Asset Allocation or Risk Parity

A Platinum member sent the following summary of an article and asked me to comment.  Note that my response is framed in the context of constructing portfolios through the use of a strategic asset allocation plan.  The Dashboard of the Curie Portfolio, posted this morning, is an example.  The second part is tied to future performance forecasts using software, Quantext Portfolio Planner (QPP).  Here is the article or a summary brief.

While there is no question about the difficulties of investing in equities during the first 12 years of this century, there are reasons for the difficulties.  Tax cuts, two wars, unpaid prescription drug plan, housing bust, misuse of derivative, etc. all combined to work against long-term investors.  Did Risk Parity work over the last decade.  Yes, but that does not mean it will work again.

The above article sounds as if the author wants to combine both strategic asset allocation and risk parity as a way to put together portfolios.  To a large degree, that is what we are doing here at ITA Wealth Management.  In outline form, here is what we do.

1) Develop a Strategic Asset Allocation plan for each portfolio.  The allocations from portfolio to portfolio do not vary all that much.  All are skewed toward the value side of the investing spectrum.  This is in keeping with academic research.

2) We look at long-term market trends through the use of Delta Factor analysis and Bullish Percent Indicators.  Search these terms on this blog for more information and examples.  Using the laws of probability, we attempt to stay on the right side of market trends.  While this is not a perfect system, it does provide a slight edge toward being successful while reducing portfolio risk.

3) While the portfolios are not built around the concept of Risk Parity, we do make a strong effort to reduce portfolio, particularly in five portfolios, by employing the ITA Risk Reduction (ITARR) model.  This is a slight modification of the Faber-Richardson risk reduction model as explained in their Ivy Portfolio book.

I found the third paragraph to be both confusing and contradictory.  It read as if the writer did not know which side of the fence made the most sense.  Do I think Risk-Parity will work over the next 12 years as it did over the last 12?  In a word – No.  With interest rates as low as they are, the laws of probability are not with bonds.  For this reason, I’m sticking with building portfolios through a thoughtful asset allocation plan and I prefer to control portfolio risk by using the ITA Risk Reduction model.

Curie Portfolio Update: 29 October 2012

Another 32 days rolled around and it is time to review and update the Curie Portfolio.  In the following screen shots Platinum members will see the Dashboard, one of the worksheets within the TLH Spreadsheet, and the performance data, another spreadsheet worksheet.  While the absolute performance is modest, the Curie continues to outperform all benchmarks.  The most important is the ITA Index as it is customized to the Curie strategic asset allocation plan.

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Bullish Percent Indicators Take Hit

As projected for a number of weeks, the market finally took a breather and retraced this past week.  The evidence is clear when one examines the index and sector tables.

Index BPIs:  We find every index below the 70% line or what we think of as an overbought condition.  While we are not rooting for the market to decline, we are well aware that it cannot maintain those lofty heights for an indefinite period.  Therefore, it is somewhat of a relief to experience a week of decline.  The market is simply catching its breath for the next race.  The defense has the ball for all markets except for the most important one, the NYSE.

When the major markets drop below the 50% line it will be time to take a careful look at available cash and think about putting it to work.

Sector BPI Data:  The sector BPI data helps one to focus in on what parts of the market are doing well and which are suffering.  This past week the offense gave the ball over to the defense in Staples, Health, and Materials.  Only the Financial and Industrial offensive teams are in control.  I would need to look again, but I think the Financial sector was one of the few sectors that showed a positive Delta Factor.  It is time to look at that data again.

If you are examining these BPI graphs on your own, be sure to use the percentage scaling model rather than the traditional model.  The traditional model is used when one is making these calculations by hand.  That is not necessary when we have computers and StockCharts as our data source.

Johnson & Johnson (JNJ): A Cornerstone Stock

With new data available I thought it prudent to analyze JNJ, a stalwart of a company.  Johnson & Johnson was one of the requested stocks by a Platinum member and it is found in many portfolios due to its consistent performance over the years.  Where does it stand today?

This information is not available for publication elsewhere on the Internet.

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