“Coming Soon: The Big Trade-Off” – Thomas Friedman’s Editorial

This morning's Oregonian carried a recent editorial by Thomas Friedman.  Here is the link to the full article.  What I found frightening in the article comes mid-way and it is a survey by the Employee Benefit Research Institute.  They found that a "sizable percentage of workers report they have virtually no savings or investments."  Among those workers polled in its retirement confidence survey, "29 percent say they have less than $1,000.  In total, more than half of workers (56 percent) report that the total value of their household's savings and investments, including the value of their primary home and any defined benefit plans, is less than $25,000."

The results shocked me.  I've read such numbers before, but not to the degree and high percentages stated in this survey.  Friedman has it right in his first two paragraphs.  "U.S. foreign policy in the age of Alzheimer's."

Photograph: Cascades – John Fitzgerald, photographer

VWO And The ITA Risk Reduction Model

During this most recent market dip, if one asset class needed protection, it was emerging markets.  Just how did our Tactical Asset Allocation (TAA) or risk reduction model work with the VWO ETF.  Here is the current price and 195-Day EMA graph for emerging markets (VWO).  This morning the 195-Day EMA is $40.80.

Since I rotate my review of different portfolios, the selling points differed for the five ITARR portfolios.  Here is the data.

Maxwell:  Sold VWO on 5/08 for $41.4.  Buying back in right now could be beneficial.

Euclid:  Sold VWO on 5/11 for $40.32.  This move is only going to be profitable if VWO moves lower.  The closing price on 7/30 at $40.15 is very close to the sold price.

Madison:  Sold VWO on 5/17 for $38.07.  This will most likely turn out to be a losing move.  The price of VWO will need to decline much further.

Kenilworth:  Sold VWO on 5/18 for $37.79.  Once more, this will likely turn out to be a losing move as it will cost more to get back in than the selling price.

Gauss:  Sold VWO on 5/29 for $38.07.  Again, this will most likely turn into a loss.  The only hope is for August to be a terrible month for VWO.

Should VWO continue to rise in price, the risk reduction move did not pan out very well for emerging markets.  Granted, the above data does not tell the full story as the cash, in most portfolios, was placed into bonds, TIPS, or U.S. Treasuries.  The interest earned on the cash is not taken into consideration in the above data.  Nor is the gain or loss in those "cash" holdings.  BND, TLT, and TIP increased in value over the few months we were out of VWO so this will offset the losses, should we incur any before moving back into VWO.

The only true way to see if the ITARR model is working is to track the Internal Rate of Return (IRR) value for a few years and see if that value gains or loses ground with respect to an independent benchmark such as the IRR for Vanguard's Total Market Index, the VTSMX.  We have the capability to check this within the TLH Spreadsheet.

VEU And The ITA Risk Reduction Model

Using the ITA Risk Reduction model for VEU tells a completely different story from the prior analysis of VTI.  Using the same time frames as we did for VTI, the first examination is to see what we do at the end of the month.

[Read more…]

VTI And The ITA Risk Reduction Model

At the request of a long-time Platinum member, I am going to examine a number of key ETFs used to populate specific asset classes in an effort to see how well the ITA Risk Reduction model worked over the last four months.  Keep in mind that no one ever stated that the ITARR model, or a variation such as the Faber-Richardson model, will work all the time, month after month.  Where the ITARR model shows up well is when we have a severe bear market such as we experienced in 2008 and early 2009.  But we are not in those situations every year, and for that we need to be thankful.  Therefore, it makes sense to take a close look at the model in what we might call, "normal" times.

[Read more…]

Bullish Percent Indicators Mixed

With the strong market yesterday (7/27/2012) I expected most of the Bullish Percent Indicators (BPI) would move up in value and definitely show X's in the right-hand column of the Point and Figure Graphs.  Of all the BPI graphs, the NYSE PnF graph is the most important.  Even though the value dropped, it is still as high as it was back in mid-May.

Right now I have the Factor Scale set to 1.  I need to do more research to see if this needs to be changed to 2.  Right now, that is not important to readers as we are looking for overall trends in the various markets and they are mixed based on sector BPI results.

[Read more…]

Starting From Scratch: The Logic Behind the “Swensen Six” Portfolio

When it comes to building a portfolio, David Swensen's general guidelines provide numerous strong starting points.  His portfolio satisfies requirements of numerical diversification, equity orientation, and functional diversification.  While Swensen does not recommend specific tickers in his book, Unconventional Success, he lays out basic guidelines I consider vital to portfolio construction.  Platinum readers will find those guidelines outlined below the following portfolio analysis.  What does a Quantext Portfolio Planner (QPP) analysis look like for the "Swensen Six" and can we improve upon his basic recommendations?

