VTI Switches Indices: Are You Concerned?

If I were to hazard a guess, most readers of ITA Wealth Management are not aware that VTI made a switch its underlying index benchmarks from MSCI to the CRSP indices (for US exposure) and FTSE indices (for international).  While this is of some concern, it will not significantly impact our portfolios as we do not invest only in the VTI index.  While the VTI will lose some exposure to mid- and small-cap cap stocks, we pick up those asset classes by over-weighting our asset allocation plans to smaller cap stocks.  In addition, we skew our portfolios to the value side of the investing spectrum based on research that tells us – over the long run, value stocks outperform growth stocks.

The move by Vanguard’s VTI ETF is not trivial, but we do not need to be concerned due to the way we build our portfolios.  Nevertheless, one wants to keep abreast of these changes and that is why I bring it to your attention.  Click on the provided link for more details.

Kenilworth Portfolio Review: 23 November 2012

Early this month I purchased a few shares of VOT to bring mid-cap growth back into balance.  Another change in the Kenilworth occurred back on 10/24/12 when I sold shares of DBC as the price of this commodity ETF was below its 195-Day EMA.  That is the reason the commodity asset class is below target.  Remember, the Kenilworth is one of the ITA Risk Reduction model portfolios.  I will need to see where the price of DBC ends up at the close of today’s shortened trading day.  No DBC decision will be made before Monday as I do not wish to incur a short trading fee from TDAmeritrade.

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A Very Basic Three ETF Portfolios

In response to the keep it simple blog post, here is a three ETF portfolio analysis.  The 30% allocation to bonds (BND) pulls down the projected return to 6.2%.  Allocating that percentage to bonds also holds down the projected volatility to 12.8%.  Note that this simple portfolio outperformed the S&P 500 over the past five years, and did it with a lower standard deviation.

With only three ETFs the Diversification Metric is low.  This is not unexpected as one needs to work to build a diversified portfolio.  A beginning investor could do a lot worse than to set up this sort of asset allocation and stick with it over a lifetime of investing.

What do other readers think of this asset allocation plan?

Happy Thanksgiving

Happy Thanksgiving to all ITA members and readers. 

Enjoy the day with family and friends.

High Yield Retirement Portfolio

A Platinum member submitted the following portfolio for analysis.  The portfolio is designed to throw off income for a retiree and as you can see, the historical yield is a very high 4.6% so the portfolio is meeting that goal.  Take note that the portfolio outperformed the S&P 500 and did it with much lower risk.

The projected return over the next six to twelve months is 7.6% or very close to our goal of 8.0%.  This projection is assuming the S&P 500 will grow at 7.0% per year.  The projected standard deviation is 15.1% is just a tad over the desired upper limit of 15.0%.  The Diversification Metric at 36% is just shy of the 40% goal.  This is not a serious deficiency.  What do other readers have to say about this portfolio?  Would you employ the ITA Risk Reduction model to hold down volatility or would you just let this dividend oriented portfolio run?

Retirement Requirements: Stress Testing the Gauss Portfolio

Assume you are using the Gauss Portfolio asset allocation plan for your retirement portfolio and you want to know if you can survive a three sigma event just prior to retirement.  The provided link or the Dashboard shown below lays out the Strategic Asset Allocation plan for the Gauss.  What is required in the way of savings for a 40-year old who has only saved $100,000 thus far and expects to retire in 27 years at age 67 on an income of $50,000 in today’s dollars?  Inflation is pegged at 3.5% and the S&P 500 is projected to grow at 7.0% annually.  The assumption of a two to three sigma negative market decline is a reasonable assumption as it happened to many of us several times over our investing lifetimes.  The last two times we experienced a two to three sigma market decline happened in 2001-2002 and again in 2008 and early 2009.  Don’t think it won’t strike again as the same skulk of foxes are running loose in the chicken house and we tolerate an impotent SEC.

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Keep It Simple: And I Mean Really Simple

Yesterday I was discussing Hedrick Smith’s new book, Who Stole the American Dream, with a relative and we talked about how ill prepared Americans are for retirement.  Part of the discussion focused on some new information where I learned a group of workers in a well-known institution had an average of $50,000 saved in their 401-k plans.  Can you imagine going into retirement with so little saved?  Now to be fair, many of these workers still have years to save, but there are many who are not taking advantage of the matching funds available from the employer.  Employees are leaving good money on the table and that is foolish – if not stupid.

If a company will match 3% to 6% of your salary in a one for one match of every dollar you put into the plan, max out the employer match.  Save 3% of your salary if they will match that saving.  Never leave free money in the office of the employer.

I’ve yet to read Hedrick’s book, but I’ve been told it is must reading for every worker in this country.

How simple is really simple?  If you are a beginning investor, open up a broker account and begin to put money away in Vanguard’s Total Stock Market ETF, VTI.  Do nothing more than that.  Just use one ETF, VTI, as it will cover the entire U.S. Equities market.  Later you can branch out into other asset classes as we do in all the ITA portfolios.  But to get started immediately, begin a monthly saving plan and put all your eggs in this well-diversified ETF.  And start as soon as possible.

Follow The Golden Rule of Investing.

QPP Projections for “Swensen Six” On March 15 of 2009

What was the Quantext Portfolio Planner (QPP) software projecting for the “Swensen Six” Portfolio back on March 15th of 2009?  I use the Swensen as an example portfolio since it is simple and it includes most of the basic asset classes we use with ITA portfolios.  In addition, March 15th was about the market bottom, so it is of interest to see what the projections were when we were all biting our finger nails.  Here is the analysis as one would have found it back near the bottom of the last bear market.  After examining this screenshot, we will look at the performance figures to check the accuracy of the projections.

The future projections are for this portfolio to grow at 8.2% annually and we can expect the volatility to bounce around 15.5% per year.  If you check the Historical Data section of the analysis below you will see that this portfolio performed much better than the S&P 500 during a very rough market period.  There were 15 months of soul searching included within this three-year period.

Now that we have the future projections available, just how well did this portfolio perform over the next year as that is about as far in the future as one might expect from the QPP?

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Accuracy of QPP Projections

How accurate have Quantext Portfolio Projections been over the last bear and bull markets.  Back on 12/31/2007, QPP projected an annualized return of 7.4% with a standard deviation of 10.5% for a portfolio made up of SPY, IWM, EFA, EEM, TIP, TLT, AGG, and IEF.  The exact percentages are listed in the screenshot below.  That low risk percentage looked great in December 2007, but we did not foresee the market cratering during the following 15 months.  If one examines a portfolio made up of the above ETFs in the percentages laid out below and assumes the S&P 500 will grow at an annualized rate of 7.0%, we have the data to see how close the projections came to their actual target.

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List of Dividend Stocks

Investors looking to build a portfolio from stocks that show continual growth in dividends will find the following list of interest.  From this long list I add a few more screens and the three stocks that pass these additional screens are identified below.

Readers are reminded that well over 95% of the investments in ITA Wealth Management portfolios are invested in non-managed index ETFs.  However, from time to time we will add individual stocks to provide additional diversity.  It may sound strange to think individual stocks can provide diversity and lower overall correlations, but that is the case if the stocks are carefully selected.  I just find it extremely difficult to construct an entire portfolio from stocks as I don’t have a global view and it is particularly lacking when it comes to selecting stocks in emerging markets.  Most investors are better off building portfolios from index funds rather than individual stocks.  Caution: Stay away from managed mutual funds if at all possible as they are bad news.

The following material is not available for publication elsewhere on the Internet.

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