ITA Wealth Management

Comparing the AA-Mosaic portfolio with either the VFINX or VTSMX results in a victory for the well diversified portfolio. The AA-Mosaic leads the VTSMX by 10.6% points and VFINX by 12.8% points. And this is without adding in the dividends that came in for the ETFs today. It will be several days before the broker statements are available, but there is not doubt about the strong relative (not absolute) performance of the AA-Mosaic portfolio.

Lowell Herr

A few of you may remember Robert Stovall, a regular guest of Louis Rukeyser on the old Wall Street Week TV program. His son, Sam Stovall, is now the chief investment strategist at Standard & Poor’s Equity Research. The young Stovall reports that between 1945 and 2007 the S&P 500 rose 10.7 percent annually when the Democrats occupied the White House, compared to a 7.6 percent annual increase when the Republicans were in control. This decade is turning out to be a lost decade for stocks and it is winding down to be a particularly poor one for Republicans. The eight year increase under the Bush administration will do well to close at an annual gain of one percent per year.

It is a myth that the stock market does better when the Republicans are in control. The historical record speaks otherwise and this administrations record is just providing an exclamation point to this record.

This weekend the Oregonian reported on the deterioration of the infrastructure of the country. It is not only the bridges that are in disrepair, but we are also falling behind other countries in building out our Internet broadband lines. One can only hope a new administration will turn this country around, but then that is dependent on an informed electorate.

The general consensus I am picking up is that we should not expect much in the way of market gains over the next decade. It may be time to focus on investments that provide a respectable yield. That bodes well for value vs. growth investments.

Lowell Herr

Photograph: Katakolon, Greece

The asset allocation percentages for the new and renamed “GLW” portfolio are published over on Premium Content. We hope to launch this portfolio tomorrow with some ETF purchases.

The “Creme & Sour” lists as well as the “Top Ten” are also available.

Lowell Herr

July 1 is the expected launch date for the “GL” portfolio, a new portfolio that will be designed around index equity ETF and bond ETF vehicles. The asset allocation percentages have yet to be determined, but they will likely differ a bit from the target percentages we are using with the AA-Mosaic and Mosaic2 portfolios. I’ve given some thought to using target percentages along the lines of Financial Engines or one of the more conservative portfolios outlined in Mark Hebner’s “Index Funds” book.

Examples of Financial Engines targets are currently posted over on the “pay-to-read” Premium Content side of the blog. I’ll be entering more ideas tomorrow as the “GL” portfolio concept develops.

For the investor just beginning a savings plan and wanting to learn how to set up a portfolio, this is an example to learn.  I will be using the Thomas/Lalla/Herr spreadsheet to track the portfolio as well as follow three indexes.  Those are: VTSMX, VFINX, and VGTSX.  The VTSMX is our primary benchmark.  In addition, the “Blend” calculation will be included so investors can tell how far they are deviating from the targets assigned to each asset class.

Lowell Herr

Photograph: Rhodes Island, Greece

Another wonderful Beethoven CD is the 5th and 6th symphonies on the Deutsche Grammophon label. The recording I have is Herbert von Karajan conducting the Berliner Philharmonic. The recording number is D-115443. Karajan always does a good job with the Beethoven symphonies and I have a great deal of confidence in the recording qualities put out by Deutsche Grammophon. This recording matches those high standards.

Lowell Herr

Photograph: Protective tug guiding ship into the island of Rhodes

No. 40

We have a new leader, TEVA, on the Top Ten stocks for 6/27/2008.  To my knowledge, this is the first time this stock reached to top of the list.

The “Creme & Sour” lists should be posted through the Premium Content later in the afternoon.

Lowell Herr

Photograph: Tug and ferry off the island of Rhodes, Greece

To launch the “GL” portfolio, I am going through a process of thinking what asset classes I want to include in this taxable account. One of the steps I will go through is to lay out recommendations from Financial Engines and show their desired asset allocation percentages. Most likely, I will deviate somewhat from the FE recommendations and when that happens, readers will see the divergence.

