Identifying ETFs For Possible Purchase

Back on December 2, 2011, I introduced a new set of metrics for identifying which ETFs have a higher than average probability of performing well over the next six to twelve months.  This post can be found at this location.  Seven metrics go into identifying which ETFs are showing the strongest signals.  Here are the indicators that go into this valuation system.

This material is not available for publication elsewhere on the Internet.  For Platinum members only.

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Monthly Review of Gauss Portfolio

Reviewing the Gauss Portfolio this month is a bit different since I made some tactical asset allocation changes.  If you examine the Dashboard (extracted from the TLH Spreadsheet) you will note a few changes.  As a result of the changes, the asset allocation plan appears to be a bit "bloody."  That should change by next month as I have a number of limit orders in place that will bring the various asset classes back into balance.

Essentially what I did with the Gauss is to align it with Swensen's recommended asset allocation percentages.  Thirty percent is allocated to U.S. Equities, 30% to bonds, cash, and commodities, 20% to international markets and the remainder to REITs.

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Weekly Portfolio Performance Update: 27 April 2012

The good news is that every portfolio increased in value this week.  The bad news is that all but one portfolio (Maxwell) lost ground relative to the benchmarks.  Two factors played into this scenario.  1) International markets continue to lag the U.S. Equities market.  2) Growth equities are performing better than value and that hurts our portfolios since we skew the Strategic Asset Allocation plans toward value.

To be fair with our measurements, not all dividends are included in the following data.  That material will be available next Saturday since the monthly statements for April will come out the middle of next week.  Just a reminder to those who are using the TLH Spreadsheet to track your portfolio(s) – update the SR worksheet this weekend. 

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Rethinking Asset Allocation

Keeping David Swensen's Strategic Asset Allocation model in mind, it is possible to use all seventeen asset classes available in the TLH Spreadsheet to fulfill his recommendations.  Platinum members will see how this is accomplished when the Gauss Portfolio is reviewed tomorrow.  Instead of using six ETFs as I showed in an earlier post, we will use many more, but still stick with commission free ETFs when possible.  Another variation of the six ETF Swensen Portfolio is available at this location.

Swensen recommends holding 30% in domestic or U.S. Equities.  Instead of purchasing one ETF such as VTI to cover this asset class, we can spread our domestic holdings over a variety of ETFs such as VTV, VOE, VBR, IWN, VUG, VOT, VBK, etc.  This variety of ETFs, while all U.S. Equities, gives the money manager the flexibility to skew the portfolio toward value and smaller-cap stocks.  If we concentrate all 30% in VTI we are heavy in large-cap stocks.

For international exposure, Swensen recommends 15% be allocated to developed countries and 5% to emerging markets.  My view is that emerging markets will outperform developed countries over the next decade.  Imagine 20% of the portfolio is allocated to international equities and we adjust our percentage allocation between VEU and VWO based on "Delta Factor" probability recommendations.  Rather than fixed percentages to VEU, which also includes emerging market holdings, and VWO, I'm encouraging readers to be more flexible.

The next large asset class is REITs.  Here again, we can split our investments between domestic and international real estate depending on which is showing the greatest probability to do well in the future.  We will still hold 20% in REITs, but the percentage allocation may vary from time to time.

The last large asset class is U.S. Treasury and bond holdings.  Since these are inflation hedges, I will throw commodities, international bonds, and distressed debt into this large asset class.  This broad asset class will include 30% of the portfolio and will be divided among TIP, TLT, BND, BIV, BSV, AGG, HYG, JNK, DBC, PCY, etc.  Once more, we will look for possible growth areas using "Delta Factor" analysis plus another model I have available.

The Six ETF Portfolio Recommended by David Swensen

Yesterday (4/26/2012) I posted an alternative to David Swensen's six asset asset allocation portfolio over on Seeking Alpha.  You can find it at this location.  As promised, below is the Quantext Portfolio Planning analysis for the original Swensen's "Six ETF Portfolio."  Be sure to read "The Art and Science of Portfolio Construction" as that blog post lays out the fundamental logic or foundational material for this portfolio.  David Swensen recommends a diversified portfolio that has an orientation toward high return investments while providing protection against inflation.  The following portfolio does just that.

This material is not available for publication elsewhere.  Reserved strictly for Platinum members.

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Schrodinger Portfolio Update: 26 April 2012

Looking for a passive portfolio?  Look no further than the Schrodinger.  In operation since late 2000, this portfolio had only two rebalancing purchases over the past year.  Otherwise, no transactions other than cash dividend payouts.  ETFs purchased when the fund was launched are still part of the portfolio.  How is that for stability.

In the following screen shot, I am using a 20% threshold for the target limits.  While small-cap growth is above the upper target limit, the asset class that is most out of balance is emerging markets.  I'll need to wait until more dividends begin to roll in before building back emerging markets.  When I last looked, VWO was bouncing around its 195-Day EMA so I am in no hurry to add to emerging markets.

