Market Timing or Portfolio Hedge

One of the strongest proponents for staying in the market and avoiding market timing is Charles D. Ellis.  In his book, "Winning the Loser's Game" he writes, "The long, sad history of market timing is clear: Virtually nobody gets it right even half the time. And the cost of getting it wrong wipes out the occasional gain of getting it right. So the average investor's experience with market timing is costly. Remember, every time you decide to get out of the market (or get in), the investors you buy from and sell to are the best of the big professionals. (Of course, they're not always right, but how confident are you that you will be 'more right' more often than they will be?) What's more, you will incur trading costs or mutual fund sales charges with each move–and, unless you ae managing a tax-sheltered retirement account you will have to pay taxes every time you take a profit." [Read more...]

Third Quarter Reminders

Today ends the third quarter for 2010. TLH spreadsheet users should have the VTSMX and VFINX distributions entered. Make sure to include all the monthly dividends when the broker statements are available or go into your account and see what the dividends are for this month. [Read more...]

A Modest Proposal: “New Normal” Portfolio #2

As a follow up to the earlier post this morning, let me propose another "New Normal" style portfolio. This is a variation of the portfolio Bob W. set up several months ago. Keep in mind that I am using a 3.5% inflation rate and the projected return for the S&P 500 over the next year is 7.3% instead of the Quantext Portfolio Planner (QPP) default projection of 8.3%. Below is a screen shot of the initial portfolio. As I will explain in a bit, when certain technical triggers occur, we will exchange two of the equity ETFs for a hedging ETF. [Read more...]

“New Normal” Debate Is On

Here are two references that articulate different points of view as to whether or not we are going to face a "New Normal" over the next decade. The first site pits Ken Fisher against the position of El-Erian. The second site is referenced in the first paper. [Read more...]

Portfolio Management

Developing Portfolio Policy

Portfolio management begins with a well considered Portfolio Policy. Basic portfolio plans include the following:

  • Asset classes to include in the portfolio
  • Percentage to invest in each asset class
  • Investments to populate asset classes
  • Portfolio monitoring method
  • Projected return analysis
  • Projected risk analysis
  • Selection of appropriate benchmark

Implementing these basic ideas will help investors plot a successful investment path. It goes without saying that one needs to follow “The Golden Rule of Investing” so make sure saving early in life is high on the list of things to do.

Examples of these suggestions are scattered throughout this blog. ITA Wealth Management personnel are strong advocates of asset allocation. We tilt portfolios toward small-cap and value as advocated by Fama-French research.

More recently we have been stress testing a number of portfolios and find there is a high correlation between all the U. S. equity asset classes. Even developed international markets provide little diversification. Finding ETFs that provide diversification is not easy and there are times when we need to dip into the data bank of individual stocks to improve diversification. Normally, one does not think adding individual stocks will provide diversity, as least compared to index funds. Intuition frequently fails investors and hard-headed analysis is necessary. The stocks we sprinkle in with index investments come from the “Creme List” and we generally publish a list each week for Platinum members. [Read more...]

Portfolio Performance Update

This week ended on a strong note with the broad market VTI up over 2% on the day.  However, that move was insufficient to pull the Maxwell and Euclid portfolios into positive territory.

Portfolios available to Platinum members continue to do well when measured against the VTSMX benchmark. Only the Kenilworth is lagging and those numbers are exaggerated due to the short period this portfolio has been in existence. Updated spreadsheets are available to Platinum members. A sample TLH spreadsheet is available to any reader and that link can be found on the right-hand edge of this page. One may need a Guest membership. 

Looking at the Sortino Ratio (SR) and Retirement Ratio (RR) columns, the RR will never be larger than the SR as it includes an additional factor explained in prior blog posts. The RR will either be equal to the SR or lower than the SR. If any reader has further questions on either of these calculations, please ask in the comments section.

