While I don't know if the current makeup of assets matches my most recent copy of the New Normal, a look at a risk reduction or equal rating of risk is instructive. Check out the QPP analysis below.
Time to update the Bohr Portfolio, one of the six portfolios that are not part of the ITA Risk Reduction model test. Nevertheless, I am using some of the exponential moving average data in an attempt to reduce risk to this portfolio. This week I picked up shares of VO and VB, but not enough to bring these blend asset classes back into balance. I'm still not completely satisfied with the asset allocation model shown in the Dashboard below. More on that in a bit.
Shares of RWX were purchased this month to bring that asset class into balance. Readers will note that the price of RWX is well above its 195-Day Exponential Moving Average (EMA), calling for a buy some weeks ago assuming the PnF graph supported this move.
No, I am not obsessed with risk even though I've recently written quite a bit on the subject. Why the concern about risk as the market seems to be having a good summer? The specter of rising interest is a major fear for this reason. If interest rates were to rise to the same level they were when George Bush (43) took office, the amount of money the U.S. Government will need to finance its debt will leave no money for discretionary spending. The country will be forced to inflate out of the crisis and inflation crushes retirees.
Zvi Bodie has been arguing the risky nature of the stock market for years. He is so conservative that he recommends investing 100% of the portfolio in TIPS (TIP). Check out this link for more on Bodie's thinking. Jeremy Siegel takes an opposing view as he argues "stocks for the long-run." One of the problems with Siegel's position, pointed out by Bodie, is that the longer one holds stocks (equity ETFs) the higher the probability one has of experiencing a three sigma event as we did in 2008 and early 2009. Think about it for a moment. Over the last 45 years there have been four major market shocks and many minor ones. That is one every four years so we can expect another major hit before 2020. This is why investors, particularly those in their retirement years or within 15 years of retirement need to prepare for such an event.
Bodie recognizes that one will not receive a robust return from a portfolio invested totally in TIPS. He advocates working longer and saving more to counter the risk one takes to increase return.
As explained recently, there are two ways major ways to construct a portfolio. Capital asset allocation, the method used in all eleven portfolios, is the most common model. Note: many individual investors have no well thought through Strategic Asset Allocation model. The second method or model is the risk-parity approach where the variance (standard deviation squared) is calculated for each investment and the portfolio is created by assigning a percentage to each investment based on its variance over a specified time period. I've been using five years for my analysis. This second approach pays much more attention to risk when compared to the capital asset allocation model.
Regardless which method to use to build a portfolio, risk can be further reduced by following the ITA Risk Reduction model. Use of the ITARR model is how we are attempting to control risk.