Semi-Variance: The Better Risk Measurement

Photograph: Government buildings in Lisbon, Portugal

Updating Sortino and Retirement Ratios Risk Management

Users of the TLH spreadsheet will want to update the semi-variance calculation in the SR worksheet after the market closes and all the index data is available.  To make sure you have the latest data, wait until at least three hours after the market closes so all the benchmarks are updated. It takes time for all the data to be collected.

If anyone needs help with this process, let me know.  If you are not sure what I am talking about, do a blog search for semivariance, semi-variance, Sortino Ratio or Retirement Ratio.  Those four searches will bring up critical blog posts.

Water ETFs

Water ETFs for Portfolio Diversification

Portfolios constructed and monitored here on the ITA Wealth Management blog focus on broad asset classes.  We use ETFs such as VTV, VOE, VBR, VEU, VWO, VNQ, etc. as our primary portfolio building blocks.  On occasion we add individual stocks or ETFs that are out of our "mainstream" group of ETFs.  One area we branch into is water.  Below is more information on a particular water ETF and an article on the whole issue of water.

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Investment Advisor: Should You Use One?

Remember the little investment book, "The Investment Answer" written by Daniel C. Goldie and Gordon S. Murray and the five critical decisions each investor needs to make as they begin the journey of investing?  You recall that decision number one was the Do-It-Yourself Decision.  Goldie and Murray advocated finding a fee based investment advisor to help with the hard decisions.  Here is an article that agrees with Goldie and Murray.

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Index Investing Puzzles

Check out this interesting article titled, "The Weighting Game, and Other Puzzles of Indexing."  Here are the opening two paragraphs.

"If we had hosted a panel discussion about active and passive investing 15 years ago, we would have titled it: "Indexing, Does It Make Sense, and If So, Why?" The burden of proof would have lain at the feet of the indexers. That's not the case anymore. The indexing community has built a compelling case in favor of the strategy, arguing that low costs, tax efficiency, and low turnover increase the odds that passive investments will outperform active vehicles. Investors have responded in droves.

To discuss the growth of passive investing, where it stands today, and whether investors, who now have immediate access to hundreds of different types of indexes, are benefiting, we invited two academics and one practitioner to participate in the Morningstar Conversation. Lubos Pastor and John Heaton are professors of finance at the University of Chicago Booth School of Business. They both helped develop the new CRSP family of indexes, which will debut this year, under the auspices of Chicago Booth's Center for Research in Security Prices. John Montgomery develops quantitative models to manage mutual funds for Bridgeway Capital Management, a firm he founded in 1993."

The issue of rebalancing or reconstituting comes up for discussion.  I don't see this as a problem for us as investors, at least in the U.S. market.  If one holds ETFs in all nine asset classes (The Big Nine) then stocks that migrate from SCV to MCV still stay in our portfolios as we hold both VBR and VOE.  We may lose or gain a slight amount as we will not hold identical percentages in each asset class, but that is minor.

The article is a tad long, but interesting for some readers.

Index Freeloaders

Take a few minutes to read and smile while reading this article about freeloading index investors.  As passive investors, we need to be grateful for active investors.

Portfolio Performance: 25 February 2011

Photograph: Harvest in the Sacred Valley of Peru with Andes in the background.

Portfolio Performance

Since posting the last performance table, the February 25 update shows nearly all portfolios gaining ground on the benchmarks.  Several of the larger portfolios also exhibited an increase in both the Sortino and Retirement Ratios.  It seems as if the portfolios are structured to show relative improvement when there is above average volatility in the market.

