04/20/2011

The incidents in Japan, the Middle East and even as far back as New Orleans teach us the danger of living on borrowed time, the reactors, the governments the levees keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

We continue to examine luminary portfolios to see what we can learn and use to further our investment portfolios.

Ted Aronson and his AJO Partners manage about $25 billion of institutional assets. Aronson puts his family's taxable money in this well-diversified portfolio of no-load index funds.

Fund	Weight	Ticker	ETF
US Equities	40%	VFINX, VEXMX, VISGX, VTSMX, VISXX	VTI, TMW, VBK, VBR
International Equity	20%	VPACX, VEURX	VEA
Emerging Markets	10%	VEIEX	EEM
US Bonds	30%	VIPSX, VUSTX, VWEHX	TIP, LQD, HYG

This is a well diversified four asset class portfolio with an aggressive profile. The US equities are broadly diversified. Asia Pacific is put above Europe for developed markets. There is a diversified set of fixed income with VWEHX and VUSTX being relatively high risk. The long term treasury bond has proved to be a good diversifier in recent history -- today all bonds are under pressure so this may be less true.

The US component is possibly over-weighted and emerging markets could be increased or, even better, some real estate assets could be added.

This portfolio was last reviewed at the end of the year and we now re-examine performance over the last three months as we see markets changing and inflation becoming more of a present reality.

This lazy portfolio will be compared with six asset class SIB to examine the returns of four and six asset class portfolios

Portfolio Performance Comparison

Portfolio/Fund Name	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe
Aronson Original	6%	74%	2%	14%	3%	16%
Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate	10%	71%	9%	73%	13%	91%
Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate	13%	103%	3%	20%	7%	35%

full comparison

The Aronson portfolio has four asset classes missing out on REIT and commodities. The performance over the last five years has not been exceptional with the Simple SIB able to beat it across the board.

Over the last three months, REIT and commodities have been in favor and having neither has had an impact on the Aronson returns.

Takeaways

• The Aronson lazy portfolio has moderate returns that can be beaten
• Having broader diversification pays off as market conditions change
• ETFs can readily be used to implement these portfolios with good performance
• A 10% spread over five years means that it’s worth looking at alternatives

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04/19/2011

The incidents in Japan, the Middle East and even as far back as New Orleans teach us the danger of living on borrowed time, the reactors, the governments the levees keeping things going -- just one more year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent. Many working people put off their retirement investing -- just one more year until it becomes a "hair on fire" problem -- which it now is for baby boomers for whom retirement is a near and present danger.

We continue to examine luminary portfolios to see what we can learn and use to further our investment portfolios.

Ted Aronson and his AJO Partners manage about $25 billion of institutional assets. Aronson puts his family's taxable money in this well-diversified portfolio of no-load index funds.

Fund	Weight	Ticker	ETF
US Equities	40%	VFINX, VEXMX, VISGX, VTSMX, VISXX	VTI, TMW, VBK, VBR
International Equity	20%	VPACX, VEURX	VEA
Emerging Markets	10%	VEIEX	EEM
US Bonds	30%	VIPSX, VUSTX, VWEHX	TIP, LQD, HYG

This is a well diversified four asset class portfolio with an aggressive profile. The US equities are broadly diversified. Asia Pacific is put above Europe for developed markets. There is a diversified set of fixed income with VWEHX and VUSTX being relatively high risk. The long term treasury bond has proved to be a good diversifier in recent history -- today all bonds are under pressure so this may be less true.

The US component is possibly over-weighted and emerging markets could be increased or, even better, some real estate assets could be added.

This portfolio was last reviewed at the end of the year and we now re-examine performance over the last three months as we see markets changing and inflation becoming more of a present reality.

This lazy portfolio will be compared with six asset class SIB to examine the returns of four and six asset class portfolios

Portfolio Performance Comparison

Portfolio/Fund Name	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe
Aronson Original	6%	74%	2%	14%	3%	16%
Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate	10%	71%	9%	73%	13%	91%
Six Core Asset ETF Benchmark Strategic Asset Allocation Moderate	13%	103%	3%	20%	7%	35%

full comparison

The Aronson portfolio has four asset classes missing out on REIT and commodities. The performance over the last five years has not been exceptional with the Simple SIB able to beat it across the board.

