There may be some merit in a mechanistic approach to portfolio adjustment for the following reasons:

- Set at suitable review intervals, trading frequency and related costs can be minimised

- The inertia effect of “falling in love” with stocks is avoided

- The system can allocate assets on a rational basis (asset allocation is the biggest determinant of performance)

- Emotional components (herd behaviour, fear and greed, reluctance to admit mistakes etc) which bedevil individual investors are minimised.

- The system can mandate sales, the hardest element of portfolio management

- The system can be engineered to be biased towards capital preservation 

I set out below the structure of a simple system which attempts to tackle the issues above.


This system determines which of four diverse asset classes are held at any given time. Each asset class has a single proxy chosen (a) to be easily traded on small spreads and (b) to have a good financial credentials (balance sheet, size etc). The four asset classes are:

  • Developed market equity
  • Real estate
  • Emerging market equity
  • Hard commodities (gold, mined raw materials)

Clearly there could be more than four asset classes but these four seem to me to cover much of the waterfront and do not correlate much in normal market conditions.

Decision process

This system is based on a quarterly review period. The decision dates are the first trading Tuesday after each of 15th January, April, July and October.  (The dates and frequency could vary but these suit me as I am usually not travelling then). The decision review answers the question “should this asset class be held for a further three months?”. If the answer is No then that portfolio element is switched to cash for the following three months.  

Basis of Decision

The asset class is held for a further three months if the 50 day moving average price on the review date is above the 200 day moving average. Otherwise the asset is sold and cash is held until the next review date.
This is a simple “the trend is your friend” methodology that can be back-tested through the last five years - a period of considerable volatility.  I have done this and the results are below.


I have chosen single proxies for the four asset classes on the basis that I know the particular assets.   My proxies…

Unlock this Article with a 14 day free trial

or Unlock with your email

Already have an account?
Login here