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The Correction Risk Level is a quick way to gauge what our indicators and studies are suggesting.The higher the risk, the more likely the market is to decline. Another way to look at it is in terms of cash. If the Correction Risk Level is 0, then we would be more inclined to keep 0% of our portfolio in cash (i.e. we would be fully invested). But if the Correction Risk Level is 10, then we would be more inclined to keep 100% of our portfolio in cash (i.e. no exposure to stocks). We take the overriding trend of the market into account. If the indicators are showing excessive amounts of bearish opinion, then the market is more likely to respond favorably to that if we're in a bull market, and the Risk Level would be lower. But if we're in a bear market, then bearish sentiment extremes are less reliable, and the Risk Level would be higher. The default Risk Level is 5, which is where it would be if there is no edge present among our indicators and studies.
We do not suggest using these Risk Levels in any kind of mechanical way. They are meant to help support any existing technical or fundamental research you may be doing. When the Risk Level is very high, though, we do recommend backing off on long positions or possibly considering short positions (especially during a bear market). For both time frames, a Risk Level below 3 can be considered "low ris"k while a level above 7 can be considered "high risk". The more extreme the Risk Level, the more likely the market will respond in a timely manner. The most likely time for these Risk Levels to fail is during a time of trend transition from a bull to bear market (or bear to bull). That is often good information in itself - if the Risk Level is very high, for example, but prices continue to rise, then that is a heads-up that buyers are very interested, and we will likely see even higher prices going forward.
ThePortfoliois a real-money portfolio for Jason Goepfert. It is structured as tax-adjantaged account and is supplementary to other investments in real estate and private businesses. The account is meant as a store of savings, and not a trading vehicle to maximize gains. This is not meant as a recommendation to buy or sell any security. It is by no means intended to represent an ideal or recommended portfolio for anyone other than the author. It can change directions quickly and heavily depending on market volatility, and does not reflect a buy-and-hold 60/40 portfolio recommended for most long-term investors. The purpose is to simply show "skin in the game" and transparency - any reader of the report deserves to know potential biases from what an author might personally own. Changes in the Portfolio will be reflected the day they are instituted. Positions taken are typically in highly liquid markets with a primary focus on ETFs and index options contracts.
The most active time frame is 1-3 months, which is the "sweet spot" for most of the indicators and studies that we follow. That is the typical intended time frame when changes are made to asset allocations. The overall strategy is to adjust allocations based on perceived risk levels, within certain bounds. For example, it will rarely be less than 30% or more than 80% invested in stocks. There is often a large cash position, which is used to heavily weight special situations that arise perhaps 2-3 times per year, and which has provided the bulk of returns in many years. Other assets could be underweighted not because of higher risk, but because of a desire to more heavily weight a special opportunity.