Portfolio Performance - 02/25/2011

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 01/31/2011 07/21/1999 Captool 2.6% NA NA -0.41% 3.01% 0.05 NA NA
Curie 02/25/2011 12/26/2007 TLH SS 5.8% -0.1% 5.9% 1.8% 4.0% NA 7.5 11.3
Mosaic2 01/31/2011 07/19/1999 Captool 4.95% NA NA -0.6% 5.55% 0.15 NA NA
Newton 02/25/2011 06/02/2008 TLH SS 10.5% 13.5% -3.1% 8.6% 1.9% NA 2.2 2.2
Passive Port. 01/31/2011 12/01/2000 Captool 5.12% NA NA 1.25% 3.87% 0.69 NA NA
Schrodinger 02/25/2011 12/01/2000 TLH SS 5.3% 5.8% -0.5% 3.3% 2.0% NA 3.8 3.8
Jane 01/31/2011 02/14/1997 Captool 9.20% NA NA 2.99% 6.21% 0.54 NA NA
Einstein 02/25/2011 06/30/2008 TLH SS 15.7% 19.0% -3.3% 12.7% 3.0% NA 4.2 4.2
Gauss 01/31/2011 02/19/1997 Captool 9.3% NA NA 2.96% 6.34% 0.22 NA NA
Kepler 02/25/2011 11/01/2008 TLH SS 21.3% 24.2% -2.9% 21.2% 0.1% NA 0.0 0.0
Scrappy 01/31/2011 08/14/2008 Captool 12.85% NA NA 5.6% 7.25% NA NA NA
Bohr 02/25/2011 08/14/2008 TLH SS 13.4% 14.1% -0.6% 6.8% 6.7% NA 0.9 0.9
Kenilworth 02/25/2011 08/18/2010 TLH SS 28.7% 34.1% -5.4% 46.1% -17.4% NA -0.1* -0.1*
Projects 01/31/2011 12/01/2000 Captool 5.6% NA NA 0.02% 5.58% 1.32 NA NA
Washington 01/31/2011 06/18/1999 Captool 3.13% NA NA -0.19% 3.32% 0.28 NA NA
Maxwell 02/25/2011 12/25/2000 TLH SS 1.0% 11.1% -10.1% 4.8% -3.8% NA -0.2 -0.2
Adams 01/31/2011 06/18/1999 Captool 3.39% NA NA -0.19% 3.58% 0.71 NA NA
Euclid 02/25/2011 06/30/1999 TLH SS 1.7% 9.4% -7.7% 4.9% -3.3% NA -0.2 -0.2
Jefferson 01/31/2011 03/13/2008 Captool 5.62% NA NA -3.21% 8.83% NA NA NA
Madison 02/25/2011 03/13/2008 TLH SS 6.0% 4.6% 1.4% 11.2% -5.2% NA -0.3 -0.3

Kepler Portfolio Update

Kepler Portfolio Monitoring

Over the past few weeks I've concentrated on bringing a number of the portfolios back into balance.  The Kepler Portfolio is one that demanded a lot of attention and activity over this last week resulted in several asset classes coming back within the Threshold of 25%.  Check the Kepler Dashboard below.

The owner of this portfolio is beginning to add a little cash each month so I am not as concerned about the Small-Cap Blend (or Core) asset class being above target.  That will smooth out over time as we bring the three under target classes into balance.  Of major concern right now is Emerging Markets.  One hundred shares will pull that asset class back into balance.

Platinum members will note the Kepler once more pulled slightly ahead of the VTSMX benchmark.  This lead could be temporary, but it is a move in the right direction.

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MEDA Trust Update: 25 February 2011

MEDA Information

"The poor stay poor not because they are lazy, but because they have no access to capital."

- Milton Friedman

It has been several weeks since I last gave an update as to what is happening with the ITA Wealth Management membership fees I am donating to MEDA Trust.  Check out the link if you want to know more about this organization.

Over the last few years my wife and I have donated X dollars to MEDA Trust.  Do to the generosity of individuals and governments, our donations have been more than matched.  In fact 1.05X dollars were matched.

Thus far, 5.27X dollars have been paid back.  The amount is greater than X as the dollars are loaned over and over.  As payments are made on a loan, the dollars flow into the donor's account.  These are not our dollars as these are contribution dollars.  When a loan is paid, those dollars become available to be loaned to start a new business and that is why more than X dollars have been paid back into our "foundation" account.

