Tactical Allocations

Tactical Allocation: The current tactical allocation is: Large Cap Equity:  50% Small Cap Equity:  50% High Yield Debt:      0% Inv. Grade Debt:       0% The change from the previous month was a reduction in Small Cap Equity and an increase in Large Cap Equity (so this months bet is 1/12th of the portfolio going into Large Cap US Equity). Since this is the first month there is really not a change but rather just the initial investment but had we been doing this for the past year it would have been as described above.  This makes the portfolio more defensive, however it is still 100% in equities and therefore very bullish. For the Allocation portfolio I will purchase VONE and VTWO. My personal enhancements to the above portfolio will be to use DSEUX (international and actively managed) in place of the Large cap equity portion and IEMG (emerging market equities) for half of the small cap equity portion.  Basically this is expressing a belief that the US is o

Risk vs, Return: This post will get into the technical details about this strategies risk and return statistics.  It will focus on measures of risk and ratios that tease out risk adjusted returns.  It will show that the returns generated by this strategy have been achieved with less risk per unit of return than a blended portfolio. Volatility Return Return/Vol* R1000    15.2%  7.64%     0.50 R2000    19.3%   7.71%     0.40 ML HY      8.1%  8.50%     1.05 BB Agg      3.9%  6.34%     1.65 TA Portfolio    12.8% 12.81%     1.00 Equal Weight Portfolio      9.8%  7.95%     0.81 * Return/Vol = risk adjusted returns Volatility (Vol) is the industry standard for assessing the riskiness of a strategy, although I do not think it is a great measure of risk (that is a discussion for another blog). Vol measures how big of performance movements a s

Theory: Basically the theory behind my allocation strategy is that history can give us some clues to the future. I look at various economic indicators relative to subsequent asset class returns. Where the indicator has been good at predicting returns I have included it into my model. Each month I invest 1/12 of the portfolio into the asset class that I expect (based on this model) to perform the best over the next 12 months. The strategy benefits by maintaining high levels of risk in most environments while reducing risk at times of longer term turmoil. The timing does not have to be perfect because each investment has a one year holding. You are making a new investment each month so over the course of a couple of years you will have a diversified set of investment decisions. Practice: Implementing the strategy can have a number of issues (fees, leftover cash, interest and dividends, withdrawals and deposits). If you are trying to implement the strategy, the below ideas may h

Introduction: Because of my profession, I am often asked for investment advice in casual circumstances.  This is difficult for me because the advice I give today (what I think are good investments today) may change quite a bit within a few months.  So while my advice may be good today, it may not be a great long term strategy. If you are looking for a buy and hold strategy in which to put your money and forget about it, I would suggest buying something that is very diversified by asset class and rebalancing once every couple of years.  My "equal weighted" portfolio would be one such option. But, if you believe, as I do, that it makes sense to take on more risk in certain environments and less risk in others then this blog may be helpful to you.  Below I highlight my investment philosophy and in the dated blogs I share the trades and ideas for three different portfolio strategies as well as how they have performed since the beginning of my blog. To be completely transpa