Tactical Allocations

Monthly Portfolio Update: The new tactical allocation for July will be: Large Cap Equity:  58%   Small Cap Equity:  42%   High Yield Debt:      0%    Inv. Grade Debt:       0%   Look for a re-cap of performance in July 3rd's post. The Equal portfolio:  There are no changes to the equal portfolio.  I will only rebalance when weightings get off by 5% or more (i.e. one of the asset classes has less than a 20% or more than a 30% weighting) or the cash balance hits $1000. The cash balance at month end is $197.27. The TA portfolio:  The change from the previous month is a reduction in Small Cap Equity and an increase in Large Cap Equity. This makes the portfolio more defensive, however it is still 100% in equities and therefore very bullish.  The size of the trade will be 1/12th of the total portfolio value ( market value of portfolio/12) plus any dividends received (there were no...

I believe diversification is one of the most powerful but misused concepts in finance. Professional investors use it as an excuse to buy horribly priced assets, index funds use it as the prime rationale for  their existence, and some people go completely away from it trying to get rich quick. I am here to tell you that Diversification is a bit like fire; If used properly it can do wonderful things for you (cook your food, heat your home) but if misused and misunderstood it can burn your home down or worse. First of all, what is diversification: Wikipedia defines it as follows:  I n finance,  diversification  is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. Basically, don't put all of your eggs in one basket. For example, if you put all of your money into  Microsoft you have a whole bunch of things that could go wrong and would cost you dearly. At the highest level, the overall markets could go d...

Trades: As this was the first month, I have invested the full $100,000 for each portfolio. Benchmark or Equal Weight Portfolio: Purchased 225 shares of VONE at $111.10 per share, $7 commission, total cost $25,004.50 Purchased 227 shares of VTWO at $110.02 per share, $7 commission, total cost $24,981.54 Purchased 228 shares of AGG at $109.48 per share, $7 commission, total cost $24,968.44 Purchased 673 shares of JNK at $37.20 per share, $7 commission, total cost $25,042.60 Cash left over $2.92 TA Portfolio: Purchased 450 shares of VONE at $111.10 per share, $7 commission, total cost $50,002.00 Purchased 454 shares of VTWO at $110.08 per share, $7 commission, total cost $49,983.32 Cash left over $14.68 Enhanced TA Portfolio: Purchased 998 shares of IEMG at $50.10 per share, $7 commission, total cost $50,006.80 Purchased 4283.30 shares of DSEUX at $11.67 per share, $7 commission, total cost $49,993.11 Cash left over $0.09 Performance: As this is the first mont...

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.  Basic...

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...

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 completel...