Maximizing The Return/Risk Ratio

I spent much of the morning working on optimizing numerous sets of ETFs until I came up with the following array of investments.  This sample portfolio consists of the ETFs used in many ITA portfolios.  Knowing that individual stocks bring diversity to most portfolio, I “Googled” for the five highest yielding dividend aristocrats.  To make sure I have the top five, I would need to confirm with other sources, but I stopped with my first search.

Take time to examine the following set of investments and the associated constraints.

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

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Retirement Portfolio: Part Five

If one is willing to add a few individual stocks to a sample retirement portfolio, what does the allocation look like when optimized?  In the following portfolio I added several ETFs to what one might consider the basic group.  These include SLV, DVY, and IDV where the latter two are dividend generators.

Special Note:  The assumed growth rate of the S&P 500 was lowered from 7.0% to 6.0% for this analysis.

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Kenilworth Update: 27 February 2013

As one of the ITA Risk Reduction model portfolios, when the Kenilworth portfolio comes up for review I go through the critical ETFs to see where the price is positioned with respect to the 195-Day Exponential Moving Average (EMA).  Here is the link to check the ETFs.  Readers will note that DBC is priced below its EMA, so why not sell?  What happened is that I set a limit order over 30 days ago and the price of DBC recently dropped below the 30% Relative Strength Indicator line.  The limit order for DBC struck a day or so ago so I will not be selling this commodity ETF even though the ITARR rule calls for a sell.  To do so now would incur a $19.99 commission charge and I want to avoid that expense.  Therefore, I am sticking with DBC in hopes it will rise off the 30% RSI line.

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Retirement Portfolio: Part Four

Part four in this series of blogs on retirement confines the portfolio to ten critical ETFs.  Before I go further, let me point out to Platinum readers that this is a new Excel™ spreadsheet that comes from Peter Hoadley of Australia.  I am new to this spreadsheet and as readers can see, I do not have the correct entries for all the “Asset Groupings.”

The critical ETFs are:  VTI, IWN, VEU, VWO, VNQ, RWX, GTU, DBC, PCY, AND BIV.  Readers can debate whether or not these are the critical ETFs, but they are the ones I selected for a basic retirement portfolio.

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Retirement Portfolio: Part Three

Part three of this series of retirement preparations shows how one might optimize the array of ETFs presented in the earlier two blog posts.  In the following screen shot I set up a number of constraints and one was to hold the Diversification Metric to the 40% standard.  I also included BND, Vanguard’s Total Bond ETF in the mix of investments.  Even by forcing none of the bonds to hold more than 4.0%, I managed to come up with a DM of 40%, although it did temper the projected return.

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Retirement Portfolio: Part Two

As pointed out in this blog post, one first selects asset classes for a retirement portfolio.  Then comes the difficult part of selecting what percentage to allocate to each ETF or asset class.  Below is a basic allocation that is not optimized.  In a later post I will run through an optimization of this set of ETFs to see if the projected return can be enhanced and still lower projected risk.

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Sample Portfolio Analysis

An ITA reader sent in the following portfolio for analysis.  Two funds, VXUS and VNQI, had short histories so the analysis is limited to 25 months of data.  Below is the QPP analysis and the correlation matrix for this group of holdings.  The S&P 500 is assumed to return 7.0% over the next six to twelve months.

QPP Analysis:  Anytime a portfolio is projected to return approximately 100 basis points below that projected for the S&P 500, one can consider it a conservative portfolio.  The projected volatility of 10.3% is another indicator this portfolio is built to withstand a major draw-down.

One observation is that a number of the holdings will not contribute all that much to the portfolio as the percentage (<=3%) is rather low.  Sometimes I will hold on to a small percentage to calculate the ITA Index.  There may be reasons for holding 2.2% in a number of the investments.

QPP Analysis

Correlation Matrix:  Due to a number of low correlated holdings, the Diversification Metric is quite high (55%), a positive indicator.  Low correlated assets almost always hold down both projected return and projected risk.  That is the case with this group of investments.  The IEF ETF should have a blue background as it is negatively correlated.Correlations




Bohr Portfolio Review: 25 February 2013

Since the last update 32 days ago, shares of VO, VB, and EFV were sold from the Bohr in an effort to both simplify the portfolio and reduce high correlated ETFs.  The Dashboard and Portfolio Performance data can be found in the following screenshots.

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Retirement Portfolio: What Are The Essential Asset Classes To Include?

A request came in from an ITA reader to put together a retirement portfolio that does not need to produce income since social security and a pension will cover those needs.  In other words, what should the retirement portfolio plan look like?  The first guideline is that this portfolio not include any individual stocks as that lays on an additional level of analysis.  I suspect most investors who select only individual stocks do not have a Strategic Asset Allocation plan, at least to the degree discussed throughout this blog.

The first step in building a retirement portfolio is to select the essential asset classes.  Here are the basic ETFs I include in nearly every portfolio, regardless whether it is a retirement portfolio or a portfolio for a thirty-year old.  This is particularly true if a portfolio that does not need to throw off income.

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

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Handel’s Water Music and Music for the Royal Fireworks

Westminster, England

Water Music and Music for the Royal Fireworks by George Frideric Handel is my CD recommendation for the week of 24 February 2013.  There are many options available for this combination of compositions, so check the reviews.  While I am still providing links to specific CDs, new generations of listeners are now finding their music on the Internet.  For example, I recently installed a beginning set of Sonos hardware and speakers in parts of the house.  From an iPhone, computer, or iPAD I am able to call music off the Internet or from my own collection (provided it is on a hard drive, not on the shelf) and play it on the speaker of choice.  For example, I can have Water Music playing in the living room and Music for the Royal Fireworks holding forth in my office.  All is wireless.  If we have friends over to the house for a summer spot of tea and conversation, I can carry the Sonos speaker out on to the patio and select a playlist of music from whatever source I choose.  It is quite amazing.

To explain in greater detail, the Sonos software permits me to stream all genres of music to speakers controlled by the Sonos hardware.  It almost takes longer to unpack the Sonos hardware than it does to install it and hear it pumping out music.  If one is using Spotify, which I am not, you then have an almost infinite source of music at your beck and call.  I use Pandora Radio as well as located right here in Portland, Oregon for music sources as both are free.  There are literally hundreds of music stations one can bring in over the Internet and play through Sonos speakers.  The choices are now almost limitless and one does not need to actually purchase the CDs.