QPP Analysis of Portfolioist Portfolio

In the last blog entry I referenced a recent article in Geoff Considine’s blog, Portfolioist.  This “QPP Analysis” post collects those asset classes and rebuilds them into a portfolio that is analyzed below using the software, Quantext Portfolio Planner (QPP).  Platinum members are familiar with the analysis that comes from this software.  If not, select the QPP option found in the right sidebar under QPP Analysis and read through some of that information.

Assumption:  Readers need to know that I am still assuming the S&P 500 will grow at a rate of 7% over the next six to twelve months.  I have my doubts about this percentage gain as my gut tells me it will be somewhere between 5% and 6%.  Nevertheless, for this analysis I am using the 7% value.

QPP Analysis:  Since Considine did not set up percentage allocations in his article, I was on my own to make those assumptions.  The strange starting date of December 19, 2007 was the launch date for EMB.  This avoids the problem of the short-term data.  All other ETFs have been operational more than five years.  I also included VEU and VEA even though Considine does not include them in his article.  In the second slide I will show readers why Considine omits them.

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How Many Asset Classes or ETFs Are Required to Construct Diversified Portfolio?

One of my favorite blog writers is Geoff Considine of the Portfolioist.  Yesterday, November 28th, Dr. Considine published an interesting article that begins to answer the above question – How many asset classes or ETFs are necessary to build a well-diversified portfolio?  Considine posits ten (10) asset classes will provide sufficient diversification.  David Swensen argues in his book, Unconventional Success, six asset classes are adequate.  Here is a link to the Swensen Six Portfolio for readers interested in the specific ETFs one might find in a Swensen portfolio.  Here at ITA we frequently use up to seventeen asset classes including cash.  That leaves sixteen (16) asset classes to be populated by an array of different ETFs or index funds.

There are common ETFs found in ITA, Considine, and Swensen portfolios.  One finds VTI, VWO, VNQ, and TLT in all these portfolios.  Considine does not include VEU or VEA as he finds a high correlation between developed international markets and the U.S. Equities market.  ITA and Swensen include developed international markets as a useful asset class, while recognizing the high correlation between international markets and U.S. markets.  In a later post one can see if adding international markets is important.

Considine separates himself from ITA and Swensen by including utilities (IDU) and energy (VDE) as separate asset classes.  In a later post I will run a Quantext Portfolio Planner (QPP) analysis so Platinum readers can see if these two additional ETFs add diversity to the portfolio.

This morning I ran into yet another way to build a portfolio, Modern Portfolio Theory 2.0.  I need to do more research and find a way to program the equation into an Excel™ spreadsheet so as to test its reliability.