[Read more…]

Einstein Portfolio Review: 26 July 2012

All sails are flying as the Einstein is fully invested.  Check the Dashboard or Strategic Asset Allocation plan below to see how the portfolio is set up.  The Einstein is not one of the ITARR model portfolios – otherwise developed international markets (VEU) and emerging markets (VWO) are two asset classes that would be under target.

Dashboard:  Thirty-eight percent of the Einstein is allocated to the U.S. Equities market.  This is a little higher than I prefer so I will slowly reduce this percentage over the next several months.  When one of the “Big Nine” is a little below target, I will shift the percentage to other asset classes.  One up for increase is domestic real estate (VNQ).  I also plan to push international REITs up to 5%.  This should increase the yield for the Einstein.  Other than a few tweaks here and there, this portfolio is in good shape.

Portfolio Performance:  As for performance, the Einstein is outperforming its benchmark by 1.1% points.  All the risk ratios are positive.  These are: Information Ratio (IR), Sortino Ratio (SR), and Retirement Ratio (RR).  If you are unfamiliar with these risk measurements, just search for them on ITA Wealth Management.

The next goal for this portfolio is to improve the IRR to where it outperforms the VTSMX index fund.  That is not going to be an easy task considering the percentage now allocated to bonds and income.

The Einstein will go into “neglect” mode for another month as there appears to be little to do before the next review.

Gauss Portfolio Review: 24 July 2012

Several limit orders were recently activated for the Gauss portfolio bringing a number of the asset classes into balance.  Both developed international and emerging markets are under target for a reason as VEU and VWO are both priced well under their 195-Day Exponential Moving Average.

The first screen shot shows the current Strategic Asset Allocation plan for the Gauss.  The second slide is the performance data when the portfolio was updated this morning.

Platinum membership is available for a mere $5.00 per month.

[Read more…]

Updating The Curie Portfolio: 23 July 2012

Updating the Curie Portfolio is upon us again.  Even though the Curie is not one of the five ITARR experimental portfolios, I am using a modified Tactical Asset Allocation version of the risk reduction model and that is why developed international markets and emerging markets are both under target.  The Dashboard, extracted from the TLH Spreadsheet, clearly shows where we are with respect to the Strategic Asset Allocation plan.

[Read more…]

Portfolio Risk Management Using The ITA Risk Reduction Model

Following up on Bob Warasila’s article, published early this morning, a review of the ITA Risk Reduction model is in order.  In addition to reviewing the ITARR, I will add a few additional wrinkles that should improve portfolio returns.

The basic ITARR model has two rules.

  1. Buy Rule:  Buy the index ETF when the price of the ETF moves from below to above the 195-Day EMA of the ETF.
  2. Sell Rule:  Sell the index ETF when the price of the ETF moves from above to below the 195-Day EMA of the ETF.

Review the portfolio once a month.  My schedule is now to update each ITA portfolio once every 32 days for reasons I articulated in an earlier blog.  The ITARR rules are similar to the risk reduction rules explained in Faber and Richardson’s book, The Ivy Portfolio.  These two rules are nearly identical to those I was using when the October 1987 (Black Monday) shock hit the market.

Anytime one is using a mechanical method as described above, it is difficult to watch the ETF snap back after a rather long decline.  Losing out on those early gains is painful to watch.  Is there a way to counter this problem?  Follow along.

Platinum membership is available for a mere $5.00 per month. 

Check the link for DBC, our primary commodity holding.  Examine the recent action of the Relative Strength Indicator (RSI).  Note the upward movement of DBC after the second or third penetration of the 30% line.  This tends to be true for other ETFs as well.  Anytime an ETF drops from above to below the 30% RSI, the risk adverse investor goes on high alert.  Rather than wait for the ETF to move from below to above the 195-Day EMA, begin to make partial moves back into the market.  When an ETF dips below the 30% RSI line the “Delta Factor” is generally flashing a “Buy” signal.  Both the RSI and “Delta Factor” are responding to the “law” of reversion-to-the-mean.”

Another confirming metric we consider is the PnF graph.  Check this one out for DBC.  While the Point and Figure graph does not provide dates, we don’t need it to see what happened.  When DBC moved from below to above the 30% line in the RSI graph, the PnF graph soon after showed up with X’s in the right-hand column.  That was the time to jump in and begin buying shares of DBC to bring the asset class back into balance.  This is one of the “wrinkles” I would like to add to the two basic risk reduction rules of the ITARR model.

Summary:  Any time an ETF moves below the 30% line from the RSI graph, go on high alert.  Frequently, the firs move is too early.  Nevertheless, pay attention to the PnF graph and I will try to let Platinum members know what the “Delta Factor” is indicating.  Remember that the “Delta Factor” tends to be an early indicator.  Use the MACD and CMF graphs as confirming indicators.  The basic idea is to take advantage of those early reversals.

Photograph:  Mt. Hood, just east of Portland, OR.  Photo by John Fitzgerald