“Swensen Six” Series Coming

Kipling

Kipling

Be sure to link to http://itawealth.com this coming week to read the three-part series on the “Swensen Six” portfolio.  To get you started on what the “Swensen Six” is all about, check out these three articles.

http://seekingalpha.com/article/531591-swensens-6-etf-portfolio

http://seekingalpha.com/article/2436415-the-swensen-6-portfolio-how-to-reduce-risk-and-trounce-the-market

http://seekingalpha.com/article/2499215-swensen-6-portfolio-etfs-to-remove-from-portfolio

 

To read the three articles over on http://itawealth.com you will need a Platinum membership.  These articles are all about portfolio management.

Aristotle To Use VTI/TLT Ratio

Check this blog to see how the Aristotle Portfolio is going to be managed using ideas from Benjamin Graham.

http://itawealth.com/2014/06/19/passive-investing-according-benjamin-graham/

If you have not recently checked out the upgraded ITA blog, check the URL under my name.

Lowell

http://itawealth.com

Basic Information for Momentum-Optimization Model Investors

Investors wishing to set up a basic portfolio will find all the essential information in the following three screenshots.  The slides are as follows.

  • Ranking of ETFs that will provide global coverage and include low correlated securities that can be used during bear markets.
  • Current Buy-Hold-Sell recommendations for rebalancing assume the investor is employing the ITA Risk Reduction model.
  • Recommendations for any investor interested in using the momentum model.

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

[Read more...]

Investing Review: Examining the Basic Principles

From time to time it is useful to go back to the basics and make sure we have an investment plan that makes sense and has a high probability of adding value, or as we like to say, adds alpha to the portfolio.  In one of his later posts, “HedgeHunter” recommends laying out an investment plan.  Here are a few basics.

  • Follow The Golden Rule of Investing by living below your means and save as much as you can as early in life as you can.  Even if you are limiting in your saving plan, stick with it and stay disciplined.
  • By all means, use index mutual funds or non-managed index ETFs.  My preference is to use ETFs.  ITA Wealth Management is loaded with examples of security tickers such as VTI, VEU, VWO, VNQ, etc.
  • Lay out an asset allocation plan.  Readers will find an example below.  Twelve (12) to eighteen (18) asset classes should be sufficient.
  • Within the asset allocation plan determine what percentage you plan to invest in each asset class.  I still think this is one of the most difficult decisions an investor makes.
  • Read a few investment books I recommend throughout this blog.  Hear what other investors have to say.  Be aware that my book recommendations have a bias toward index investing and my investing style is rather conservative.  It may not seem conservative with all this discussion on momentum, optimization, and risk reduction – but it is.

Einstein Dashboard:  The following screenshot was extracted from the Einstein TLH Spreadsheet and is an example of the Einstein asset allocation plan.  It is more colorful than one might expect as I am deviating from the asset allocation plan by employing the Momentum-Optimization Model overlay with this portfolio.  In addition, I am paying attention to the ITA Risk Reduction (ITARR) model as I am adamant about preserving capital.

U.S. Bonds, Int’l Bonds, Precious Metals, Commodities, and Emerging Markets are all under target as these are currently under-performing asset classes.  Expect this to change over the coming months and even in the next review of the Einstein.

Dashboard

Another example of an asset allocation plan is one I use with the Schrodinger.

Schrodinger Dashboard:  In this portfolio most of the asset classes are in balance.  Due to the recent strong performance in Small-Cap Growth (VBK) this asset class is now above target and will need to be scaled back.  Commodities is under target and could use a boost.  If one is sticking with an asset allocation plan, momentum is out the window.  After laying out an asset allocation plan, and the Schrodinger may not fit your risk capacity, stick with it and keep the various asset classes in balance.

Dashboard

Based on the recent research from “HedgeHunter” I think it is prudent to employ the ITARR overlay.  What I am less sure about is the 195-Day EMA.  I need to do more research on EMAs as I recall reading an academic paper where a little faster moving EMA is preferred.  My recollection is that a 150-Day Exponential Moving Average is superior to the 195-Day EMA.  The problem with choosing one over the other is that the decision is based on back testing and there is no guarantee that is what will work best in the future.

If you are looking for an approach that requires about one hour of work per year, set your portfolio up similar to the Schrodinger.  It you want to be a little more active, then consider the MOM with the ITARR overlay.  Examples of these approaches are on display each month as the various portfolios come up for review.  To gain access to all the details requires a Platinum membership so keep that option in mind.

