April 23, 2012: All Weather Portfolio Construction

04/23/2012 Share 0 comments

Re-balance Cycle Reminder

We just had a reblance today (April 23, 2012). Based on our monthly re-balance calendar, the next re-balance time will be on Monday, May 28, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

All Weather Portfolio Construction

Many investors such as retirees or those close to retirement are seeking all weather portfolios that have reasonable returns. In our opinion, Harry Browne's permanent portfolio concept lays out the solid foundation for these portfolios.

Basically, the concept deals with the possible four corner economic cycles:

In the figure, we have put down possible financial securities that can be used for a corner situation.

The elegant four corners cover all possible major economic scenarios. Furthermore, securities should be selected to directly benefit from each scenario. For example, in an inflation scenario, gold and commodities have been the direct hedge against (or beneficiaries from) inflation pressure. Fortunately, for fixed income investors, inflation protected bonds (such as TIPs for inflation protected Treasury bonds or I-bonds) are also direct hedge against inflation. On the other hand, Real Estate Investment Trust Securities (REITs) are not as direct as the above securities.

Based on this foundation, one can construct various combinations of portfolios to suit his/her purpose.

The following presents a portfolio that is named as Permanent Income Portfolio. This portfolio is suitable to conservative income investors. The following are the portfolio components:

Dividend-Stocks VDIGX 12.5%

REITs VGSIX 12.5%

TIPS VIPSX 25%

Long-Treasury-Bonds VUSTX 12.5%

Long-Corp-Bonds VWESX 12.5%

Short-Term-Bonds VFSTX 25%

See complete detailed performance comparison>>

This portfolio differs from Harry Browne's portfolio mainly in the inflation hedge portion: it uses TIPS (VIPSX) instead of Gold. This is for the purpose to avoid volatile gold that produces no income. Unfortunately, TIPS does not provide good deal of regular interest income (the principal appreciates along with CPI/inflation, which is price appreciation).

The above portfolio was constructed using the newly released 'Static Portfolio' feature (you can find the link on 'My Portfolios' page). It uses annual rebalance.

There are numerous other ways to construct such portfolios. Advanced (expert) users can further create their own plans (i.e use funds of their choice) and then construct individual portfolios for each corner using tactical or strategic asset allocation to pick funds. They then can use these individual portfolios as securities (or funds) to construct an all weather portfolio.

Portfolio Reviews

We continue our regular reviews on various portfolios we provided. The following is the performance of the five tactical portfolios for the first 5 fortune 10 companies' 401Ks: 

Portfolio Performance Comparison (as of 4/23/2012)

More detailed comparison>>

Market Overview

As stated in U.S. Stocks Are The Last Ones Standing, US stocks and REITs are the last two major risk assets that are still ranked higher than total bond index. Three major asset classes: Emerging market stocks (VWO), International developed countries stocks (ETA) and Commodities (DBC) have been at the bottom for the last two weeks.

See MyPlanIQ 360 Degree Market View for more details.

Latest Articles

• Chasing Yield: Is the Flow of Money into Munis and High Yield Bonds Rational?
• Low-risk Stocks Outperform High-risk Stocks: Most Startling Fact In Finance
• U.S. Stocks Are The Last Ones Standing
• Reexamining the Meaning of “Safe Assets”
• $ ?s: Dividend Portfolios Carry Hidden Risks (Part 2)
•  Unsinkable ways to avoid a Titanic portfolio
• Worst ETFs Ever? Have Your Own Self Defense
• Defensive Sectors Are On The Rise
• Felix Salmon: Stay Liquid And Wait For Big Up Or Down
• RAIL TRAFFIC TRENDS CONTINUE TO TURN NEGATIVE
• POST-MASSIVE BEAR MARKET RALLIES
• What's on your investing bucket list?
• Rebalancing asset classes and subcategories
• Natural Gas Spot Prices Now Below $2: Adjusted for Inflation, That's the Lowest Since the Mid-1970s
• GMO's Jeremy Grantham Explained: Your Money Or My Job, A Dilemma Financial Pros Face
• Press Release: Renasant Employee Benefit Solutions Recognized as Top 401(k) Plan Services Provider
• Gary Shilling's Bearish Prediction Explained Chart By Chart
• Sell in May?
• Domestic Stock Funds Continue To Lose Assets
• Time To Have Separate European And Asia Pacific Equity Classes?
• Self-directed IRAs Trouble
• Lou Harvey on Investor Learning and Modern Portfolio Theory
• Index Universe: 5 Worst ETFs Ever
• DoubleLine Gundlach: Asset Class Outlook
• The Death Of Bond Investments Is Greatly Exaggerated: A Look At Total Return Bond Funds
• Should I pay off my mortgage early?
• 294 Chances to Screw Up
• Covered Call Or Dividend Stock ETFs, Which Is Better?
• 4 Reasons Gold Trader Are Now Bearish For Gold, Should You?
• The Biggest Unknown in Financial Planning
• Don’t do the portfolio tango on Spanish concerns
•  3 Differences Between Gold or Gold Miners

RSS Feed 

Disclaimer:

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.