Portfolio #2: Ages 26 – 35

Portfolio #2 adds a few more ETFs and gives up nothing in performance.  In fact, the projected standard deviation (portfolio uncertainty) drops from 20.1% to 17.6%.  Diversity is increased from 8% to 29% and the Portfolio Autocorrelation drops two percentage points.

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General Guidelines for Investing Success

While it is rather early in the morning here on the West Coast, I'm still thinking clearly so take these ideas seriously.  When putting together a portfolio, follow these general guidelines.

  • Use index funds or index ETFs to build the core of the portfolio.

    • One should not need more than eight to twelve ETFs to build a well-diversified portfolio.
    • Only add individual stocks with your "mad" money.
  • Always follow the Golden Rule of Investing.  Search the blog if you missed this fundamental rule.
  • Be patient.
  • Develop a plan and then discipline yourself to stay with the plan.

    • The plan should include a model to avoid or minimize losses.

The last point – avoiding portfolio losses is essential if the investor is to end up with the necessary funds for retirement. Pay attention to, and learn from, the ITA Risk Reduction model I am using with the Maxwell and Euclid portfolios.  If only I had followed this advice over the last 50 years of investing.  I'm passing on my experience so young investors can avoid pitfalls that are going to come in the future.

Portfolio Performance: 29 October 2011

This has been a great week for the ITA Wealth Management portfolios.  Not only did we see absolute gains for all portfolios, but there were many relative gains when measured against the VTSMX and ITA Index benchmarks.  Not every portfolio showed relative gains, but in general the Sortino and Retirement ratios increased in value.  Inflation held the same since last week.  While inflation does not impact the Sortino ratio, it does affect the Retirement ratio.

The ITA Index showed major changes in the Maxwell and Euclid portfolios as the Strategic Asset Allocation (SAA) was changed for these portfolios in preparation for full activation of the ITA Risk Reduction model.

Below is the October 28th data table.  Examine it carefully and if you have any questions, drop them in the Comments section.  Questions and comments are highly encouraged.

Portfolio Performance - 10/28/2011

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 08/31/2011 07/21/1999 Captool 2.4% NA NA 1.71% 0.69% 0.05 NA NA
Curie 10/28/2011 12/26/2007 TLH SS 4.6% 0.3% 4.3% 0.8% 3.7% NA 6.4 -0.5
Mosaic2 08/31/2011 07/19/1999 Captool 4.68% NA NA 1.53% 3.15% 0.16 NA NA
Newton 10/28/2011 06/02/2008 TLH SS 8.0% 4.9% 3.2% 6.0% 2.0% NA 1.5 1.5
Passive Port. 09/30/2011 12/01/2000 Captool 3.39% NA NA 2.03% 1.36% 0.69 NA NA
Schrodinger 10/28/2011 12/01/2000 TLH SS 4.7% 3.2% 1.5% 2.9% 1.8% NA 15.2 -1.6
Jane 09/30/2011 02/14/1997 Captool 7.71% NA NA 5.06% 2.65% 0.54 NA NA
Einstein 10/28//2011 06/30/2008 TLH SS 10.9% 10.7% 0.2% 8.5% 2.4% NA 1.1 1.1
Gauss 09/30/2011 02/19/1997 Captool 7.86% NA NA 5.03% 2.83% 0.23 NA NA
Kepler 10/28/2011 11/01/2008 TLH SS 14.8% 14.7% 0.1% 15.4% -0.6% NA -0.23 -0.23
Scrappy 09/30/2011 08/14/2008 Captool 5.37% NA NA -0.73% 6.1% NA NA NA
Bohr 10/28/2011 08/14/2008 TLH SS 9.8% 10.1% -0.3% 4.4% 5.4% NA 3.3 3.0
Kenilworth 10/28/2011 08/18/2010 TLH SS 5.7% 9.5% -3.8% 9.9% -4.2% NA -0.03 -0.03
Franklin 10/28/2011 05/6/2011 TLH SS -1.5% -3.4% 1.8% -8.2% 6.7% NA 0.05* -0.05*
Projects 09/30/2011 12/01/2000 Captool 3.74% NA NA 2.12% 1.62% 1.29 NA NA
Washington 09/30/2011 06/18/1999 Captool 2.19% NA NA 1.93% 0.26% 0.28 NA NA
Maxwell 10/28/2011 12/25/2000 TLH SS 0.9% 13.0% -12.0% 4.0% -3.1% NA -0.10 -0.13
Adams 09/30/2011 06/18/1999 Captool 2.9% NA NA 1.93% 0.97% 0.73 NA NA
Euclid 10/28/2011 06/30/1999 TLH SS 2.0% 28.7% -26.7% 4.1% -2.1% NA -0.09 -0.13
Jefferson 09/30/2011 06/13/2006 Captool 3.31% NA NA -0.48% 3.83% NA NA NA
Madison 10/28/2011 03/13/2008 TLH SS 5.1% 12.5% -7.4% 7.1% -2.1% NA -0.09 -0.09

Delta Factor of International ETFs

Readers interested in equity and bond "Delta Factor" projections will find the following international "Delta Factor" data table of interest.  For this set of ETFs, the reference or standard upon which the results are tested is the international iShares, EFA.