Which ETFs To Use When Constructing A New Portfolio

Which ETFs do I recommend for different asset classes when putting together that first portfolio?  The first move is to decide which asset classes to use.  Twenty-five months ago I posted this Asset Allocation blog and little has changed over that time.  One error in the table is the position of VEA.  That ETF should be included in the Developed International Equities box rather than the Emerging Market asset class.  Since posting this asset allocation table I added a Precious Metals asset class to several portfolios.  Another change is that I no longer use mid- and small-cap blend (VO and VB) as those asset classes are covered by the value and growth ETFs.  This cuts the number of U.S. Equity asset classes from nine to seven.  A strong argument can be made that the “Big Nine” (now “Big Seven”) are highly correlated and one only needs VTI to cover all U.S. Equity asset classes.  If you want to simplify your portfolio or if it is rather small, use only VTI for U.S. Equities.  However, I’ll continue to use VTI, VTV, VOE, VBR, VUG, VOT, and VBK as the primary representative ETFs for the U.S. Equities market.

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

The remaining nine asset classes are: Cash, Domestic Bonds (BND), Developed International Markets (VEU), Emerging Markets (VWO), U.S REITs (VNQ), International REITs (RWX), International Bonds (BWX), Commodities (DBC), and Precious Metals (GTU).  While these are the primary ETFs used to calculate the ITA Index benchmark, I hold other ETFs in different portfolios as well as a few individual stocks.  For example, I don’t limit bonds to just BND.  Other bond and income ETFs include BSV, BIV, AGG, JNK, LQD, TLT, TIP, SHY, etc.

As stated many times on this blog, the second decision of what percentage to allocate to each asset class is the most difficult decision facing investors.  If one follows the Momentum-Optimization Model, and you are satisfied with the constraints applied to the different asset classes and individual securities, it is possible to receive help with this difficult decision through the optimizer.

Here is the link to a series of articles on Dynamic Asset Allocation or Adaptive Asset Allocation.  I believe I referenced this second article in a prior blog.

Here is the latest ranking of ETFs I use to populate most of the portfolios tracked here at ITA.

Ranking

Where To Begin If You Have Never Managed A Portfolio

If someone asked you what to do with an inheritance or 401(k) sum of money, what advice would you give them?  Here are some basic ideas for a novice investor.

  • Assume the money is in your checking account and available to be invested.
  • Open up a broker account with a discount broker.  For example, go to a “bricks and mortar” location if possible and fill out the forms.  A good idea is to print out the forms in advance and fill them out at home.  Then take the forms into the broker (TDAmeritrade for example) and have them look over the forms to make sure everything is accurate.
  • If you are a couple, set up separate accounts for each person.  I think it is wise to keep investment portfolios separate.
  • Invest the minimum amount in each account.  If there is no minimum, begin with a minimum of at least $1,000 in each account.  Another option is to place all the available money in a money market account so it is available for investing.  If the money is coming from an inheritance, invest the money in a taxable account.  If the money is coming from a tax deferred account, and you can set up a self-directed IRA account, do that.
  • With the market as high as it now is, I certainly would not invest everything in the stock market.  Be patient.  Take any where from six months to two years to fully invest the money.  The time will depend on the amount of money to invest.  There is nothing quite so discouraging as to loose money right out of the starting blocks.
  • By all means, use index funds or index ETFs rather than trying to select individual stocks.
  • At this point I would select one of the ITA portfolios to follow on this blog.
  • Begin an investing education program by reading some of the Top Ten Investment Books.

Coming back to the original question, what advice would you pass on to the novice investor?

Setting Up a New Portfolio

Whether one is a beginning or experienced investor, a respectable portfolio can be constructed using the following 27 ETFs.  These ETFs are available commission free to TDAmeritrade clients.  While there are 27 ETFs available, it is not expected all would be part of the portfolio at any one time.  Currently, only 13 ETFs are recommended with the current conditions.

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

[Read more...]

Tax Deferred Accounts: How To Begin Your Investment Plan

Planning and Saving for Retirement

Whether you are just beginning to establish a tax-deferred or taxable account, the basics principles of investing are the same.  Saving and developing an investment plan are the basic starting points.  Readers of ITA Wealth Management have The Golden Rule of Investing drilled into their thinking so they understand the importance of saving and doing it as early in life as possible.  As for saving, a good rule is to save 10% of your salary each year.  If you take home $3000.00 per month, save $300.  If you can manage to save on your gross salary, so much the better.  Years ago there was a bank here in Portland that advertised, “Pay yourself first.”  That is easier to accomplish if your employer is putting away money in your tax deferred account.  It is a discipline I highly recommend and there are many encouraging suggestions to be found within this blog.

