The Portfolio's

The Portfolios:

In the blog, I am sharing three different portfolios which are related but different in important ways.

Portfolio 1: (Equal Weighted)

I am calling this portfolio "Equal Weighted" because it is equally weighted between four different asset classes. This is comparable to the portfolio you might receive if you went to a professional advisor. They would almost certainly use different securities to get their exposures and they might not put as much in high yield bonds but the resulting returns would not differ substantially from this portfolio's returns.  This portfolio has the following allocation (which does not change):

25% Small Cap US Equity (VTWO)

25% Large Cap US Equity (VONE)

25% High Yield US Bonds (JNK)

25% Investment Grade US Bonds (AGG)

Note: I color code all of my blogs with the same four colors (red is for small stocks, orange is for large stocks, purple is for high yield bonds and green is for investment grade bonds). This way no matter what security I am talking about you can know what asset class it belongs to (and my blogs are more colorful). 

This is a great portfolio if you don't want to think about your investments often or don't want to actively manage them. Over time the allocations will change, as one asset class outperforms and others underperform. They will need to be rebalanced occasionally (I suggest waiting until something is out of balance by 5%) but you should not have to do much to maintain this portfolio. For those less familiar with investing, the 3-4 letters in parenthesis above (ie VTWO) are called ticker symbols and are used to identify a particular security. If you go to Google and type in the codes you will get a lot of information about the securities.

Portfolio 2: (TA)

I am calling this portfolio "TA" which stands for tactical allocation (yes, the blog is named after this one). This portfolio is constructed in what is called a "laddered" portfolio. It contains 12 investments meant to last one year long. One investment is made each month so every month you have an investment that is ready to liquidate and you can use the proceeds to buy your new investment. Every month, this portfolio seeks to invest in the asset class that has the highest likelihood of outperforming over the next year (based on a model that I have created looking at market indicators).

I will go through the proof statement of the model at a later time but suffice it to say that over the past 30 years (10 of which were actual experience and 20 of which were back tested) the model picked the best asset class about 50% of the time. It picked the second best more than 25% of the time. Those are very strong hit rates and they are marginally stronger in the 10 years of actual experience than they were in the back test.

Even though there is a unique bet made each month it is common for the bet to remain the same for many months so the portfolio historically has often been 100% allocated to one asset class or another. The following video goes through each month's allocation over the past 30 years if you care to see how it has changed over time. It only invests in the same 4 securities as the Equal Weighted portfolio with the only difference being the weightings.

Portfolio 3: (Enhanced)

This portfolio goes one step further than the TA portfolio. I call it "Enhanced". In this portfolio I use the same weights to each asset class as the TA portfolio but I vary the security that I use to get the exposure (rather than small cap US equity I may use small cap international equities or an actively managed small cap equity fund). The security used is completely qualitative, based on my understanding of current market valuations and structures.

Summary:
There you have it. Three portfolio's starting with a plain vanilla, highly diversified, do nothing portfolio. Then adding in active (or tactical) asset allocation and finally adding both asset allocation and security selection.