'Buffett Ratio' for Stock Market Valuation Up 7% Since November
01/14/2011 0 comments
In the previous article we weighed in on the debate about the use of tactical asset allocation compared to the venerable strategic asset allocation. Both
have benefits and both have weaknesses.
We used the 3 Asset SIB (Simpler Is Better) Portfolio -- one
index fund in each asset class. We recognized that the SIB has significant limitations in diversification -- if one asset class was underperforming, the
other asset classes would not be able to prop it up.
We now introduce and extended SIB or ESIB. An ESIB has multiple funds in each asset class.
The purpose being to allow a better opportunity for each asset class to have a better opportunity to offset an underperforming asset class.
In
this article, we introduce the ESIB3 and compare its results with the SIB3 before we investigate its properties in tactical asset allocation strategies.
The ESIB3 comprises ten funds. These funds provide access to three major assets: US and foreign equity and fixed income.
| Asset Class | Ticker | Name |
|---|---|---|
| LARGE BLEND | VTI | VanguardTotal StockMarket ETF |
| MID-CAP BLEND | VO | VanguardMid-Cap ETF |
| SMALL BLEND | VB | VanguardSmall CapETF |
| Foreign LargeBlend | EFA | iSharesMSCI EAFEIndex |
| Foreign Small/MidValue | SCZ | iSharesMSCI EAFESmall CapIndex |
| Intermediate-TermBond | BND | VanguardTotal BondMarket ETF |
| High Yield Bond | HYG | iSharesiBoxx $ HighYieldCorporateBd |
| Inflation-ProtectedBond | TIP | iSharesBarclaysTIPS Bond |
| WORLD BOND | WIP | SPDR DBIntl GovtInfl- ProtectedBond |
| ROOT | CASH | CASH |
| Asset Class | Number of funds |
|---|---|
| REITs | 0 |
| Balanced Fund | 0 |
| Fixed Income | 5 |
| Commodity | 0 |
| Sector Fund | 0 |
| Foreign Equity | 2 |
| Emerging Market Equity | 0 |
| US Equity | 3 |
| Other | 0 |
| Total | 10 |
Diversification -- Rated as above average (69%) This compares favorably with the 3 ETF SIB's rating of 12%. Performance chart (as of Jan 7, 2011) Performance table (as of Jan 7, 2011)
As of Jan 7, 2011, this plan investment choice is rated as below average based on
MyPlanIQ Plan Rating methodology that was
designed to measure how effective a plan's available investment funds are . It has the following detailed ratings:
Fund Quality -- Rated as poor (7%)
Portfolio Building -- Rated as below average (12%)
Overall Rating: below average (28%)
When we compare the historical results:
| Portfolio Name | 1YrAR | 1YrSharpe | 3YrAR | 3YrSharpe | 5YrAR | 5YrSharpe |
|---|---|---|---|---|---|---|
| ESIB-3 Tactical Asset Allocation Moderate | -0% | -2% | 2% | 24% | 5% | 44% |
| ESIB-3 Strategic Asset Allocation Moderate | 11% | 113% | 2% | 9% | 4% | 23% |
| Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate | -3% | -28% | 2% | 17% | 4% | 30% |
| Three Core Asset ETF Index Funds Strategic Asset Allocation Moderate | 9% | 67% | 1% | 6% | 4% | 15% |
We note that in the short term -- i.e. in a bull market, an ESIB improves the performance and closes
the gap very slightly between SAA and TAA. In the longer term, the additional funds allows the TAA to squeeze out a little more performance.
In the next articles we will look at how the strategies perform in detail with the additional funds and we will compare the ESIB-3 with
a SIB-4 -- i.e. by how much does an extra asset class beat (if it does) multiple funds in fewer asset classes.
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