Delta Index Calculation #1

When Is It Time to Invest?

Long-time readers of ITA Wealth Management are familiar with the Quantext Portfolio Planner (QPP) analysis and to a lesser degree the "Delta Index" worksheet I developed as an extension to QPP.  The jury is still out as to the predictive powers of the Delta Index.  Is it useful to any degree?  In the first screen shot below, I am showing what the VTI did over its lifetime and since it is a total U.S. market ETF, it serves as an excellent guideline for this analysis.

Keep the above graph in mind as the following analysis will show what the "Delta Index" was telling us back in April of 2006.  According to the above graph the market had another year and a half to run.

The following data is from 4/15/2003 through 4/15/2006.  I chose the starting date as the first day EEM was launched.  In these examples I will be using iShares as most of the Vanguard ETFs were non-existent. The projections are grim.  The following data is telling investors to get out of the market.  If one goes by the "Delta Index" column, we would continue to hold VTI and IVW, large-cap stocks.

I conclude "Delta Index" gives an early signal.  Much too early in fact.  However, if one looks at the top graph, the market had a great run.  One had no idea how long it would run.

[Read more…]

Asset Allocation: The Basic 17 Asset Classes

Much is made of the importance of asset allocation here at ITA Wealth Management.  Not all portfolios tracked on this blog use the seventeen asset classes, but we want to list the stable of assets we draw from depending on the size of the portfolio and goals of the investor.  Cash is included as one of the 17 in the data table shown below.

Below the title row we have the three cap sizes ranging from large to small.  Those nine asset classes we refer to as the “Big Nine.”  If we eliminate the Blend column we end up with the “Big Six.”  The reason for including VTI instead of VV in Large-Cap Blend is that for some reason, TDAmeritrade still applies a commission charge to VV whereas VTI is commission free.  Yes, I realize VTI holds stocks found in all the “Big Nine” asset classes.

The ETFs found in the various boxes represent basic holdings and we might substitute iShares or ETFs from other companies.  One reason for sticking with Vanguard is cost as most of these ETFs have low expense ratios.

When we move into Commodities, International REITs, etc., we find we need to branch outside the Vanguard family to find ETFs to cover these classes.

Basic Asset Allocation ETFs

Asset Classes Value Blend Growth
Small-Cap VBR VB VBK
Bonds - Income BND or AGG    
Domestic REITs VNQ    
Dev. International VEU    
Emerging Markets VWO or VEA    
Commodities DBC or GSG    
International REITs RWX    
International Bonds BWX or EMB    
Cash IEF or TLT    

Platinum membership is available for $5.00 per month.

Many of the Vanguard ETFs do not go back to the early 2000s so I will substitute iShare ETFs when I start running Delta and Delta Index test with the QPP software.  The plan is to begin to run QQP analysis using the basic equity asset classes to see if there is any merit to the Delta Index worksheet.

If you are just starting a portfolio, I highly recommend you purchase a few shares of each of the above ETFs so you have the means to eventually develop a customized benchmark for your portfolio.


Portfolio Performance Data for June 16, 2011

Asset Allocation Is Working

The good news is that all eleven portfolio tracked using the TLH spreadsheet demonstrated the power of asset allocation by performing better than the VTSMX benchmark.  In almost every case, the Internal Rate of Return (IRR) for the portfolio also showed improvement when measured against the ITA Index. While the IRR for the portfolio and IRR for the ITA Index should move together, cash holdings work in favor of the portfolio when the market declines as it did since the last update two weeks ago.

Inflation moved up to 3.57% pulling down the Retirement Ratio for those portfolios with an IRR below inflation plus the withdrawal rate.  If any of this is a mystery to new Platinum members, feel free to ask questions in the comment section.

While we do not like to see the IRR for any portfolio decline, it is expected in a down market.  What is encouraging is that our portfolios resisted the reversal and did not go down as much as the broad market.


Portfolio Performance - 06/17/2011

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 05/31/2011 07/21/1999 Captool 3.0% NA NA 1.6% 1.4% 0.05 NA NA
Curie 06/17/2011 12/26/2007 TLH SS 5.1% -0.3% 5.3% 0.6% 4.4% NA 13.7 -0.3
Mosaic2 05/31/2011 07/19/1999 Captool 5.2% NA NA 1.42% 3.78% 0.16 NA NA
Newton 06/17/2011 06/02/2008 TLH SS 9.1% 11.5% -2.4% 6.4% 2.7% NA 2.1 1.5
Passive Port. 05/31/2011 12/01/2000 Captool 5.61% NA NA 3.3% 2.3% 0.70 NA NA
Schrodinger 06/17/2011 12/01/2000 TLH SS 5.0% 4.3% 0.7% 2.9% 2.1% NA 4.4 -0.3
Jane 05/31/2011 02/14/1997 Captool 9.45% NA NA 4.92% 4.5% 0.54 NA NA
Einstein 06/17/2011 06/30/2008 TLH SS 13.3% 15.0% -1.8% 9.5% 3.8% NA 5.0 5.0
Gauss 05/31/2011 02/19/1997 Captool 9.58% NA NA 4.89% 4.69% 0.23 NA NA
Kepler 06/17/2011 11/01/2008 TLH SS 17.9% 19.7% -1.9% 17.4% 0.5% NA 0.3 0.3
Scrappy 05/31/2011 08/14/2008 Captool 13.64% NA NA 6.1% 7.51% NA NA NA
Bohr 06/17/2011 08/14/2008 TLH SS 11.6% 11.5% 0.1% 4.6% 7.0% NA 3.5 2.2
Kenilworth 06/17/2011 08/18/2010 TLH SS 9.7% 11.4% -1.7% 13.1% -3.4% NA -0.02 -0.02
Franklin 06/17/2011 05/6/2011 TLH SS -39.3% -31.2% -8.1% -36.5% -2.8% NA -0.01* -0.20*
Projects 05/31/2011 12/01/2000 Captool 5.84% NA NA 2.01% 3.83% 1.33 NA NA
Washington 05/31/2011 06/18/1999 Captool 3.32% NA NA 1.72% 1.6% 0.28 NA NA
Maxwell 06/17/2011 12/25/2000 TLH SS 0.9% 7.9% -7.0% 4.1% -3.2% NA -0.12 -0.20
Adams 05/31/2011 06/18/1999 Captool 3.71% NA NA 1.72% 1.99% 0.72 NA NA
Euclid 06/17/2011 06/30/1999 TLH SS 1.6% 8.9% -7.3% 4.1% -2.5% NA -0.11 -0.16
Jefferson 05/31/2011 06/13/2006 Captool 6.47% NA NA 1.0% 9.79% NA NA NA
Madison 06/17/2011 03/13/2008 TLH SS 5.6% 7.6% -2.0% 7.8% -2.2% NA -0.09 -0.09