Bullish Percent Indicator Update: 19 October 2012

Despite the poor market yesterday, not too much changed in the Bullish Percent Indicator world.  As Platinum members can see from the tables below, many of the sectors and/or indexes dipped in the number of companies showing positive BPI values (X's in the right-hand column), but few handed the ball over to the defense.

[Read more…]

Investing 102: Strategic Asset Allocation Planning

Investing 102 – The SAA Plan

As a followup to Investing 101, where does one go after reading some verbal guidelines.  Read on.  Laying out a Strategic Asset Allocation (SAA) plan is high on the to-do list.  What is a SAA plan? An example is shown below in the Dashboard worksheet extracted from the TLH spreadsheet.  The arguments for such a plan is explained in some detail.

One of my complaints when it comes to investment books is the lack of specific information.  Admittedly, books have the problem of going out of date the minute they are published, assuming they include specific portfolio information.  Blogs are not saddled with this problem as new data can be posted on the hour if required.  While we don't change SAAs frequently, at least our models are not locked on to the printed page never to be changed.  The SAA plan will change as we age and our circumstances evolve.

The screen shot below (Dashboard from Sample Portfolio) requires two of the most important decisions all investors make.  Choosing not to make these decisions still ends up with a made decision.  It is better to do it rationally rather than letting events make the decision.

  • The first decision is selecting what asset classes to include in the portfolio.  The sixteen asset classes shown below cover most of the asset classes available to the small investor.  We now use seventeen asset classes in most of the larger portfolios.  There are asset classes such as private equity, venture capital, and distressed debt that remain outside the reach of most small investors so we don't worry about them.  There are professional advisors who recommend eliminating commodities.  I include it, but there is no need to assign a percentage if someone decides to avoid this asset class.
  • After the asset classes are selected, the most difficult decision investors face is – what percentage should I assign to each asset class?  This is a very personal decision and I cannot answer it for everyone.  But I do have some general principles I will share.

When deciding what percentage to allocate to each asset class, skew or tilt the percentage toward the value side when it comes to allocation U.S. Equities. [ Recent data indicates we should not neglect growth ETFs. ]  This is demonstrated in the Dashboard screen shot.  That is the first principle.  The second basic principle is to tilt the percentages toward mid- and small-cap asset classes.  In other words, load up on smaller cap stocks vs. investing in the S&P 500.  Research from Fama & French support these portfolio tilts and I've personally shown this works.  Examine the Schrodinger Portfolio as a classic example.

Does one need to use any of the three Core asset classes?  No, is the simple answer.  We can get by using the "Big Six" rather than the "Big Nine" U.S. equity classes.  Older investors may want to hold a larger percentage in bonds vs. the 13% shown below.  The problem with holding a high percentage in bonds at this time is that we expect interest rates rise and bond values will decline as sure as rain falls in Oregon.  This may not happen for a few years as the FEDs are holding interests very low.  Dividend oriented portfolios, and I favor them, seem to be where investors are moving.  Higher interest rates are coming and we don't know how changing tax laws may impact dividends.  Despite these potential headwinds, I still favor pulling in monthly dividends.

Another general principle is to not fear investing in the international markets.  That includes both developed and emerging markets.  Examples of this diversity are modeled in all the portfolio that have been operational for more than a year.

If you are new to ITA Wealth Management or a relatively new investor, I highly recommend using the TLH spreadsheet as it is an excellent aid in portfolio management.  Remember, you cannot management what you do not measure.  One of the core principles of Investing 101 was to diversify.  Another is to rebalance when necessary.  The TLH spreadsheet is an essential tool when it comes to handling those two assignments. 

Comments are encouraged.  Platinum members can request a portfolio analysis.  All I need to know are the ticker symbols and what percentage is allocated to each ticker.  Broker statements include this information.