Dividend Investors: Article of Interest

Dividend investors may find this article of interest.


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Happy New Year

Happy New Year


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Bullish Percent Indicators Show Markets Continue to Weaken

Bullish Percent Indicators (BPI) provide us with a broad look at large index and sector movements for the U.S. Equities market.  While I do not use either the index or sector tables as trading tools, I do watch them for general market trends and as guides to determing when the market is over bought or over sold.  Right now the market is over bought and weakening.

Index BPI:  One significant move this week shows up as the NYSE transferred the ball from the offensive team (X’s in right-hand column) to the defense (O’s in the right-hand column).  In addition, with a 69.49% rating the NYSE moved out of the over bought zone.  The move was not major, but sufficient to show weakening continues.  The S&P 500 also showed movement from offense to defense.  However, the S&P 100 actually picked up one stock as the percentage moved from 78% to 79%.  Once more, Platinum members should keep an eye on NYSE, the primary index.


Sector BPI:  What are the trends of market sectors?  The following table of market sectors shows Discretionary and Energy moving out of the over bought zone.  This brings to nine the number of sectors that are now in the hands of defensive teams.  While one does not like to witness a declining market, these moves are a healthy correction to an over bought situation.

Readers who have been following The Feynman Study and subsequent ETF rankings are well aware of declining momentum in nearly all asset classes.  There are a few exceptions such as gold and commodities, but the primary U.S. Equity asset classes are showing negative momentum percentages.  The Point and Figure (PnF) data from market sectors and broad market indexes paint the same picture.


Basic Portfolio Update: Changes in Momentum

Photo taken at Cyclopedia show at the Portland Art Museum.

Photo taken at Cyclopedia show at the Portland Art Museum.

As the market rotates from day to day, changes will show up in any portfolio if one is following the “Dynamic” plus SHY model.  If you are new to the blog and do not know what I am referring to, be sure to read The Feynman Study.  For example, yesterday there were only two viable ETFs that were outperforming the SHY, our cutoff ETF.  As mentioned in a comment, only VBK and VTV were ranked above SHY.  Using closing figures yesterday, what are the latest results?  See first screenshot below.

One of the principle reasons for not updating any portfolio more than once every 33 days is to avoid a lot of whipsaws.  Many of you may not want to update your portfolio more than once every quarter.  Even then, I would not always update exactly at the end of the quarter, but set up a tickler on your calendar to update – say every 85 or 95 days so the rotation happens at different times of the month.

If you are monitoring your portfolio using the TLH Spreadsheet you want to keep a few shares in each of the critical asset classes.  As a review, here are those critical asset classes and associated ETFs.

  • U.S. Equities – VTI
  • Bonds and Income – BND or AGG
  • Developed International Markets – VEU or VEA
  • Domestic Real Estate – VNQ
  • Emerging Markets – VWO
  • Commodities – DBC
  • International Real Estate – RWX
  • International Bonds – BWX or PCY
  • Precious Metals – GLD
  • Cash – SHY

Several ETFs do not precisely fit the definition of the asset class, but they are close enough for “government work.”  If you are client of a discount broker other than TDAmeritrade (the firm I use) then seek out your own reference ETFs.  The above are only provided as examples and all are commission free from TDAmeritrade with exception of GLD.  In each portfolio I want to hold a few shares in each of the above asset classes so I can continue to calculate the ITA Index.

ETF Rankings:  The up market yesterday was sufficient to push VBR, VOE, and VTI back above the performance of SHY.  If the market stays up today it will impact the ETFs to include in the Gauss – scheduled for an update tomorrow.  Note that SDS and GLD are no longer dragging along the bottom.  Remember that we use SDS as our “canary in the portfolio” ETF and will rarely, if ever, include it in a portfolio.


Buy-Hold-Sell Recommendations:  If this is a $100,000 portfolio with $5,000 in cash, we will hold 277 or 275 shares of VTI, 185 shares of VTV, 64 or 60 shares of VOE, 10 shares of VBR, and 25 shares of VBK.  I round down to the nearest 5 shares as I want available cash to invest in the ETFs need to cover every basic asset class listed above.  The number of shares comes from the optimizer recommendations.  We are waiting for results from a study that will focus on momentum.  We hope to present that data within the next few weeks so keep abreast of The Feynman Study as new articles appear.

The process is quite simple.  Select your basic set of ETFs, run the optimizer, check the rankings for ETFs performing above SHY, and then buy the number of shares based on the optimizer recommendations.  If just starting a portfolio, buy fewer shares than max out the size of the portfolio.  In a few months the number of shares to purchase every 33 days or the review period you choose, will smooth out.  If you are still uncertain what to do, follow the process when I update the Gauss portfolio tomorrow.


$100,000 Starter Portfolio

For prospective investors just beginning a portfolio, here is a sample based on the Momentum-Optimization Model (MOM).  MOM is discussed elsewhere on this blog.  Just search to full title or MOM to find this material.

We first begin with a ranking of all the securities we might consider for our holdings.  This includes approximately 30 ETFs.  Most are commission free to clients of TDAmeritrade.  While I use TDA as a discount broker, I have not other connections with this firm.

ETF Rankings:  Pay particular attention to ETFs that rank higher than VTI as one can consider that to be a benchmark for the U.S. Equities market.


Buy-Hold-Sell Recommendations:  Few changes in the portfolio are necessary as I set it up to reflect an asset allocation plan that is very close to an optimized portfolio.  If you are beginning with a $10,000 portfolio just divide the holding by 10 to come close to an optimized portfolio.

Note that I am not holding any ETF that is priced below its 195-Day Exponential Moving Average.  As the eleven (11) portfolios tracked here at ITA Wealth Management come up for review, watch how the MOM plan is implemented.  We will not be using MOM with the Schrodinger portfolio.