I plan to use the classic Thomas/Lalla/Herr spreadsheet to track this portfolio. In this portfolio I do not expect to hold any individual stocks, but will constrain investments to ETF index choices.

Look for details over on the Premium Content side of the blog over the next few weeks.

Lowell Herr

Photograph: Artistic rendering of cactus plant

I am in the process of reading Christopher L. Jones’ book, “The Intelligent Portfolio.” In a way, this book was written to chum for Financial Engines clients as there is a one-year promo for FE that comes with the book.

Two points are standing out in the book at the moment. One begins on page 189 where Jones warns readers of why hierarchical asset allocation is bad for portfolios. Hierarchical asset allocation is where one first sets up portfolio asset allocations and then funds those asset classes with actively managed mutual funds, index mutual funds, ETFs, bonds, stocks, etc. Jones writes about the danger of forcing poorly managed or expensive funds into an asset class simply because it is not funded. Instead, one should pick the best funds and then tweak the allocation around those funds. Wrong!

For those of you who have kept up with this blog, you know that setting up allocation percentages is one of the very first steps in portfolio planning. I am puzzled as to why ETFs were not used as an alternative to portfolio development.

Where Jones is wrong on this point, in my opinion, is that he seems oblivious to the wide array of index funds and ETFs one can use to populate a portfolio. While he does mention ETFs elsewhere in the book, he views them mainly as the “new kid on the block.” Instead of using low cost index funds and/or ETFs, he seems hitched to actively managed mutual funds. Jones devotes one chapter to “Picking the Good Ones,” where he provides guidance for selecting funds. I will need to hold my nose as I read this chapter. Other readers may have a different take on pages 189-193. In this section he also uses the Brinson et. al. studies, but fails to mention the Ibbotson & Associates studies that answered the questions he criticizes Brinson for not answering. If you missed the Ibbotson material, just do a search and read all those posts.

Another area I question comes out of the Financial Engines (FE) optimization model and that is where he tells us growth will outperform value. My data tells me the reverse is true. Maybe the FE model is spotting something going forward that most of us fail to see. I have yet to run into the notion that rebalancing is unnecessary, but I understand from the reviews it is there.

Jones talks a lot about the “Market Portfolio,” a 15-asset class portfolio that covers just about everything except international REITs and commodities. What I found very interesting is how little one gives up in projected return by not including many of the asset classes. This is due to the fact that most of the 15-asset classes are highly correlated. If one combines several asset classes, FE comes up with similar future projected returns. This section of the book certainly makes the case for portfolio simplicity.

If I were to list the 15 asset classes and ask 100 people what asset class, if removed from the portfolio, will result in the maximum loss of expected return, I’ll bet not more than one or two percent would get it right. Anyone want to take a guess?

Lowell Herr

Photograph: Lily from our front yard

Early in July, I expect to launch a new portfolio that will have yet a different asset allocation than either the AA-Mosaic or Mosaic2. I am thinking through what asset classes will be included, but there is almost a certainty it will include a higher percentage of bonds than what we see in the Mosaic2 portfolio. One new asset class readers can expect to see included is Foreign Bonds. The details and spreadsheet of this portfolio will be covered in detail over on the Premium Content side of this blog.

Lowell Herr

Photograph: Istanbul, Turkey

John Spears wrote a paper, “The Road To Wealth: Long Term Investment In Stocks” where he found, using data from 1871 through 1992, stock beat bonds in 80% of the rolling 10-year periods.  In rolling 30-year periods, the time most investors save in a lifetime, stocks won out over bonds 100% of the time.

I’ve written previously about a spreadsheet I have that runs from the late 1920s through 2006 and using 5-year rolling periods, bonds only added to the portfolio five times.  The odds are quite strong that over time, stocks outperform bonds.  Therefore, only use bonds later in life when you need to reduce the risk of the portfolio.

Lowell Herr

Photograph:  Photographed in the jungle of Peru.  I would not want to climb this vine.