About that BCM Market Risk Model – Part 2

About that BCM Market Risk Model – Part 2

by Bo Billeaud on May 10, 2018 The All-Weather Investor

Regarding last week’s blog discussing our Market Risk Modeltm, we have been asked, “what happens when the model changes to a “high-risk” outlook”?

As you know, in normal conditions our Tactical All-Weather portfolio maintains an allocation of 50% stocks, 40% bonds and 10% gold.

When the model signals a “high-risk” risk environment, we will decrease our exposure to stocks from 50% to 30% and increase our holdings of bonds from 40% to 60%. Following that allocation change, Tactical All-Weather will then hold 30% stocks, 60% bonds and 10% gold. Furthermore, we will maintain that allocation throughout the “high-risk” risk model outlook period for stocks and will revert back to a baseline allocation only when the risk model again signals a “low-risk” outlook.

For Tactical Growth, it is much the same. We would shift our baseline allocation from 70% stocks / 30% bonds to 35% stocks / 65% bonds.

You may wonder why we would redeploy funds raised from reducing stock market exposure into bonds. It is because this area typically does well during times of duress. For example, in 2008, while stocks got slammed, the Vanguard Long-Term Govt. bond fund rose by 25.9%. Government bonds have historically been a great shock absorber, a bridge over troubled water.

With these allocation changes, we would expect that we might well-handle whatever might occur in the market reasonably in-tact, as we will have hedged our positions for most any outcome. While we can’t offer any guarantees on anything, we can say that is how it has worked out in the past for us, and we believe (and expect) that is how it might work out in in the future.

And, that is our plan.