Sixteen Asset Classes: The Basic Portfolio

More Asset Classes Are Not Enough

TLH Spreadsheet users are familiar with the sixteen (cash is excluded) asset classes used with most of the larger ITA Wealth Management portfolios.  Below is what I call the Basic Portfolio as standard ETFs are used to populate the different asset classes.

Despite all the asset classes being populated with nearly equal percentages, there is something missing in this portfolio.  The projected return of 8.0% meets our first requirement of topping the projection for the S&P 500.  It is 7.0% in this analysis.  When we examine the projected Standard Deviation (SD) of 16.15% we hit the first hurdle as we want this value below 15%, and the lower the better.

Now scroll down to the Diversification Metric (DM). The portfolio is not all that well diversified since DM is a rather low 27%.  While this portfolio covers all the basis, it still lacks the "juice" required to meet all our Quantext Portfolio Planner standards.

Part of the problem reaching our QPP goals is that we are in a high market environment.  This same portfolio would have looked better back in March of 2009.

Check out the "Delta Index" as it looked back at the end of March 2009.

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Retirement Ratio: Building a Higher Standard

The Ultimate Return/Uncertainty Ratio

Built into every TLH spreadsheet is the "Retirement Ratio," a look-alike of the Sortino Ratio (SR).  Readers can read about this Return/Uncertainty ratio over on Seeking Alpha.  Inside the Sortino Ratio is a trademark term, Desired Target Return, a percentage determined by the investor.  In the Retirement Ratio we use Portfolio Target Return (PTR) or the maximum return percentage a portfolio must hurdle to satisfy investor requirements.

The Retirement Ratio equation appears below.

Retirement Ratio = (Return – PTR)/DU  where the terms are defined as follows.

Return = Internal Rate of Return (IRR) of the portfolio.  This important measurement comes right out of the TLH spreadsheet.

PTR = Portfolio Target Return and this is where the RR differs significantly from the SR.  The PTR demands more from the portfolio in the way of performance.

DU = Downside Uncertainty.  This is the same as Downside Risk (DR) in the Sortino ratio.  My word preference is uncertainty as risk carries so many different meanings.

When running a TLH spreadsheet analysis, the RR is the ultimate measuring instrument as it takes into account both the return of the portfolio and the risk one accepts to obtain that return.  Portfolio return and portfolio volatility are intimately linked.  The greater the volatility, the greater the uncertainty.  Keep in mind that DU uses a semi-variance calculation so we are measuring only the downside uncertainty.

In all our measurement values, if I were limited to one, it would be the Retirement Ratio. 

Curie Portfolio: 14 June 2011

Curie Portfolio Review

Little changed within the Curie Portfolio since the last update.  Dividends were paid out by EMB, TLT, TIP, ORCL, and BND.  EMB is the new international bond asset class recently added to the Curie.  EMB is actually an emerging market bond fund established by JPMorgan. The Dashboard for the Curie is shown below. Eight of the nine asset classes are out of balance indicating this portfolio needs attention.

This morning I committed another $30,000 to various limit orders in preparation for filling up the asset classes that are still below target.  Readers familiar with ITA Wealth Management know the purplish coding indicates the asset class is below target and the dark red asset classes are above target.

Despite the many out of balance asset classes, the portfolio continues to do very well when measured against the benchmarks.

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