 

Portfolio Performance - 9/24/2010

Portfolio Last Update Launch Date Tracking Tool Port. IRR ITA Index Diff Port. vs. ITA Index VTSMX IRR Diff. Port. vs. VTSMX Index IR SR RR
AA-Mosaic 08/31/2010 07/21/1999 Captool 1.39% NA NA -0.42% 1.8% 0.05 NA NA
Curie 09/24/2010 12/26/2007 TLH SS 2.4% -4.2% 6.6% -4.3% 6.7% NA 9.6 -1.1
Mosaic2 08/31/2010 07/19/1999 Captool 3.8% NA NA -0.62% 4.3% 0.15 NA NA
Newton 09/24/2010 06/02/2008 TLH SS 7.2% 1.8% 5.4% 2.7% 4.5% NA 11.2 10.2
Passive Port. 08/31/2010 12/01/2000 Captool 4.31% NA NA 0.02% 4.29% 0.68 NA NA
Schrodinger 09/24/2010 12/01/2000 TLH SS 4.7% 1.8% 2.9% 1.6% 3.1% NA 11.6 11.6
Jane 08/31/2010 02/14/1997 Captool 8.08% NA NA 3.09% 4.99% 0.53 NA NA
Einstein 09/24/2010 06/30/2008 TLH SS 12.2% 21.4% -9.2% 6.7% 5.5% NA 5.9 5.9
Gauss 08/31/2010 02/19/1997 Captool 8.35% NA NA 3.06% 5.29% 0.22 NA NA
Kepler 09/24/2010 11/01/2008 TLH SS 21.2% 31.4% -10.2% 17.3% 3.9% NA 3.5* 3.5*
Scrappy 08/31/2010 08/14/2008 Captool 7.00% NA NA -4.28% 11.28% NA NA NA
Bohr 09/24/2010 08/14/2008 TLH SS 10.3% 13.0% -2.7% -0.1% 10.4% NA 10.8 7.5
Kenilworth 09/24/2010 08/18/2010 TLH SS 40.9 41.4 -0.5 60.8 -19.9 NA -1.4 -1.4
Projects 08/31/2010 12/01/2000 Captool 4.42% NA NA 0.02% 4.40% 1.33 NA NA
Washington 08/31/2010 06/18/1999 Captool 2.40% NA NA -0.19% 2.59% 0.27 NA NA
Maxwell 09/24/2010 12/25/2000 TLH SS -0.1% 0.6% -0.7% 2.5% -2.6% NA -1.3 -1.3
Adams 08/31/2010 06/18/1999 Captool 2.39% NA NA -0.19% 2.58% 0.70 NA NA
Euclid 09/24/2010 06/30/1999 TLH SS -2.2% -0.1% -2.1% 2.5% -4.7% NA -1.7 -1.7
Jefferson 08/31/2010 03/13/2008 Captool 4.23% NA NA -3.75% 7.98% NA NA NA
Madison 09/24/2010 03/13/2008 TLH SS 5.1% 0.2% 4.9% 4.9% 0.3% NA 0.4 0.4

Quotes from Charles Ellis

"It's not how good you are that counts, but how good you are compared with your competitors."

"The really impressive characteristic of investment returns is that the variation in year-to-year rates of return on common stocks dwarfs the average annual rate of return on stocks."

"Investment policy is the foundation upon which portfolios should be constructed and managed."

"America's most successful investor, Warren Buffet, recommends that individual investors consider indexing."

"After formulating and implementing a sound investment policy, changes should be made carefully and infrequently."

 

Photograph: Los Caracoles Restaurant in Barcelona, Spain

Technical Indicator Check

A few days ago several ETFs approached the 70% line on the Relative Strength Indicator (RSI) graph.  This evening I ran a quick check of all the major ETFs held in the various portfolios to see where current RSI values were positioned, knowing we had a few down days in the market.  As expected, the RSI graphs are in retreat.

The market retreat means we can postpone any thought of selling some of the large-cap core holdings and buying S&P 500 shorts in the form of SDS.

Photograph:  Sea Cloud II in dock on Gibraltar.

Investment Check List

On a regular basis, it is prudent to go through an investment checklist to see if all the bases are covered.  Here is a review of such a list.

Early in January I encouraged investors to set out on a new path of investing. Let’s run through a checklist to see how well you are doing.

Investment Checklist

1. Portfolio Policy: Have you written up a portfolio plan or put it into a spreadsheet format?

2. Saving: What is the plan to save on a regular basis? Portfolio planning is useless unless one is saving to build a portfolio. Remember the first chapter of Ellis and Malkiel’s book, “The Elements of Investing” and how it recommended a savings plan?

3. Books: What is the education plan? What books are you finding useful? Make recommendations for other readers of this blog.

4. Asset Classes: What asset classes are included in the portfolio plan? Is the portfolio sufficiently diversified?

5. Percentage Allocations: What percentage is allocated to each asset class? Are you finding examples on this blog of use. If not, how can I help?

