It was about a year ago that I first heard the terms "contango" and "backwardation" described in a commodities discussion. An endowment committee I sit on was in the process of doing due diligence on several commodities managers. While those terms stuck briefly, I did not pay much attention to how they might impact portfolios tracked here at ITA Wealth Management.
While this is an intraday update, the asset allocation relationships shown in the following Dashboard will not change all that much. Shares of VWO were added to bring the emerging markets closer to target. We still need another 105 shares of VWO to push this asset class back to target.
Are we paying too much attention to risk or portfolio uncertainty? The answer to that question may not be as straight forward as readers might expect. Each time ITA Wealth Management readers see a Quantext Portfolio Planner (QPP) analysis, projected portfolio uncertainty is one of the five critical metrics or outcomes. Since projected return and projected standard deviation (SD) are tightly connected, holding down the portfolio volatility (lower SD) also restricts the projected return. One of the goals within the QPP analysis is to come up with assets that generate a minimum of 0.60 for a Return/Uncertainty ratio. If another goal is to hold uncertainty down to something below 15%, we need to come up with a projected return of 9% or greater. This is not an easy task, particularly when the market is priced rather high. Depending on the performance of the portfolio, these goals or limitations can be relaxed. Here are some reasons for paying less attention to portfolio risk.
Several portfolios are scheduled for review this week and the Einstein is first on the list. Platinum members who follow ITA regularly know that I review the portfolios approximately every four to five weeks. The first thing I do is look at the Dashboard, a worksheet housed within the all important TLH Spreadsheet. The Dashboard lays out the asset classes and the percentage allocated to each. Below is the Dashboard for the Einstein Portfolio and readers will note the new asset class, international bonds.
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This is the first of four portfolios that run from low risk to high risk or aggressive growth. One Quantext Portfolio Planner (QPP) analysis is already available on the Internet at Seeking Alpha for a medium risk portfolio. That is the fifth portfolio in this series of analysis. In the following example, I make a few changes in the ETFs as I prefer using the low-cost Vanguard funds when possible. In addition, many of the investments in the following portfolio are found in the stable of TDAmeritrade's commission free ETFs.
Note the heavy emphasis toward bonds and treasuries in this portfolio. A full 80% is allocated to what I call the bond/income asset class.
Special Note: The percentages allocated to each of the nine ETFs comes directly from Daniel R. Solin's fine book, "The Smartest Portfolio You'll Ever Own." I highly recommend all serious passive oriented investors purchase and study this book.