Customized Benchmark: What Is Required To Calculate The ITA Index?

Windmill in Amsterdam

Windmill in Amsterdam

Long-time readers know the importance of benchmarking a portfolio, but some investors may not know what is required to calculate the ITA Index.  Understanding how to use the TLH Spreadsheet is at the core of calculating the ITA Index.  Assume you are constructing a portfolio using sixteen different classes.  Here is a list similar to what I use in nearly every portfolio.  I’ve included the critical ticker for each asset class.

  • Large-Cap Blend (VTI)
  • Large-Cap Value (VTV)
  • Mid-Cap Value (VOE)
  • Small-Cap Value (VBR)
  • Large-Cap Growth (VUG)
  • Mid-Cap Growth (VOT)
  • Small-Cap Growth (VBK)
  • Bonds and Income (BND)
  • Developed International Markets (VEU)
  • Emerging Markets (VWO)
  • U.S. Real Estate (VNQ)
  • International Real Estate (RWX)
  • Commodities (DBC)
  • International Bonds (BWX or PCY)
  • Precious Metals (GTU or GLD)
  • Cash

All of these Exchange Traded Funds (ETFs) with exception of DBC, GTU, and GLD are commission free if you are a client with TDAmeritrade.  Otherwise the commission is $7.00 per trade.  Be sure to negotiate with TDAmeritrade for the $7.00 rate as that is not automatic.  At least it was not a few years ago.  If you are with Fidelity or another discount broker, select commission free ETFs that represent the asset classes you want to include in your portfolio.

After you determine the asset classes to include in the portfolio, invest 5 shares in each of the above sixteen (16) ETFs.  Once this is accomplished you are ready to begin a calculation of the ITA Index, provided you know how to use the TLH Spreadsheet.  Platinum members have access to a number of “Camtasia” audio/video help sessions.  If there is something you don’t understand or I was not complete in one of the “Camtasia” sessions, I will develop a new “Camtasia” to help you over the hump.

For more information on the importance of benchmarking a portfolio, go over to the right-hand sidebar and under Categories select the option, Benchmarks.  You will find a number of posts on this important, but frequently neglected, topic.


Sample Portfolio For Fidelity Clients

The following portfolio represents a sample of commission free ETFs available through Fidelity.  The efficient frontier shows an asset allocation plan that is so close to an optimized portfolio that the diamond and red dots are no different on the graph.

Efficient Frontier:  The indicator for the optimum portfolio lies behind the diamond dot.  The Return/Risk ratio is just a bit over 0.5, quite a common value when running the numbers through the Momentum-Optimization analyzer.


Rankings:  Here we have the ranking of the suggested ETFs.  I failed to include VTI as a reference ETF.  As one can easily see, most of these ETFs are currently priced above all three EMAs.  This is a sign of a stock market that is performing very well.


Buy-Hold-Sell Recommendations:  The recommendations are highly dependent on the cash available and the size of the portfolio.  Do not take the buy and sell numbers as absolute values.  This is strictly a sample portfolio.  For a more precise description of how to handle a portfolio wait for the update of the Kepler Portfolio, due this Friday.


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?

My Portfolio Is Performing Great. Really? How Do You Know?

One comment I frequently hear when folks talk about investments is the following. “My portfolio is performing great.” This statement conjures up questions I rarely ask as it tends to put the investor on the spot. Here are a few question that run through my mind.

  • Performing great with respect to what?
  • When was the portfolio launched?
  • Is the portfolio return calculated by an acceptable method?
  • Is there a benchmark for the portfolio and if so, what is it?
  • Is the benchmark appropriate for the portfolio?
  • What risk is involved and how is the risk measured?

Nearly fifteen years ago I was involved in an interesting Internet discussion where the author of an investment book and associated software made the claim as follows. If one followed the advice of his software one could reach an annualized return of 15% per year. Rather a heady statement. One needs to recall this discussion began in the late 1990s when the U.S. Equities market was particularly hot.

As an owner of this software I was interested in the claim and took up the challenge. I agreed to set up a portfolio of no trivial amount and I would precisely follow the signals of the software program for five years as the portfolio should double over that period. The bet was accepted. I figured I was a winner both ways. If the portfolio doubled, I could easily afford to pay off as a loser and if the portfolio did not meet the 15% annualized return, I would win the bet. As it turned out, I won the bet as the software program fell short of returning 15% per year, but the portfolio actually outperformed both the VTSMX and VFINX index funds, the two used as benchmarks for this portfolio.

While I had several commercial programs available to track the Internal Rate of Return (IRR) of the portfolio, none of these programs had the capability of tracking a benchmark such as the S&P 500 (VFINX) or the total U.S. Equities market (VTSMX). While one commercial program claimed to accurately track an index such as the VTSMX, I was able to show that the program did not correctly track cash flowing in and out of the portfolio. Two other commercial programs paid no attention to benchmarks. Tracking the performance of a portfolio without an acceptable benchmark is akin to high jumping without a bar.

The discussion and debate over performance and doubling the portfolio in five years was taking place over the Internet and as a result a commercial portfolio tracking company took up the challenge to develop several benchmarks one could use to track portfolios. They got it right.

In addition to the commercial company getting involved, a bright Excel programmer coded a spreadsheet that eventually evolved into the TLH Spreadsheet. This spreadsheet calculates both portfolio performance (tested for accuracy against three commercial programs), four benchmarks, and includes several portfolio risk calculations. One of the benchmarks (ITA Index) is customized to the strategic asset allocation plan for the portfolio.

To understand what is meant by “my portfolio is doing great” one needs to consider a number of questions and it involves more than just avoiding loss of money, although that too is very important.

PS  Without benchmarking we would not have a clue as to how well the Momentum-Optimization Model is working.