09/17/2010

Frank Armstrong, author of The Informed Investor, proposed thisportfolio for an MSN Money article. The two key points of the portfolio are that it has four asset classes (US, International, REIT, Bonds) and relies on market indices rather than active management.

 

The portfolio uses index funds because index funds eliminate manager risk. It overweights small-cap stocks as small-cap stocks have historically outperformed large caps stocks. The portfolio has a strong value tilt, based on the theory that, over the long haul, beaten-down stocks will perform better than high-flying growth stocks.

This should be a low cost, well performing portfolio.

 

The fund selection for testing the strategy is listed below with the ETF alternatives:

  

• 9.25% in Vanguard Small Cap Value VISVX  (SCZ)
• 9.25% in Vanguard Value VIVAX (SPY, IYY)
• 6.25% in Vanguard Small-Cap Growth VISGX (VBK)
• 6.25% in Vanguard 500 Index VFINX (IVW) 
• 31% in Vanguard Total International Stock VGTSX (EFA)
• 8% in Vanguard REIT VGSIX   (IYR, VNQ, RWX)  
• 30% in Vanguard Short-Term Bond VBISX (BND, AGG)

 

Things to note about the portfolio:

• This is designed as a lazy portfolio with limited rebalancing specified
• With 70% in equities, this would be considered an aggressive portfolio
• REIT is possibly underweighted

 

We will create historical returns of this portfolio as originally planned and then compare against strategic asset allocation (annual rebalance) and tactical asset allocation. This will measure:

• The impact of equal weighting of the equities – bonds will be fixed at 30% -- SAA strategy
• The impact of actively managing the equities – bonds remain fixed at 30% -- TAA strategy

We will then introduce a four asset SIB which will give a measure of the choice of funds. The SAA and TAA strategies will give the same weights to each of the funds but use simpler asset classes funds.

 

4 Asset SIB Breakdown with ETF alternatives

LARGE BLEND                    VTSMX       (VTI)

Foreign Large Blend            VGTSX      (VEU)

REAL ESTATE                     VGSIX        (VNQ)

Intermediate-Term Bond       VBMFX      (BND)

 

 

The results are shown below. There are a number of interesting things to note

• The closest comparison of similar strategies is the Armstrong Original versus the Armstrong SAA. The Armstrong original outperforms SAA which says that overloading the US stocks towards small value is successful
• All of the buy and hold strategies suffer from the “downturn dip” and the tactical asset allocation strategies perform much better
• The difference between the two TAA strategies is negligible 

labels:investment,

Symbols:DIA,IYY,VTI,DVY,ONEQ,QCLN,QABA,PWC,VTV,VUG,IWM,IWO,IWW,MDY,IJJ,IJK,VO,AGG,BND,SHY,VBK,IJS,VBR,IWP,IWS,VEA,EFG,EFV,VWO,VEU,SCZ,SPY,IYR,IVW,RWX,EFA,VNQ,Tactical,Asset,Allocation,asset,allocation,armstong,ideal,index,strategic,asset,allocation,

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09/16/2010

• 10% in Diamonds Trust DIA (SPY)
• 15% in iShares DJ U.S. Total Market IYY (VTI, DVY)
• 7.5% in Fidelity NASDAQ Composite ONEQ (QCLN, QABA)
• 7.5% in Power Shares Dynamic Market PWC (VTV, VUG)
• 10% in iShares Russell 2000 IWM (IWO, IWW)
• 15% in Mid Cap SPDR Trust MDY (IJJ, VO)

International Equities

• 25% in iShares MSCI International EAFE EFA (VEA, EFV)
• 10% in iShares MSCI Emerging Markets EEM (VWO)

• 100% in equities is an aggressive portfolio
• 65% in US equities is high in today’s market environment
• There is no real estate (IYR, VNQ, ICF) or fixed income which would likely result in improved performance today
• With three asset classes (US, international and emerging markets), this can be mapped against a 3 asset class SIB

• Large Blend VTSMX (ETF VTI)
• Foreign Large Blend VGTSX (ETF VEU)
• Intermediate-Term Bond VBMFX  (ETF BND)

• The Lowell SAA and TAA were driven with a 100% in equities -- the TAA strategy will move to fixed income (cash) should the momentum drive it that way, the SAA strategy will not
• The 3 asset SIBs are using an aggressive model portfolio that still includes some fixed income

• The choice of funds, even if diversification enables reasonable returns
• Before the downturn, the original portfolio was outperforming everything except the dynamic allocation of the original strategy
• The strategy falls foul of the 2008/2009 downturn and tracks pretty closely with any buy and hold strategy
• The three asset SIBs have a fixed income fund that enables slightly better performance in choppier market conditions
• The Lowell choice of funds allows the tactical asset allocation strategy to outperform the three asset class SIB with TAA
• The 2008/2009 downturn shows the benefits of a tactical asset allocation – even if it means moving equities to cash

Takeaways:

• The Sower’s growth portfolio is a low maintenance portfolio that is heavily weighted towards US equities. In the long term, there is still confidence in the US economy but following this portfolio and strategy will give you some heartache
• This portfolio was created when the sort of downturn we experienced in 2007/2008 was not envisioned -- it's hard to imagine that this portfolio would still be recommended today
• Migrating to a dynamic strategy with the same funds provides much higher returns. Given a dynamic strategy, it would make sense to add some fixed income such as AGG, BND, SHY, CSJ rather than just cash
• Conventional tactical asset allocation with the right number of asset classes (at least five) still provides the best performance
• ETF’s give you a good degree of choice a good vehicle for any portfolio and with increasing track record, it’s possible to demonstrate good historical performance

labels:investment,

Symbols:DIA,IYY,VTI,DVY,ONEQ,QCLN,QABA,PWC,VTV,VUG,IWM,IWO,IWW,MDY,IJJ,IJK,VO,AGG,BND,SHY,SPY,VBK,IJS,IWP,IWS,VEA,EFG,EFV,VWO,VEU,ETF,Asset,Allocation,Tactical,Asset,Allocation,

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