Back on January 18, 2012 I posted a table showing asset allocation plans that ranged from low risk to very aggressive portfolios. At that time I posted a Quantext Portfolio Planner (QPP) analysis of the low medium-risk portfolio. A Platinum member requested a similar QPP analysis of the high risk or aggressive portfolio. Below is the analysis.
QPP Analysis of High Risk Portfolio: The following analysis assumes the S&P 500 will grow at a rate of 7.0% per year and I used five years of data. The percentages allocated to each asset class match those found in the table from that January 2012 entry. This portfolio is projected to grow 230 basis points above that projected for the S&P 500 or 9.3% per year. However, this return carries a high risk of 20.3%. Remember that we try to keep the volatility to something below 15%. Users following the ITARR or Momentum-Optimization Model need not fear this high volatility as we place “collars” around ETFs in trouble. In the case of the ITARR model, when the price of the ETF declines or dips below their 195-Day Exponential Moving Average we are out of there. This permits us to take on a bit more risk.
The Diversification Metric comes in at 19% or well below our goal of 40%. The low figure is due in large part to the focus on equity ETFs so there is a high correlation between the various assets.
Correlation Matrix: Is it any wonder why the Diversification Metric is only 19%? Glance down over the Portfolio column and you see the high correlation among this group of ETFs. Only DBC provides a bit of diversity, but not much. In a later post I plan to look at this array of ETFs and run it through the optimizer to see how the asset allocation plan might be changed to improve the portfolio.