Dashboard:  The Schrodinger is populated with all asset classes except for international bonds or distressed debt.  I have no plans to add that asset class to this portfolio.  If I were to make any changes it would be to eliminate mid- and small-cap core holdings and beef up bonds-income and domestic real estate.  Stay tuned for my "Swensen Portfolio" analysis.

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David Swensen Comments

A member of the Bogleheads Forum was invited to a university gathering to hear David Swensen, author of the outstanding investment book, Unconventional Success: A Fundamental Approach to Personal Investment.  I pulled the following summary of points covered at this meeting from the Bogleheads site.


* He met privately with President Obama recently in the oval office. He explained to the President that the systematic risks of the mega banks is too great. Banking should be small and simple.

* Executive compensation needs to come down, and in the financial sector, this is already underway (i.e. Citi a couple of days ago).

* Derivatives need to be put on an exchange and regulated. Wall Street is fighting this due to the risks of loss of fees.

* He had a meeting on Lehman Brothers recently. As of today, 3 1/2 years since the firm imploded, there are estimates of derivatives exposure of $10 TRILLION to $30/$40 TRILLION. No one still knows the impact or understands it.

* The Euro will in all probability fail and dissolve. He was not sure if that was 2, 5, or 7 years from now. However, he believes the Federal Reserve is already underway in being proactive with the risks.

* He likes a tax system with the rates increasing with income. He does not like that 40% – 50% of citizens pay no tax. We all need to "have skin in the game". We need to increase taxes on the wealthy, and all classes, but find the right mix. We can not burden the poor as much.

* Favors the Buffett rule with taxes.

* Government needs to find the right mix with higher taxes and reduced spending to solve the deficit. Either alone with not do it as the debt is too big now.

* Wanted to write his book Unconventional Success first and not write a book on endowments at all. The publisher made him write that book first.

* Stands behind his 5-6 portfolio recommendation in Unconventional Success after all these years without exception or change for the individual investor (i.e. no International Bonds still). [I'll comment on the Swensen portfolio in a later blog post.]

* Unless individual investors have a full time department, research staff, all hours of the day to research, at very low costs, there should be no stocks or active investments. We should all be passive investors in the funds he recommended in his book.

* The problem is most investors are in the middle between active and passive. This concerns him. We need to continue to get the passive approach out there.

* Discussed Vanguard for a while, and encouraged everyone to place their assets with the firm as it is non-profit. There is no struggle between a profit orientation and a fiduciary responsibility.

* Believes the US and China (more the US) will carry the global economy forward over the next few years and decades.

* The last couple of years made him realize you are foolish to bet against the United States. No other country on the planet gets things done, responds to a crisis, supports capitalism, as we do.

* Believes the markets will be volatile for the next few years, possibly 5 – 10 years.

* Our debts and deficits are unsustainable and coming to a head soon. The fact that they are now out in the open and being discussed is a very good thing.

* Corporations have done a great job in building cash and paying off/down debt.

* The Individual has paid down some debt, and this is good, but he believes the individual has another 5 – 10 years of deleveraging ahead.

* Blames Alan Greenspan more than anyone on low rates, cheap money, excessive risks, bubbles, etc.

The Art and Science of Portfolio Construction

Basic investment principles require long-term portfolios exhibit the following characteristics.

1.  Equity orientation.

  • Equity orientation includes high-expected return ETFs such as VTI, IWN, VTV, VOE, VOT, VBR, VBK, etc.

2.  Diversification over the entire world market.

  • International exposure is possible through ETFs such as VEU, EFA, VWO, EPP, etc.

This blog post is not available for publication elsewhere on the Internet.  The material is restricted for Platinum members only.

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Kenilworth Portfolio Review: 24 April 2012

Today is monthly review time for the Kenilworth Portfolio.  Checking the critical ETFs, three of eight ended up in the "sell" zone, but two are so close the end of day price could reverse the trigger.  Since I will not be making any moves before the business day tomorrow, I'll wait to see the opening prices for VEU and VWO.

The Dashboard is shown in the following screen shot.

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QPP Projections for the Bohr Portfolio

As promised, here is the Quantext Portfolio Planning analysis for the Bohr Portfolio.  Since I ran the analysis, shares of VEU and VWO were sold.  These ETFs plunged well below their 195-Day EMAs early this morning so I decided to protect gains and sell off, not all, but the majority of shares held in emerging markets and developed international markets.  This move is contrary to what I wrote earlier this morning.  I just don't want to chance losing too much ground since this is a rather aggressive portfolio.  Note the projected standard deviation (portfolio uncertainty or volatility) is nearly 19% or 4% points above our goal.  The asset allocation plan calls for 8% in bonds and that is a very low percentage.

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