SRM Tutorial
The Sector Rotation Model (SRM) helps you determine which sector is most likely to outperform each month. Focusing your investments in the top performing sectors will allow you to earn higher returns while taking on less risk.
This tutorial will guide you through applying the SRM’s recommendations to your own personal portfolio.
Getting Started
The Sector Rotation Model is updated monthly. Updated recommendations are accessible with a premium subscription and are available on the first trading day of each month. They represent proper positioning for the duration of that month.
Updated recommendations can be accessed through the Current Recommendations page, available at the top of our home page once you log in. An email is sent out each month to alert you when updated recommendations have been posted.
To get the most out of the SRM, you will want to update your holdings immediately upon receiving the latest recommendations.
Note: If you invest primarily through you employer sponsored 401(k) plan, or the Federal Government’s Thrift Savings Plan (TSP), please see those specific models. The recommendations provided by those models utilize similar logic to the SRM, and are customized to provide more tailored guidance.
How to Use
The most straightforward way to leverage the SRM is to follow it exactly, as it rotates between the 11 sector exchange-traded funds (ETFs).
- Each month when you receive the latest SRM recommendation, sell any previously established positions and move those funds into the new selection. The ticker symbols for each of the sector funds are clearly identified on the recommendations page.
- If the model selects Cash, sell any positions you have in any of the 11 sectors and keep the funds in your money market account. It is rare when the SRM moves to cash, but it does happen. When the SRM recommends Cash, it’s a signal that the stock market is in a downward trend and the best place to be is on the sidelines.
Note: The SRM works in sync with the Asset Rotation Model (ARM). When the SRM goes to cash, you can check the ARM to see if bonds are an appropriate alternative to stocks. If so, you can follow the ARM until the SRM reenters the market.
You will need to monitor both the SRM and your positions monthly.
Additional Considerations
The historical backtested performance of the SRM is based on following the model exactly, maintaining exposure to only one sector at a time, and moving the entire portfolio according to each month’s recommendations. While the results speak for themselves, we understand that you may be hesitant to invest so heavily in just one sector.
If that’s the case, we suggest two possible alternatives:
- Use only a small portion of your overall portfolio to follow the SRM’s recommendations. As you see the results over time and become more comfortable with the model’s performance, then consider increasing your exposure.
- Consider splitting your investments between the top two or three recommended sectors each month. This will allow for greater diversification and will reduce overall risk. The trade-off comes in the form of marginally lower expected returns, as well as slightly higher trading costs. Again, once you develop more comfort with the model, you can adjust accordingly.
Color Coding
On the Current Recommendations page you will find the latest SRM recommendation and you will also find a table that ranks all the funds included in the SRM from best to worst. We have included this information for those who may wish to deviate slightly from the model’s recommendations, either for diversification purposes or other reasons. In the Complete Ranking Table, you will notice a color coding schema designed to alert you to the status of each option. The color coding is as follows:
| Key | |
|---|---|
| Green | Showing positive price performance and acceptable as an investment |
| Yellow | Acceptable as an investment but significantly better alternatives exist |
| Red | Not recommended at this time |
We recommend that you stay away from any sectors in red and concentrate your investments in the highest ranked sectors.
As a final reminder, not following the SRM’s exact strategy and recommendations will result in returns that differ from the model’s historical and future performance.
This wraps up the SRM Tutorial.
If you have any additional questions, please reach out to us by using the Contact Us page or sending an email to support@modelinvesting.com.
