Tag Archives: tlt

Dividend Oriented Retirement Portfolio Using Only 9 Commission Free ETFs

Asset allocation is set to generate approximately 3.0% yield. Dual momentum option is designed to enhance return while reducing risk. Three portfolio management styles are: Passive, Dual Momentum, and Tranche. A Tranche Model will reduce “luck” of rebalancing. Dividend yield closely matches that provided by a portfolio of Dividend Aristocrats. Retirement goals drive investors to save and invest. The following three models use eight ETFs for investing and one ETF, the iShares 1-3 Year Treasury Bond ETF ( SHY), as a cutoff or “circuit breaker” security. When set up using the following asset allocations, the portfolio will generate approximately 3.0% annually or not far off a portfolio built around Dividend Aristocrats. The nine ETFs are as follows. Vanguard Total Stock Market ETF ( VTI) Vanguard FTSE Developed Markets ETF ( VEA) Vanguard FTSE Emerging Markets ETF ( VWO) Vanguard REIT Index ETF ( VNQ) SPDR Dow Jones International Real Estate ETF ( RWX) PowerShares Emerging Markets Sovereign Debt Portfolio ETF ( PCY) iShares 20+ Year Treasury Bond ETF ( TLT) Vanguard Intermediate-Term Bond ETF ( BIV) iShares 1-3 Year Treasury Bond ETF (( SHY)) Passive Portfolio Model: The next major decision focuses on what percentage to invest in each ETF if one is constructing a portfolio to be passively managed. The percentage allocations follow the ” Swensen Six ” recommendations with a few modifications. RWX and PCY are new additions and BIV replaces TIP. SHY is the ninth ETF and is used strictly as a cutoff ETF in the momentum and tranche models – to be described below. VTI = 30% with a 1.96% yield VEA = 10% with a 3.07% yield VWO = 10% with a 3.1% yield VNQ = 15% with a 4.11% yield RWX = 5% with a 3.2% yield PCY = 10% with a 5.07% yield TLT = 10% with a 2.66% yield BIV = 10% with a 2.7% yield Using the above asset allocations, all one needs to do is keep the various asset classes in balance or close to the suggested targets. All ETFs pay a nice dividend, an advantage for retirees, while providing an equity emphasis for future return. The portfolio also meets the diversification requirement as there are hundreds of stocks and bonds spread out all over the globe. Dual Momentum Model: The dual momentum model is slightly more complicated compared to the passive model in that it requires a bit more time to manage. The basic concepts behind this model can be found in Antonacci’s Dual Momentum book or a condensed version in this Seeking Alpha article . The major advantage of this investing model is keep one out of deep bear markets as we experienced in the early part of this century and again in 2008 and early 2009. Using the same eight commission free ETFs, three metrics are used to rank the securities and compare performance with SHY. 1. Return of Capital (ROC1 and ROC2) are assigned weights of 50% and 30%. 2. Look-back periods are 91 and 182 calendar days. 3. A 20% weight is assigned to volatility where a mean-variance calculation is used and low volatility is rewarded. When a portfolio is reviewed, the securities are ranked as shown below. The recommendation is to only invest in the top two ranked ETFs, and then only if they are outperforming SHY. Based on current data (10/2/2015) only BIV and TLT meet this standard so 50% of the portfolio is invested in BIV and 50% in TLT. If there is a tie, then the investments are split evenly three ways. (click to enlarge) Tranche Model: The Tranche Model may be new to many investors and therefore requires a little explanation. The logic behind this model is to mitigate the “luck-of-review-day” problem. I review portfolios every 33 days so the reviews come at different times of the month. This also avoids wash sale issues and short-term trading fees that are accessed by brokers offering commission free ETFs. When a specific review days is selected, the dual momentum recommendations can vary from day to day. We might be lucky and find recommended buys on a day when the market down, or we could be unlucky and end up with a pair of ETFs that were not ranked so high on trading days on either side of the review day. What the Tranche Model (TM) does is permit the user to select multiple portfolios using different days of separation. The TM answers the question, what was the dual momentum recommendation two days ago, or four days ago? While the Tranche Model reduces risk, it also tends to reduce return. In the following screen-shot the number of Offset Portfolios is set to eight (8). The software permits as many as 12 portfolio options. The period (trading days) between offsets is set to 2. Otherwise, the settings are similar to the above dual momentum screen-shot. Recommendations from the Tranche Model, if rounding to the nearest 50 shares, are as follows. For a $100,000 portfolio, buy 200 shares of SHY or leave in cash. Purchase 400 shares of PCY, 250 shares of TLT, and 450 shares of BIV. Once the portfolio is positioned based on these recommendations, do nothing until the next portfolio review. (click to enlarge) The passive portfolio is the easiest to manage and there are tax advantages as shares are held for long periods of time. The dual momentum and tranche models require more attention, but will prevent major losses when major bear markets strike.

How Would Your Portfolio Do In A 50% Market Decline?

