Volatility Adjusted Adaptive Asset Allocation (VA4)

Strategy Overview

The Milwaukee Company’s Volatility Adjusted Adaptive Asset Allocation (VA4) strategy combines tactical security selection with a rules-based approach that strategically varies the amount allocated to portfolio securities in response to changing market conditions.

 

Diversification

VA4 begins with a broadly-diversified model portfolio of low-cost exchange-traded funds (ETFs) that track widely-recognized stock and bond market indexes, as selected by The Milwaukee Company.  The amount invested in each ETF is determined in accordance with the investment objectives of the client.  The model portfolio is rebalanced monthly to keep ETF allocations within a pre-determined range to maintain the overall portfolio’s risk-profile target.

 

Volatility Adjustment

High degrees of stock price volatility are often a precursor to falling prices, and low-price volatility often precedes rising prices.  Accordingly, when the return volatility for a security significantly exceeds its historical average, the recommended allocation to that security is reduced, and vice versa.  (See side bar.) 

 

 

Hidden Markov Model

VA4’s algorithm seeks to forecast bull and bear markets using a variation of a probability-based statistical model known as the Hidden Markov Model (“HMM”).  (See side bar).  If HMM signals a bear market for stocks, the algorithm will negate an increase to equity target allocations, if otherwise called for by the volatility adjustment referred to above. 

Components

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Volatility Adjustment

  • VA4 monitors the volatility in the price of each security included in the portfolio, over a rolling 60-day period.

  • When the return volatility of an ETF exceeds its historical average by more than 25%, the target allocation to that ETF is reduced. 

  • When the 60-day return volatility of an ETF is more than 25% below its historical average, the target allocation to that ETF is increased.

​​Hidden Markov Model (HMM)

  • HMM is a statistical model that can be used to identify trends. With VA4, HMM uses historical time-series data to forecast the likelihood of stock prices moving higher or lower in the near future.

The Milwaukee Company℠ is a tradename of Estate Counselors, LLC. The information provided herein is believed to be correct and has been obtained from sources that we consider reliable, but we do not guarantee that this information is accurate or complete.  All expressions of opinion reflect our judgment at the present time, but are subject to change. Nothing found herein is intended to be a substitute for personal investment advice. The investments discussed herein are risky in nature and involve a substantial risk of loss, and we do not in any way warrant or guarantee the results you will experience.