QPP Analysis of Bohr Portfolio

Where does the Bohr Portfolio stand when examined using Quantext Portfolio Planning (QPP) analysis?  Several months passed since I last ran this type of analysis.  As Platinum members can see from the screen shots below, the projected return is quite good considering the high market.  However, the projected risk or standard deviation is about 1.5% higher than preferred.  The Diversification Metric meets current standards of exceeding 40%.

In the second screen shot the Bohr Dashboard is displayed.  Several asset classes are out of balance due to recent market action as I am trying to preserve capital.

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Rick Ferri: “Power of Passive Investing”

Photograph: Restored houses in Waterford, Virginia

Rick Ferri, author of "The Power of Passive Investing," is interviewed in this video clip.  The interview was recommended by an ITA Wealth Management member.  Thank you for the suggestion. 

Pay particular attention to the last third of the interview where Ferri discusses the problem of adding multiple actively managed mutual funds to a portfolio and how this action, over a life-time of investing, almost assure one of under-performing a portfolio of index funds.  I was impressed with Ferri's analysis of this problem in his book.

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Benchmarking a Portfolio: Essential to Portfolio Management

Waterford, Virginia

ITA Wealth Management readers know I am passionate about portfolio benchmarking and portfolio risk analysis.  To my knowledge, there is no better software program for the small investor than the TLH Spreadsheet, provided to all Platinum members.  We use two primary benchmarks in this spreadsheet, although four are available.  One is Vanguard's Total Stock Market Index Fund, the VTSMX.  The second is a customized benchmark know as the ITA Index.  The ITA Index is about one year old so it suffers from a lack of history.  There are positives and negatives to each benchmark and I'll admit that neither is perfect.  Here are a few of the attributes to each.  I want to be frank with readers so I will point out some of the flaws to each of these two benchmarks.

First, we will deal with the VTSMX benchmark.  If a portfolio is confined to the U.S. Equities market and investments are limited to, for example, VTV, VOE, VBR, VUG, VOT, and VBK, then the VTSMX works fine in the TLH spreadsheet.  In fact, it is an excellent benchmark as it accurately accounts for cash flowing in and out of the portfolio.  This index was checked against three commercial programs and tested perfectly.  Where the VTSMX benchmark begins to falter is for portfolios that include international markets, emerging markets, REITs, and bonds.  With a well-diversified portfolio, the VTSMX benchmark is not adequate.  Understanding this problem is why I spent a lot of time trying to come up with a benchmark that is customized to each portfolio.  The ITA Index is the end product, and even it has undergone several revisions over the last year.  Here are the benefits and warts of the ITA Index benchmark.

For the U.S. equities portion of the portfolio, we use the VTSMX as the benchmark.  For example, if we allocate 43% of the total portfolio to U.S. companies, we benchmark that percentage of the portfolio against the VTSMX.  For developed international markets, we use VGTSX.  Again, cash flowing in and out of the portfolio is correctly handled.  For most of our portfolios, we allocate approximately 55% or each portfolio to those two asset classes.  But what about REITs, emerging markets, international REITs, bonds, and commodities.  Forty-five percent (45%) of most portfolios fall into other asset classes.

If we allocate 15% of a portfolio to emerging markets, we benchmark that specific asset class using VWO, the emerging market ETF index.  Where the ITA Index falls down is that this particular index (VWO) is not set up inside the spreadsheet to handle cash flowing in or out of the portfolio as is the case with VTSMX and VGTSX.  Therefore, we introduce a slight error in the benchmark.  Since not much cash is flow in these portfolios this is not a significant problem.  Nevertheless, the limitation needs to be recognized for complete honesty.  The same problem arises for any asset classes that is not under the VTSMX or VGTSX umbrellas.

Despite the negatives related to the ITA Index, I think it is superior to using only the VTSMX as the ITA Index provides a clear picture of how well the overall portfolio is performing with respect to the Strategic Asset Allocation plan.

It is easy to understand how the ITA Index works if one examines the equations created inside the TLH spreadsheet.