By Ron DeLegge Prudent investing in a reckless world has become a long-forgotten idea. And the 6-year run-up in U.S. stock prices (NYSEARCA: VOO ) has certainly been a contributing factor. After love, risk might be the most misunderstood and misinterpreted word in the English language. Today, people’s perverted sense of risk management is making sure they don’t miss the next big run in Netflix (NASDAQ: NFLX ) or Tesla (NASDAQ: TSLA ). Forgetting History People have let their guard down and are once again repeating the same mistakes investors in previous eras have made by underestimating the risk character of their investments. The only difference between now and previous bear markets like 2000-02 and 2007-09 is that everybody today is older and not necessarily wiser. As a result, I felt a certain obligation to help the investing public to have a multi-dimensional and complete view of their entire investment portfolio. But figuring out how to do it on just a single written page that anyone could understand took me years to develop. When I first introduced the idea of assigning a written grade to investors’ portfolios back in 2010, I had my doubts. Would people embrace my Portfolio Report Card concept? Would people send me their portfolio data for diagnosis? How would I fit their final grade onto just one page? Would my grading system be robust enough to work on all portfolios, regardless of the size and tax status? Would people be motivated to eliminate the weaknesses inside their portfolios identified by the Portfolio Report Card? A Crucial Grading Factor In case you didn’t know, risk is one of the most important grading categories of Ron DeLegge’s Portfolio Report Card grading system. And over the past year, I’ve diagnosed more portfolios than the typical investment advisor sees during their entire career. One of the most consistent patterns I’ve seen from the Portfolio Report Cards I’ve recently executed is that people are jacked up on risk because of overallocation to stocks (NASDAQ: QQQ ). Back on Aug. 18, 2004, Bridgewater Associates (run by billionaire Ray Dalio) made a similar observation and classified it as the “biggest investment mistake.” Bridgewater pointed out that over 80% of a typical investor’s risk is in stocks and that because of that overexposure, owning other asset classes like municipal bonds (NYSEARCA: MUB ), Treasuries (NYSEARCA: TLT ), and REITs (NYSEARCA: VNQ ) does little to balance out the portfolio’s risk profile. According to Bridgewater’s analysis, the overallocation to equities at the expense of other asset classes penalizes investors by roughly 3% in expected value, which could be used to cut risk. Put another way, Bridgewater’s original assessment of investors’ portfolios back in 2004 was true and it’s still true today. A Lazy Approach The fairyland idea that prudent risk management is simply a function of doing nothing during a dreadful bear market is popular but ignorant view. First, it incorrectly assumes that bear markets (NYSEARCA: SPXS ) will be short-lived. Second, it incorrectly assumes that bear markets will only happen during non-emergency moments or when we least need our money. More importantly, the do-nothing approach of “staying the course” badly misses in the biggest way because it erroneously assumes that Joe and Jane Investor have well-designed investment portfolios. My data shows quite the opposite; that Joe and Jane Investor have poorly constructed portfolios that are one-dimensional, under-diversified, and not the least bit equipped to deal with a severe market decline of 20% or more. Figure 3, which will be in my upcoming book, provides a sober look at the math of market losses. As you can see, if your portfolio suffers a 50% cut, you’ll need a 100% return just to get back to even. And since the velocity of bear markets happen faster compared to bull markets which tend to happen over a period of years, it often takes many years for an investor to recoup their losses – that’s if they ever recover at all. And that’s exactly why having a margin of safety within your portfolio is imperative. I am grateful to the many people – individual investors just like you – who have allowed me to analyze and grade their investment portfolios. I also want you to know that my Portfolio Report Card grading system just quietly passed a new milestone: over $100 million of investments have now been analyzed and graded. How would your portfolio do during a 50% market decline? Remember: Bear markets have happened in the past and will happen again in the future. And the time to find out if your investment portfolio is architecturally sound and read for the fire is before not after the market event. Original post Disclosure: No positions

Portfolio Risk Contributions: Practical Examples

Portfolio risk contribution of an investment tends to differ from its portfolio weight. In some cases intuition may be misleading – a good example is the traditional 60/40 portfolio. It is paramount to assess the impact from each position in a portfolio. It is no secret that portfolio risk contribution of an individual security almost always differs substantially from its portfolio weight. However, investors frequently overlook this simple truth and tend to focus on notional dollar amounts invested. I have compiled a few examples that clearly illustrate why risk contributions matter. Let’s start with the traditional 60/40 portfolio, where SPDR S&P 500 ETF (NYSEARCA: SPY ) is used as a proxy for equities and iShares 20+ Year Treasury Bond ETF (NYSEARCA: TLT ) for bonds. Analyzing this portfolio on InvestSpy Calculator with 1 year historical data, we get the following results: The table above tells us that even though TLT had a slightly higher annualized volatility than SPY (which is an interesting fact in itself), its risk contribution to the total portfolio volatility was only 21.4% – way below TLT’s portfolio weight of 40%. And the difference would only get wider if we used shorter duration bonds for the fixed income component. So even though an investor may intuitively feel well diversified between stocks and bonds, almost 80% of portfolio risk comes from the equities component. Big discrepancies between portfolio weights and actual risk contributions can arise in equities-only portfolio as well. I came across the next example while writing a recent article about the ‘Fab Five’ stocks. Assuming a simple hypothetical portfolio where 50% is invested in SPY ETF and 50% in Google (NASDAQ: GOOG )(NASDAQ: GOOGL ), risk contributions from each position are far from even: This gap between risk contributions is primarily factored by the fact that GOOG is by far a more volatile security than SPY. The third example I would like to present is a portfolio that includes emerging market stocks. Investors are frequently reminded of a home country bias in their allocations and encouraged to include international stocks in their portfolio. So if a US investor allocates 20% to Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) with the remainder sitting in SPY, the risk profile of such a portfolio looks as follows: The risk contribution of the VWO position appears to be fairly close to its portfolio weight. Interestingly, the annualized volatility of the portfolio is only a tad higher than that of SPY’s in isolation despite the fact that VWO is significantly more volatile security. This is a direct result of the diversification effect. Therefore, the addition of emerging market stocks to diversify a portfolio of US stocks looks like a sensible decision. I hope the examples above give the readers a bit of a flavor how risk contributions work and why they are important. It is crucial to look beyond notional amounts invested in each position to assess if your portfolio is balanced the way it was intended. You will be surprised in some cases. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.