 |
Vanguard ETF: |  |
7.4%* |
|
Diversified Core: | |
8.1%* |
|
Six Core Asset ETFs: | |
7.3%* |
Articles on Economy
- BBC’s Eurozone Debt Web
11/18/2011
The arrows point from the debtor to the creditor and are proportional to the money owed as of the end of June 2011.
Visit the original page for the interactive charts
- Dow Theory Revisited, Reviewed, Compared
10/08/2010
In this article we are going to revisit Dow Theory -- the grand-daddy of all portfolio strategies and then compare it with more modern approaches. We will look at Shiller, a long term but newer approach and then modern portfolio theory which is based on asset allocation.
The Dow Theory is one of the most venerable strategies. It uses the price trends of the Dow Jones Industrial index (^DJI) and the Dow Jones Transportation Index (^DJT) to decide whether to invest in the stock market.The Dow Theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of Dow theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, the Dow Theory addresses not only technical analysis and price action, but also market philosophy. Many of the ideas and comments put forth by Dow and Hamilton became axioms of Wall Street.
Today, there are a variety of strategies
There are multiple interpretations of the original Dow Theory. This strategy represents a typical version: all the buy and sell signals are confirmed by both the Dow Jones Industrial Average and Dow Jones Transportation Average.
The Dow Jones Transportation Average is used to triangulate the Dow Jones Industrial Average to ensure that an upward or downward trend is not just a localized phenomenon.
The buy signal- A primary low is established
- A secondary bounce
- A pullback of around 3% but above previous lows
- Both averages hold above the prior lows
- Both averages exceed the secondary bounce
The sell signal- A primary high is established
- A secondary drop
- A rally of over 3% but falls short of the previous high
- A drop of both averages below the previous drop
The funds in the portfolio are (ETF alternatives):- Wilshire 5000 total return index ^DWC (VTI, SPY, IWM)
- Cash (BND)
This is a long established strategy and should be reviewed to see how it performs in more recent operating conditions. To achieve this, we will compare results with another long term plan – Shiller, a modern portfolio (a 6 asset SIB with tactical asset allocation) and the total market (^DWC).
Click here for the interactive graphHistorical Returns for Dow Theory, Shiller and 6SIB TAA Annual Returns 1 Year 3 Years 5 Years Dow Theory -14% -12% -2% Shiller 8% 16% 11% 6 SIB TAA 9% 10% 13%
The Dow Theory has not been effective in the last ten years given the prevailing market conditions. It is possible that a different investment portfolio would perform better but given that Shiller is using similar funds, Shiller appears to be a better choice.
Today, Dow Theory is signallingTakeaways:- Both the Dow Theory and Shiller are based on long term indices and both of them outperform the market
- Shiller performs better as we recover from the nightmare of the last few years
- Modern portfolio theory based on diversification and tactical asset allocation consistently outperforms the other strategies – within the measurement timeframe
labels:investment,
Symbols:VTI,SPY,IWM,BND,AGG,DBC,EEM,EFA,GSG,IYR,LQD,SHY,TLT,Bonds,Dollar/Currencies,Earnings,Economy,Hedge,Funds,
- Three Asset Class Lazy Portfolios Reviewed
09/29/2010
Three luminaries presented three very similar (two identical) lazy portfolios.- Bill Schulthe, a former Smith Barney broker and author of "The Coffeehouse Investor
- Andrew Tobias, a Harvard alum and writer of 12 books including The Only Investment Guide You'll Ever Need.
- Scott Burns has covered personal finance and investments for nearly 40 years and ranks as one of the most widely read personal finance writers in the country
Bill Schultheis' Coffeehouse Portfolios% Allocation Description Ticker ETF 34% Total US Equities VTSMX VTI 33% Total International Equities VGTSX VEU 33% Total Bond Market VBMFX BND Scott Burns' Margarita
% Allocation Description Ticker ETF 34% Total US Equities VTSMX VTI 33% Total International Equities VGTSX VEU 33% Vanguard Inflation-Protected Securities Fund VIPSX TIP Tobias’ 3 Fund Portfolio
% Allocation Description Ticker ETF 34% Total US Equities VTSMX VTI 33% Total International Equities VGTSX VEU 33% Vanguard Inflation-Protected Securities Fund VIPSX TIP These are all easy to understand and easy to follow portfolios. They only require annual rebalancing and so it is not onerous to build and manage this portfolio.
Note that Tobias and Burns portfolios are identical so we combine them henceforth.
We will test the results in three dimensions:
Firstly, how does performance compare with a buy and hold strategy for a similar portfolio with monthly rebalancing. For this, we will compare the two portfolios against a 3 asset SIB and measure results.
From this graph, it is clear that the portfolios have similar performance although the lazy portfolios perform slightly better than the monthly rebalancing. This is consistent with other research that says too frequent rebalancing can limit returns. All the portfolios suffer from the big drop around 2008/2009.
Secondly, what impact does adding asset classes have on performance. Three asset classes would be considered insufficient diversification today and we will compare it with a 6 asset SIB with strategic asset allocation.
Here we can clearly see the benefits of adding extra asset classes. Note that the 6SIB portfolio was rebalanced monthly so there is probably more juice that can be extracted from this portfolio. This is not surprising and if you are looking to invest for the long term and rebalance infrequently, having the extra asset classes is not onerous and delivers significant benefit.The final test is to compare strategic and tactical asset allocation. For this test we will compare the lazy portfolios with a 3 asset SIB with tactical asset allocation, we will also include a 6asset SIB with tactical asset allocation to see what best in class performance looks like.
As the lazy portfolios have similar performance characteristics, we have removed one of them to make the graph easier to understand. To get more details, use the full graph.
Tactical asset allocation clearly delivers superior results. While it may not get the highest returns in bull markets, it limits the downturn in bear markets and reduces losses and personal stress. The tactical portfolios are altered monthly so there is extra effort required but the returns are worth it.Results of the Three and Six Asset Class Portfolios with SAA and TAA Annual Returns 1 year 3 Years 5 Years Tobias/Burns 7.4 -1.69 3.5 Schulthe 6.78 -2.34 3.87 3 SIB SAA 7.4 -1.69 3.5 3 SIB TAA -2.86 0.67 4.14 6 SIB SAA 10.63 1.66 6.72 6 SIB TAA 9.0 10.0 13.0
Takeaways- If you want a lazy portfolio, go for five or six asset classes – you won’t rebalance that often so having the extra classes isn’t a big overhead
- If you want to maximize returns, look for tactical asset allocation – it may be a compromise to have four or five asset classes with tactical asset allocation – historically that has delivered higher returns that buy and hold
- Consider using an on-line broker that allows on-click execution of trades at a fixed price – that makes the time and cost overhead low.
labels:investment,
Symbols:TIP,VTI,SPY,IWM,BND,AGG,DBC,EEM,EFA,GSG,IYR,LQD,SHY,TLT,ETF,ETF,Portfolio,Building,Asset,Allocation,Bonds,Dollar/Currencies,Earnings,Economy,Hedge,Funds,