6. Risk: Is a sample portfolio available so one can upload it to the RiskGrades site and check out if the risk level is acceptable.

7. Monitoring: What means are in place to monitor the portfolio to see if it is carrying out the Portfolio Policy?

 

Photograph: Lisbon fountain


Investing requires discipline and the above seven (7) checklist items are to help investors gain traction as they build a portfolio.

Portfolio Performance Data

Portfolios tracked using the Captool software have been updated as of 8/31/2010. All of these portfolios lost a little ground over the month of August to the Vanguard Total Market Index Fund, VTSMX, a primary benchmark. Portfolios tracked using the TLH spreadsheet will be available this Saturday (9/25/2010) and if the market holds, we expect most of the portfolios will show a positive separation between the portfolio Internal Rate of Return (IRR) and the benchmark IRR.

Readers following the "New Normal" portfolio reports will note it does better in down markets whereas most of the 20 portfolios in the data table do better than the index in up markets.

As you examine the table below, pay attention to column nine where the percentage difference between the portfolio and the benchmark (VTSMX) is recorded. The results are rather amazing considering how difficult it is to beat the market.  Keep in mind that it is more difficult to outperform the VTSMX than it is the S&P 500 (VFINX), a benchmark used by many mutual fund money managers.

 

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio Performance - 8/31/2010

Portfolio Last Update Launch Date Tracking Tool Port. IRR ITA Index Diff Port. vs. ITA Index VTSMX IRR Diff. Port. vs. VTSMX Index IR SR RR
AA-Mosaic 08/31/2010 07/21/1999 Captool 1.39% NA NA -0.42% 1.8% 0.05 NA NA
Curie 08/27/2010 12/26/2007 TLH SS 0.3% -11.6% 10.7% -8.0% 8.3% NA 12.0* -1.22*
Mosaic2 08/31/2010 07/19/1999 Captool 3.8% NA NA -0.62% 4.3% 0.15 NA NA
Newton 08/27/2010 06/02/2008 TLH SS 4.6% -1.1% 5.7% -1.7% 6.3% NA 16.0* 3.84*
Passive Port. 08/31/2010 12/01/2000 Captool 4.31% NA NA 0.02% 4.29% 0.68 NA NA
Schrodinger 08/27/2010 12/01/2000 TLH SS 4.3% 6.0% -1.7% 0.5% 3.8% NA 5.7 4.8
Jane 08/31/2010 02/14/1997 Captool 8.08% NA NA 3.09% 4.99% 0.53 NA NA
Einstein 08/27/2010 06/30/2008 TLH SS 8.8% 15.8% -7.0% 2.0% 6.8% NA 7.3* 6.1*
Gauss 08/31/2010 02/19/1997 Captool 8.35% NA NA 3.06% 5.29% 0.22 NA NA
Kepler 08/27/2010 11/01/2008 TLH SS 18.3% 27.1% -8.8% 12.2% 6.1% NA 5.5* 5.5*
Scrappy 08/31/2010 08/14/2008 Captool 7.00% NA NA -4.28% 11.28% NA NA NA
Bohr 08/27/2010 08/14/2008 TLH SS 7.5% 7.7% -0.2% -4.7% 12.2% NA 15.3* 5.5*
Kenilworth 09/24/2010 08/18/2010 TLH SS                
Projects 08/31/2010 12/01/2000 Captool 4.42% NA NA 0.02% 4.40% 1.33 NA NA
Washington 08/31/2010 06/18/1999 Captool 2.40% NA NA -0.19% 2.59% 0.27 NA NA
Maxwell 08/20/2010 12/25/2000 TLH SS -0.5% -1.6% 1.1% 1.4% -1.9% NA -1.0 -1.3*
Adams 08/31/2010 06/18/1999 Captool 2.39% NA NA -0.19% 2.58% 0.70 NA NA
Euclid 08/20/2010 06/30/1999 TLH SS -0.7% -1.3% 0.6% 1.3% -2.0% NA -0.8 -1.2*
Jefferson 08/31/2010 03/13/2008 Captool 4.23% NA NA -3.75% 7.98% NA NA NA
Madison 08/20/2010 03/13/2008 TLH SS 4.3% -1.9% 6.2% 1.4% 2.9% NA 4.2* 1.8*

Photograph: Art on the Celebrity Eclipse ship