What can ITA readers look forward to in 2013? My resolutions and recommendations can be found at this link. As hinted at in several portfolio reviews, I will be rethinking whether to use as many different asset classes as I now do in many portfolios. The reason for reducing the number of asset classes is tied to correlations. There is no need to use similar ETFs if the correlations are high. In addition to reducing the number of asset classes, several portfolios hold ETFs that make up less than 5% of the portfolio and as a result have little impact on portfolio performance. It is important to diversify to the degree that each asset class receives sufficient weighting to make a difference, but not so large that it matters too much.
I’ll be looking at ETFs that cover the four primary stages or phases of the economy. They are: prosperity, recession, inflation, and deflation. Portfolios not only need to be constructed to generate a respectable return, but they also need to insulate the investor from inflation and deflationary conditions by holding long-term U.S. government obligations.
The “new” portfolio needs to pass the mathematical requirements of diversification, equity orientation, inflation-deflation protection, and do it with as low correlated ETFs as possible. In addition we prefer to use commission free ETFs from TD Ameritrade or a similar discount broker.