Over the last three months, REIT and commodities have been in favor and having neither has had an impact on the Aronson returns.

Takeaways

• The Aronson lazy portfolio has moderate returns that can be beaten
• Having broader diversification pays off as market conditions change
• ETFs can readily be used to implement these portfolios with good performance
• A 10% spread over five years means that it’s worth looking at alternatives

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04/15/2011

Retirement investing is now a "hair on fire" problem for Boomers who have no time to waste in getting their portfolios in order. The challenge is how to avoid being overwhelmed with conflicting data and shutting down.

We present simple approaches to understand the path to higher returns with lower risk.

Dr. William Bernstein is the author of the "Intelligent Asset Allocator" and "The Four Pillars of Investing." He's also a physician, neurologist and financial adviser to high-net-worth individuals. He has proposed a number of lazy portfolios. There are two that we now examine in the light of a more active benchmark which has monthly instead of annual rebalancing.

1. The smart money portfolio

2. The no-brainer portfolio

The no-brainer portfolio comprises the following fund allocation:

• 25% in Vanguard 500 Index VFINX (IVW)

• 25% in Vanguard Small Cap NAESX or VTMSX (VB)

• 25% in Vanguard Total International VGTSX or VTMGX (EFA, VEA)

• 25% in Vanguard Total Bond VBMFX or VBISX (BND)

Things to note about the portfolio:

• Heavily weighted towards domestic equities

• Similar to a three asset SIB [simpler-is-better] with domestic, international and fixed income
  

• It would be better to have some REIT or emerging markets exposure

The smart money portfolio comprises the following fund allocation:

• 40% Vanguard Short Term Investment Grade VFSTX (SCJ, SHY)

• 15% Vanguard Total Stock Market VTSMX (VTI)

• 10% Vanguard Small Cap Value VISVX (VBR)

• 10% Vanguard Value Index VIVAX (VTV)

• 5% Vanguard Emerging Markets Stock VEIEX (VWO)

• 5% Vanguard European Stock VEURX (VEU)

• 5% Vanguard Pacific Stock VPACX (VPL)

• 5% Vanguard REIT Index VGSIX (RWX, VNQ)

• 5% Vanguard Small Cap Value NAESX or VTMSX (VB)

To summarize:

• 40% in U.S. equities

• 10% in international equities

• 5% in emerging market equities

• 5% in REITs

• 40% in fixed income

The smart money portfolio is more conservative and has two more asset classes but they only represent five percent of the portfolio each. With 80% of the portfolio in US and fixed income, it isn't very different from the no brainer portfolio.

We are going to use the SIB (Simpler Is Better) Portfolio as a benchmark. The SIB comprise – market index funds (ETFs or Mutual Funds) from key asset classes that can be used to measure historical returns to show the impact of asset class selection rather than fund or stock selection. We are going to use a six asset ETF SIBs. This will enable us to see the type of returns we can expect and contrast Mutual Funds and ETFs

The following funds are used:

The strategic asset allocation strategy has 40% in fixed income and 12% in the other five funds.

The tactical asset allocation strategy has 40% in fixed income and 30% in the top two asset class funds determined by the price momentum -- unless that performance is below fixed income when the money will be diverted to fixed income. If fixed income is performing below cash, the fixed income portion will be cash.

Portfolio Analysis

full chart

Takeaways

• Both Bernstein portfolios perform satisfactorily for a lazy portfolio – it is surprising that the no-brainer performs so well against its more diversified smart-money cousin
• The Six Asset SIB buy and hold outperforms both Bernstein portfolios based on broader diversification.
• Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment

Symbols: BND, DBC, EFA, IVW, NAESX, RWX, SCJ, SHY, VB, VBR, VEA, VEIEX, VEU, VEURX, VFINX, VFSTX, VGSIX, VISVX, VIVAX, VNQ, VPACX, VPL, VTI, VTMGX, VTMSX, VTSMX, VTV, VWO

Disclosure:

MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned

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