Once you have a savings plan in place, move on to setting up an investing plan.  This is not as difficult as it may sound.  In the initial planning stage you will be forced into one of several investing models.  You will become either a passive or active investor – or possibly a mosaic investor.  Search these terms on this blog to learn more about each.  For the new investor, I highly recommend taking the path of a passive investor.  Not only does it take the least amount of work on your part, but it also has the highest probability of success over the long run.  That is a winning combination.  In addition, and I cannot emphasize it enough, use non-managed index funds for the core of the portfolio.  Stay away from actively managed mutual funds as they are too expensive and active management has a poor track record when it comes to performance.  My investment preference is to use Exchange Traded Funds (ETFs).

While this particular blog can be read by anyone, it is primarily written for a medical team just setting up a retirement program with Wells Fargo.  From what reading I’ve done, it looks like Wells Fargo will serve you well.

Now let’s get back to setting up that investment plan.  Below is a screen-shot of one worksheet from the TLH Spreadsheet, an Excel™ program used to track portfolio performance as well as the performance of several benchmarks.  The Dashboard is designed to aid the investor in setting up an asset allocation plan.  In other words, how are you going to distribute your assets or the money you are saving each month.

I would begin by focusing on Large-Core.  The nine major blocks, of which Large-Core is one, are all part of the U.S. Equities (stocks) market.  The Exchange Traded Fund (ETF) of choice to fill this asset class is VTI.  VTI is Vanguard’s low-cost index ETF that holds a few hundred U.S. stocks.  The other asset classes can wait until the nest egg in Large-Cap Core begins to develop.

After VTI amounts to a few thousand dollars, then branch out into developed international markets (VEU or VEA), followed by real estate (VNQ), and emerging markets (VWO).

Dashboard

Before you go very far with your investing play, I highly recommend you pick up a copy of William J. Bernstein’s book, Us this book as an investment reference.  You will not be able to absorb all the ideas in one read.  I have other investment books you might read.  Check out my Top Ten Investment Books as a place to start.

The question always arises, is this a good time to get into the market?  My answer is yes, even though this is a high or overvalued market.  Just get started with your saving and investing plan and pray the market goes down so you will be purchasing more shares with your saved dollars.  This is known as dollar-cost-averaging.  There are other savings plans, but this one is easiest implement.

This will at least get you started with your tax-deferred plan.  If any reader has questions, post them in the comment section.

Key Ideas to Beginning Your Retirement Program

Keys to successful retirement investing.

It All Starts With Saving

  • Follow The Golden Rule of Investing.  Time is money.
    • “Save as much as you can as early as you can.”

Five critical investment decisions.

  • The Management Decision
    • Will you do it yourself or will you hire a professional money manager?
  • The Active vs. Passive Decision
    • Will it be stock, index funds, or a combination of both?
  • The Asset Allocation Decision
    • What asset classes to include in a portfolio?
    • What percentage to invest in each asset class – a most difficult decision?
    • What risks are you willing to accept?
  • The Diversification Decision
    • Think global.
  • The Rebalancing Decision
    • Which strategy to use to rebalance the portfolio?

Develop an investment plan.

  • Plan using asset classes instead of sectors.
  • Use ETF index instruments instead of picking stocks.
  • Learn how to monitor your portfolio.
  • Continue to increase your investing education by reading.

Risk Analysis

 

Contact Information:  itawealth@comcast.net

Blog Information:  ITA Wealth Management  http://itawealthmanagement.com

Seeking Alpha:  http://seekingalpha.com   Search for Lowell Herr

Six Investing Basics

1.  Save

2.  Index

3.  Diversify

4.  Cut Costs

5.  Rebalance

6.  Monitor

Save:  Follow “The Golden Rule of Investing.”  There is no substitute for saving and living below your means. Save early in life and do it frequently.

Index:  Use index funds or index ETFs.  Avoid picking individual stocks unless you are an expert.  Even most experts cannot do it successfully.  Remember, the market is generally smarter than you are.

Diversify:  Spread investments all over the world.  Include REITs, emerging markets, and for larger portfolios, commodities and international REITs.

Cut Costs:  Examine the expense ratio of your index investments.  We use Vanguard ETFs as they consistently have the lowest expense ratios.

Rebalance:  Keep the asset classes within the target ranges.  If this concept is new, do a search for “rebalance.”  The TLH spreadsheet is a great help.  For most portfolios we use a 20% to 30% threshold for our asset classes.  If one is adding new money on a monthly basis, rebalancing will be very rare as one always adds money to the asset class most under target.

Monitor:  Learn what it means to manage and monitor the portfolio.  The TLH spreadsheet is the answer to this problem.

 

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