After establishing a portfolio design and choosing the investments, actual investment of that portfolio and the timing of that investment, is controlled by the use of an economic model, one that is designed to determine the nature and direction of current economic activity. This model will cause an asset allocation to vary such that the portfolio volatility is less than or equal to the design profile. This means that, as the economy deteriorates, the model will call for a reduced percentage of equity investment: investment money will come out of equities and will be placed into fixed income and/or cash or cash equivalents. The opposite is true for a strengthening economy.
This is not a trading model. It is, however, a model which reduces volatility when the economy is deteriorating and increases volatility when the economy is improving.
The model tends to lead the stock market by several months.
The maximum amount of risk that the model will allow is the volatility level of the portfolio asset allocation design.
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