Stress Testing the Modest Retirement Portfolio

Back on January 7 of this year I posted a "Modest Portfolio" that readers can locate and see the entire analysis.  Below is the same portfolio with a stress test included.  Since this is a middle of the road type portfolio, it is an excellent example to use for a stress test. The portfolio holds only nine ETFs and there are times when one will want to be out of SDS.  Now is such a time, but I included it in this portfolio so as to hold down the volatility.  Note the low (12.0%) standard deviation.  That low percentage will help in this stress test.

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Advantages to Mosaic Investing

It comes as no surprise to long standing Platinum members that most equity ETFs are highly correlated.  The basic ones we use to populate many of our portfolios show correlations of 80% or higher when analyzed using the Quantext Portfolio Planner (QPP) software.  To reduce portfolio volatility and increase the Diversification Metric (DM) we have several choices.  One common approach is to increase the bond and income asset class percentage. ETFs such as BND, IEF, and TLT have low, but not negative, correlations with ETFs such as VTI, VEU, and VWO.  A second approach is to use short or ultra-short ETFs.  SDS is one ultra-short we used with a few portfolios.  When to activate the SDS position and when to sell it is tricky at best.  A third approach is to seed the portfolio with a few highly selected, low correlated individual stocks.  We all know how difficult it is for stock pickers to outperform benchmarks such as Vanguard's Total Market Index Fund, VTSMX.  Therefore, this is also a difficult approach to lowering portfolio volatility.  Nevertheless, here is the approach I used.

In a recent portfolio I posted on Seeking Alpha, I took the third approach.  I refer to this as Mosaic investing or one where a few stocks are sprinkled in with a core of ETFs.  Using AAII's "Stock Investor Pro" software, I ran the following screen.  When I first ran the "dividend seeking" screen, 19 stocks made the cut.  When I imported the most recent data, only 14 stocks passed the screen shown below.

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