you have a portfolio of 5 stocks (Stock A, Stock B, Stock C, Stock D, Stock E) and cash, with an initial target allocation of 20% for each stock and 0% in cash.
Initial Portfolio:
- Stock A: $2,000
- Stock B: $2,000
- Stock C: $2,000
- Stock D: $2,000
- Stock E: $2,000
- Cash: $0
Total Portfolio Value: $10,000
After Market Movement (Example):
- Stock A: $2,500
- Stock B: $1,800
- Stock C: $1,500
- Stock D: $2,200
- Stock E: $2,300
- Cash: $200
Total Portfolio Value: $10,500
The new weights:
- Stock A: 23.8%
- Stock B: 17.1%
- Stock C: 14.3%
- Stock D: 21%
- Stock E: 21.9%
- Cash: 1.9%
These weights deviate from the target allocation of 20% per stock.
Rebalancing:
To rebalance, you would sell assets that are over their target allocation (e.g., Stock A and Stock E) and use the proceeds to buy assets under their target allocation (e.g., Stock B and Stock C).
- Sell $500 of Stock A.
- Sell $300 of Stock E.
- Buy $500 of Stock C.
- Buy $300 of Stock B.
After Rebalancing:
- Stock A: $2,000
- Stock B: $2,100
- Stock C: $2,000
- Stock D: $2,200
- Stock E: $2,000
- Cash: $200 (unchanged)
Now, the portfolio is closer to the original target allocation, ensuring balanced risk and exposure across the assets.