I used three years of data to reduce the number of "short records."  Only the two Indonesia ETFs (EIDO & IDX) have fewer than three years of data.  By the way, I hold shares in both EIDO and IDX.

Based on three years of data, the following QPP analysis is not all that hot on the international market going forward.  For those readers who have the QPP software available, try a four-year analysis and the results don't look so grim.  The reason is the major bear market of 2008.  In 2012 and 2013, we will begin to work out of the price trough created during 2008 and early 2009.

Click on table to enlarge.  Post your questions in the Comments box.

Always keep in mind that these "Delta Factor" data tables are projections and at best are only probability arguments.  They are to help us tilt the portfolio in the right direction.  Any time one sees numbers, the mind is conditioned to latch on to them and pay far more importance than they merit.  I too need this reminder.

Portfolio #1: Ages 15 – 25

Portfolio #1 emphasizes simplicity.  This is a starter portfolio for young investors who have little to save, but want to begin putting together a core portfolio to build on in later years.  It is extremely simple in that it holds only four asset classes.

While the projected return is relatively high based on our S&P 500 projection of 7%, the 9.2% return comes with a high projected standard deviation.  The very young investor can handle this as there is plenty of time to recover from the bear markets that are almost sure to hit over this ten year period.  The diversification is very low as we expect from a portfolio holding only four ETFs.  This is very much a "starter" portfolio.  If a young investor is not satisfied with this diversification, they will want to take a careful look at Portfolio #2, even though it is a little more complex.

Investors using Portfolio #1 could reduce portfolio volatility by employing the ITA Risk Reduction model.

“Delta Factor” Update: October 27, 2011

Equity ETF Performance Projections

Based on popular demand, here is another "Delta Factor" update of the equity ETFs we use to populate our portfolios.  New readers to ITA Wealth Management would do well to search the blog for other "Delta Factor" posts.  A quick explanation is that the "Delta Factor" and "Conservative Delta Index" columns are probability projections as to how well the different ETFs are expected to perform over the next six to 12 months. In the following analysis, I used the last 45 months of data.

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“Decade” Portfolios

Age Appropriate Portfolios

Several weeks ago a reader wrote and asked me if I had "age oriented" portfolios on the blog.  While those were not the exact words, the question was designed to extract more precise portfolio direction than descriptions such as Einstein, Bohr, and Schrodinger.  Rather than build portfolios around high growth or conservative yield, I chose to go with different ages spanning a decade.  In the case of portfolio #3, I am using 20 years since this is generally a period when individuals are working and beginning to save seriously.   Yielding to this readers request, I am going to try to come up with five portfolios that will span these periods of life.

  1. Ages 15 – 25
  2. Ages 26 – 35
  3. Ages 36 – 55
  4. Ages 56 – 65
  5. Ages 66 – 100

There are several guidelines for each of the portfolios.

  • They need to be simple so anyone can put them together.
  • All portfolios will have a global outlook.
  • Portfolio volatility is given attention, particularly for older investors.
  • Consider these portfolios to be "framework" portfolios.  This means individuals will tweak the percentages to fit their own requirements.
  • Portfolios will be put together using non-managed ETFs.  Stocks are eliminated, but might be added by individuals managing their own portfolios.
  • Portfolio construction will assume new money is added each month with exception of portfolio #5.  The fifth portfolio will be a retirement portfolio.
  • Where possible, I will use commission free ETFs available through TDAmeritrade.
  • Portfolios 3 – 5 will pay more attention to diversification.

Look for the different portfolios over the next two weeks, if not sooner.

Einstein Portfolio Update: 27 October 2011

Several moves took place over the last few weeks in an effort to bring more asset classes into balance within the Einstein Portfolio.  Shares of VO and VB were sold in order to bring mid-cap and small-cap blend within the 20% threshold limits.  Shares of the International bonds (BWX) were added and we made a few small purchases in IEF and BND to bolster the bonds asset class.  Bonds is one of two asset classes still below target as you can see from the Dashboard worksheet below.

Platinum membership is available for $5.00 per month.  Learn how to use the TLH spreadsheet.

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Repositioning Madison Portfolio

ITA Wealth Management readers checking the latest Portfolio Performance* data table will observe that the Madison Portfolio is lagging the VTSMX benchmark.  In an effort to push this portfolio performance to a higher level, I am going to employ the ITA Risk Reduction (ITARR) model, or the same one being used for the Maxwell and Euclid portfolios.  This will require selling some current ETFs in an effort to reposition the asset allocation plan.  The new Strategic Asset Allocation plan is built around specific ETFs instead of finding ETFs to fill asset classes as we normally do.  In the first screen shot I show the new allocation plan and in the second slide is the QPP analysis for this newly configured portfolio.  The third slide shows how including SDS in the allocation plan impacts projected return, projected volatility, and diversification.

Platinum membership is available for $5.00 per month.  Learn about the Risk Reduction model.

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ITA RR Style Portfolio

Planning a Risk Reduction Portfolio

Special note to Platinum members: I've been working on an asset allocation plan that I think would work for an ITA Risk Reduction (ITARR) style portfolio.  Below is the screen shot of the QPP analysis of such a portfolio.  In the current analysis, only seven of the 10 ETFs are used.  SDS would only come into play under extreme conditions.

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