Currently, 7.36X dollars are out on loan and working with farmers, store owners, market vendors, weavers, etc.  Checking our account this morning, I see where we have helped launch 237 businesses.  One writer calculates that for each business started, another 100 people are impacted.  By this summer we expect to be helping over 250,000 people and our goal is to impact 1 million people.  You can help by becoming involved.

If you would like to become directly involved in helping the less advantaged, open up your own account with MEDA Trust.  Or you can take out a Platinum membership and become a student of ITA Wealth Management knowing that your membership fees will be donated to MEDA Trust.


Platinum membership is available for $5.00 per month.  Learn how to construct, manage, and monitor your portfolio.

Portfolio Update

Curie Portfolio Revisited

While it is a tad early to revisit the Curie Portfolio, shares of ORCL were added to this portfolio over the last few days and we want to see how that impacts the asset allocation plan.  Examine the Dashboard screen shot below for that information. Using a 25% Threshold, one can easily see that Oracle (ORCL), a large cap growth company, pushed LCG over target.  This leaves SCG and International REITs below target.  Limit orders are in place to bring those asset classes up to target levels.

The performance screen shot below shows the portfolio is still performing quite well with respect to the two benchmarks.  Both the Sortino and Retirement Ratios are very high.

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A Portfolio Construction Policy

Photograph: Main Gate to University of Glasgow, Scotland

As an educational investment blog, ITA Wealth Management is all about portfolio construction, management, and monitoring.  In this post I will focus on the beginning steps of portfolio construction.  Portfolio construction is the process of assembling security holdings using a Strategic Asset Allocation blueprint.  We will walk through that process in this critical blog entry.  It is not unusual for an investor to put together a hodgepodge of individual stocks and call it a portfolio.  This is not what I call an intelligent approach to portfolio construction.  What are the steps one uses to weave a portfolio?

Platinum membership is available for $5.00 per month.  Subscribers should more than earn this fee back each year.  Membership fees go to support new businesses for the less fortunate through MEDA Trust.

1.  Step one is to determine the percentage breakdown between equities (stocks) and bonds.  The ratio will vary from 90% to 30% equities with 10% to 70% in bonds.  This is not to say there might be rare instances when one holds 100% in either equities or bonds.  The Equity/Bond ratio is very individual as are most of the steps to building a portfolio.  A common Equity/Bond ratio is 60/40.  Most portfolios I track have ratios that vary from 70/30 to 90/10 with a strong tilt toward equities.  Tilting toward equities to this degree indicates rather aggressive portfolios.  Retired investors with no pension and modest social security income will want to move to a higher percentage in bonds or at least income generating investment vehicles.

2.  Step two is not as difficult as step one.  What investment vehicles should one use for equities and bonds?  In my opinion, serious investors will use non-managed index mutual funds or non-managed Exchange Traded Funds (ETFs).  Flee actively managed mutual funds and be very careful when it comes to using individual stocks.  While I am not opposed to buying individual securities, I don't think it is wise to use them as core portfolio holdings.  The odds of meeting investment goals are too low when portfolios are built around individual stocks.  We are still examining "Fundamental ETFs" and I will not go into that subject as I don't want to cloud the more important aspects of following a portfolio plan toward construction.  My investment vehicles of choice are index ETFs and Platinum members see this strategy implemented daily.

3.  Step 3 is lay out what asset classes to use to build the portfolio.  At a minimum, investors should use ETFs to cover U.S. Equities, Developed International Markets, Emerging Markets, Bonds, and REITs.  I consider these to be the five basic asset classes.  Larger portfolios will include International REITs, and some will add Commodities.  I have yet to branch out into International Bonds.  That asset class is certainly a possibility.  It is assumed that all portfolios will include Cash, so lets add that as a major asset class even though the percentage held in Cash will be small if we are following a policy of full investment.

Those are the basic steps to I follow when launching a portfolio such as the Kenilworth.  The Kenilworth is our newest portfolio and investors new to asset allocation will want to watch that portfolio as it continues to grow into the various asset classes.