To see how the ITA Index (customized benchmark) is calculated, go to the TLH SS Help tab and look at #8. The link will take users to the audio-video clip for a walk through as to how the ITA Index is determined. While not a perfect customized benchmark, it is superior to other benchmarks available.
Although the regular review for the Kenilworth is a few weeks away, purchases and sales this month are reasons for updating the portfolio today. Readers will note some changes in the Strategic Asset Allocation plan. For example, shares of VO and VB were sold out of the blend asset classes and those assets were shifted to VTI, the large-cap blend ETF. VO and VB are highly correlated with VTI as are VTV and VUG. Limit orders are in to sell the small positions of these two ETFs. I am increasing the Bond & Income asset class to 15%. A limit order is placed to purchase a few shares of BWX in an effort to gain exposure to international bonds. Another order was placed to purchase BND, a bond ETF.
The Kenilworth is a candidate for employing market timing in and effort to push the Internal Rate of Return (IRR) back above both the VTSMX and the ITA Index benchmarks. The hope is to have most of the asset classes in balance by the first of November or by the next review.
In the following screen shot we have the performance data for the Kenilworth. One can view the IRR values for each holding. The yield for this portfolio is 2% and I want to raise that by increasing investments in bonds. This portfolio is for a young investor not needed a lot of income.
Over the past 10 to 20 years is was not unusual to watch portfolios experience two and three sigma moves over a few months if the standard deviation of the portfolio was something around 15%. Market volatility continues to frighten the average investor who constructed a portfolio with an expected standard deviation of 12% to 15%. Is there a way to tamp down market volatility?
Benoit Mandelbrot and Richard L. Hudson write the following in their book, "The (Mis)Behavior of Markets." "From 1916 to 2003, the daily index movements of the Dow Jones Industrial Average do not spread out on graph paper like a simple bell curve. The far edges flare too high: too many big changes. Theory suggests that over that time, there should be fifty-eight days when the Dow moved more than 3.4 percent; in fact, there were 1,001. Theory predicts six days of index swings beyond 4.5 percent: in fact, there were 366. And index swings of more than 7 percent should come once every 300,000 years; in fact, the twentieth century saw forty-eight such days. Truly a calamitous era that insists on flaunting all predictions. Or, perhaps our assumptions are wrong."
While it is up to the investor to build an uncertainty resistant portfolio, we could use some outside help. I posit two solutions to reducing market volatility. 1) Attach a percentage "trading tax" on every transaction held for less than 30 days. 2) Where trades once required 1/8 of a point break points on trades, move the current penny divisions back up to five cent or ten cent break points.
The cry of lack of liquidity is bound to erupt. However, is it really necessary for large firms to move their computers closer to the NYSE so as to gain nanosecond advantages over the competition. The "trading tax," if sufficiently large, could slow the skimming process that now occurs and encourage long-term investing. Is this likely to happen? Not a chance, but at least it is a point for discussion.
I throw these ideas out for readers to punch holes in them. Have at it and add your own ideas for tempering market volatility.