The primary goal of the Model has always been to capture significant portions of stock market gains with less than commensurate stock market risk.
Over 35 years ago, I faced the reality that virtually no investment vehicle could touch the long-term return potential of the stock market. I also had to deal with stark truth that significant loss possibilities accompanied this return potential as well.
Back in the late 1970s any serious investor would have been quite aware of the 1973-74 bear market when the S&P 500 index declined nearly 50%. A loss of this magnitude was far too severe for me to emotionally handle, even as a young man.
It forced my pursuit of an objective method that would allow me to invest in stocks and yet satisfy my low tolerance for investment risk.
I am admittedly predisposed to view the general investment (i.e., economic and political) climate negatively. As such, my greatest flaw as an investor has been to short-change the awesome power of the American economic engine. Combine this mindset with an aversion to risk and it will usually produce a lousy investor.
The Low-Risk-Investment Model (the Model) was ultimately developed to give me enough confidence to actually put my hard-earned capital at risk by investing in equities.
It was a long and arduous journey which resulted in the earliest version of the Model and led to my first serious dip into stocks back in June 1982, on the eve of one of the greatest bull markets in history.
This early Model borrowed elements from some of the popular advisory services of the day of the day like Martin Zweig’s “Zweig Forecast” and Dick Fabian’s “Telephone Switch Newsletter.” It used relatively simple market “barometers,” or what some might say, “timing models” to provide guidance.
Since the early 1990s, data availability and sophisticated spreadsheet programs have allowed me to invest considerably more time and effort into the Model itself for continued improvement and refinement.
Until 2013 I never expected this Model to see the light of day. Interest by several friends convinced me to make it readily available to them (and others if so interested), hence the development of this website. It has been fully operational since early May 2013.
The Model and its Components
Today’s version of the Model uses none of the original components and is presently comprised of eleven individual “indicators” — mini-models really — which are weighted mostly based on past performance.
Of these eleven indicators, seven are considered short-term oriented because they call for allocation adjustments more frequently than the other four indicators.
The seven short-term indicators are shown in the chart and designated by the “S” in the “Item” column. The weighted sum of these seven short-term indicators is 60% as shown in the far right column. This 60% sum is percentage of a sample portfolio given to funds not subject to capitals gains taxes, like IRAs. The remaining 40% of the weight is given to those four remaining indicators which trade considerably less often and have a greater chance of capturing long-term capital gains tax rates.
All but one of the Model’s eleven components are highly proprietary and worthy survivors of countless dozens, perhaps hundreds, of failed efforts. Below is the updated indicator list (as of Jan. 2015) along with the percentage weighting of each.