ITA Wealth Management

On the right-hand side of the page you will find links to the “Creme & Sour” lists. In addition, go to the link below to view the Manifest Investing (MI) dashboard of the “Creme List.”

http://www.manifestinvesting.com/auth/portfolio/port_show?port_id=1772

From this weeks “Creme List,” here are the Top Ten stocks.

• INFY
• FDS
• TEVA
• BBY
• PAYX
• CTSH
• AMGN
• FAST
• MSM
• AIG

There is a little turnover since I last published this list, but most are repeats.

Disclaimer: Do your own independent research before purchasing any of these stocks.

This morning, 100 shares of GSG were added to the AA-Mosaic Portfolio. This brings the commodities asset class into balance. For a complete look at the AA-Mosaic Portfolio, click on the Bivio link found on the right-hand side of the page and once inside Bivio, look for the AA-Mosaic.xls file. All the detailed transactions are available for close examination. A few of the ETFs paid dividends in early January. Those dividends are recorded.

The portfolio, while back in negative territory, is still well ahead of the VTSMX benchmark.

Photograph: Oregon Coast

While the AA-Mosaic Portfolio continues to maintain a commanding lead over its VTSMX benchmark, the percentages are not all that meaningful as they swing wildly with any volatility in the market. At the close of 2/28/2008, the IRR for the portfolio showed a slight gain of 0.9% while the VTSMX benchmark was lagging with a negative -19.4%. The VFINX or S&P 500  index is negative 19.3%. Performing a bit higher is the total international index (VGTSX) at negative 6.8%.

It is encouraging to see a diversified portfolio maintain this lead, knowing full well the gap will likely close as the different asset classes revert toward their mean value.  Nevertheless, we do expect the AA-Mosaic Portfolio to perform better than the VTSMX without taking on too much additional risk.

Photograph: Mt. Hood, OR - Photograph by my good friend, Wayne Gingerich

If you have questions why the AA-Mosaic Portfolio includes so many asset classes, just read the referenced article, “The Benefits of Low Correlation.”

After reading this article, I had second thoughts about allocating only 5% to commodities. However, 5% should be adequate due to our emphasis on value and small-cap stocks as well as participating in emerging markets. These areas will bring down the overall correlation between the asset classes. In addition, we include more than seven asset classes in our portfolio.

Do take the time an go over Israelsen’s study as it provides additional strength to the asset allocation argument.

Photograph: Drivers for Old 4449

If you read yesterday’s post, you picked up the Israelsen study and the evidence that REITs and commodities increase return while reducing risk. Note that Israelsen’s study ended in 2006. Now look at these figures to see why REITs aided return. This data comes from eight major asset classes I’ve been tracking. My data begins in 1989 and runs through 2007.

• 2000 - First Place Finish - 26.37%
• 2001 - Second Place Finish - 13.9%
• 2002 - First Place Finish - 3.82%
• 2003 - Sixth Place Finish - 37.13%
• 2004 - First Place Finish - 31.58%
• 2005 - First Place Finish - 15.9%
• 2006 - First Place Finish - 38.2% (Israelsen’s study ends here)
• 2007 - Eighth Place Finish - negative 17.22%

Look at that great run for REITs from 2000 through 2006 and it is easy to see why REITs aided his portfolio and reduced risk. If his study were to include 2007 data, the results would be slightly tempered. This does not imply one avoid REITs. To the contrary, as REITs are once again helping the AA-Mosaic Portfolio.

I will admit I sold REITs out of our portfolio in 2006 as word was beginning to spread about the nothing-down-interest-only loans. That seemed to spell disaster for most public REITs.

Here is a Scott Burns article folks will find interesting.

Photograph: Old 4449, now housed and maintained in Portland, OR

For those interested in analyzing individual stocks, here are my Top Ten.

• INFY
• CTSH
• TEVA
• PAYX
• HOG
• BBY
• COH
• FAST
• WAG
• CVS

Disclaimer: Do not purchase blindly. Do your own research on each stock.

Photograph: Bridal Veil Post Office - Bridal Veil, Oregon

The second 50% of the AA-Mosaic Portfolio will be invested in REITs, international, emerging markets, commodities (or bonds), and cash.

Let’s get cash out of the way as we plan to hold no more than 1% in cash.

As stated before, we plan to invest 20% of the portfolio with developed international countries. From iShares we have a broad based index, EFA. Vanguard’s broad based international ETF is VEU. While these two broad based ETFs will include some emerging market stocks, we are not going to worry about that situation. If we want to specialize in specific countries or areas, we might choose VGK for a European ETF or VPL for an Asia ETF. SCZ is a small-cap international that would be of interest. EFV is an international value play. This ETF is of interest as we prefer value over growth, for reason articulated in prior posts.

Thus far, we have invested in EFA, where we hold 300 shares in the AA-Mosaic Portfolio. We also hold 200 shares of VEU, so we have the broad based international arena covered.

Emerging Markets is where we plan to park another 15%. So far we have invested 100 shares in FXI, a China market. FXI does not give much diversification so ETFs such as EEM and VWO will be next on the list for purchase.

The plan is to place 5% of the portfolio in commodities or bonds. Right now we favor commodities over bonds. DJP and GSG are two choices. DJP is actually an exchange trade note, not an ETF.

For REITs, we have 9% as our target percentage. VNQ and ECF are two primary choices. Thus far we have invested in VNQ at two different times and we now hold 200 shares on this ETF.

Dubrovnik, Croatia

Another ratio used to measure portfolio return vs. risk is the Information Ratio. Check this site for one definition.

http://en.wikipedia.org/wiki/Information_ratio

The following site gives the reader a comparison between the Sharpe Ratio and the Information Ratio.

http://seekingalpha.com/article/63911-clarifying-the-information-ratio-and-sharpe-ratio

I have software that permits me to calculate the information ratio from alpha and standard deviation. Eventually, I plan to provide this information for the AA-Mosaic Portfolio. If the Information Ratio is positive, then we know the portfolio manager is adding value to the portfolio.

The AA-Mosaic Portfolio is 19.2 percentage points above its benchmark. Those are the figures at the market close today. The benchmark I am using is the VTSMX and this index carries a high percentage of large-cap stocks. The AA-Mosaic Portfolio is benefiting by the higher risk investments in small-cap stocks.

The AA-Mosaic portfolio is constructed on the theory one can outperform a common benchmark such as the S&P 500 by increasing the diversification to multiple asset classes, skewing the portfolio toward smaller size stocks, and including international, emerging markets, and REITs.

Photograph: Fishing - Oahu, Hawaii

Sunset at Twin Rocks - Photograph by John Hill

For the first time since launch, the AA-Mosaic Portfolio turned positive. As of a few minutes ago, the Internal Rate of Return (IRR) is 7.6% while the VTSMX benchmark is a negative 17.7%.  The -17.7% will change for the better if the market continues to hold the gains today.  The price of the index is not fixed until the close of the day.  The boost to the AA-Mosaic Portfolio is coming from Fastenal (FAST), emerging markets, small-cap, commodities, small-cap value, and REITs. The big loser is the mid-cap growth VOT ETF.

The gap between the portfolio and the VTSMX benchmark will close over time, but we do expect to see the portfolio maintain a lead over the benchmark.