Zig-Zag Portfolio Optimization
Blend fundamentally strong assets that move differently to smooth portfolio risk
- Difficulty
- Expert
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 96%
Navellier constructs portfolios by blending fundamentally strong holdings that move differently, especially dividend-growth stocks with higher-growth stocks. The mechanism is behavioral diversification: when one group zigs and another zags, optimization can assign weights that lower beta, maximum drawdown, standard deviation, and unsystematic risk. This means a concentrated portfolio can be safer than a larger one if its holdings are individually lower risk and fit together better. Selection is not permanent. As an individual stock becomes more erratic, loses a fundamental advantage, or adds more portfolio volatility, it is trimmed or replaced by a safer stock. The sale does not imply the old holding is bad; the replacement only needs to be fundamentally superior and improve the overall ride. Portfolio construction therefore combines security quality, complementary movement, explicit risk measures, and recurring substitution.
Origin
Navellier describes optimization as the firm's way to combine dividend growth with growth stocks and pursue a smoother risk-adjusted portfolio.
Core principles
- 01Diversification depends on different behavior, not merely more holdings.
- 02Fundamental quality and portfolio fit must both be present.
- 03Dividend-growth and growth stocks can offset one another's movements.
- 04A safer replacement can improve a portfolio even when the sold holding remains good.
- 05Risk control requires continuous measurement and replacement.
How to run it
- 1
Build a quality pool
Start with candidates that pass the fundamental scoring process. Exclude holdings whose business evidence is not strong enough to support the next earnings period.
Pro tip Treat fundamental superiority as an entry condition before optimizing weights.
Watch out Low correlation cannot rescue a fundamentally weak holding.
- 2
Measure each risk
Estimate beta, drawdown, standard deviation, and unsystematic trading risk for each candidate. Identify holdings that are becoming increasingly erratic.
Pro tip Include execution-related unsystematic risk, particularly in less liquid securities and ETFs.
Watch out Do not treat volatility as the only dimension of risk.
- 3
Find offsetting behavior
Compare how candidates move under the same conditions and look for groups that zig when others zag. Navellier specifically combines dividend-growth and growth stocks.
Pro tip Seek complementary return drivers rather than simply adding more names.
Watch out A high holding count can still be concentrated in one behavior.
- 4
Optimize the weights
Assign weights that preserve expected return while smoothing the portfolio's aggregate risk measures. Evaluate the portfolio as a system rather than as isolated picks.
Pro tip Compare a concentrated optimized portfolio against a broader unoptimized alternative.
Watch out Optimization based on stale relationships can give false precision.
- 5
Replace rising risk
When a holding becomes more volatile or a safer fundamentally superior candidate emerges, trim or replace it. Judge the trade by its effect on the whole portfolio.
Pro tip A good holding can still be the correct sale when the replacement improves portfolio smoothness.
Watch out Waiting for a holding to become objectively bad can leave avoidable risk in the portfolio.
In the wild
Navellier says his optimized eighteen-stock portfolio was safer than a thirty-seven-stock portfolio because it blended lower-risk dividend and growth stocks that moved differently. The number of holdings fell while the combination improved the portfolio's behavior.
→ Concentration did not automatically raise measured risk because portfolio fit improved.
Common mistakes
Counting names as diversification
More holdings do not necessarily reduce risk when they respond to the same market forces.
Optimizing weak stocks
Navellier begins with fundamentally superior stocks rather than using portfolio math to justify poor candidates.
Keeping a good but inferior holding
A holding can remain good yet deserve replacement when another stock offers lower risk and better portfolio fit.
Is it for you?
Best for
It is best for equity managers who can estimate correlations, security-level risk, and fundamental quality across distinct stock styles.
Not ideal for
It is not ideal when risk estimates are unreliable or the available assets all respond to the same underlying forces.
From the transcript
“because dividend stock zig one grows stock zag you can mix dividend growth with real real growth stocks and really reduce the volatility.”
“Most of the stuff we sell is actually pretty good. We just gotta sell with something that's better, they'll have less volatility and add the…”
“I'm actually safer today on eighteen stocks and I'm on about thirty seven”
From the episode
Interview With Louis Navellier: Masters in Business (Audio)
Louis Navellier