ITA Wealth Management

Another serious error made by investors is lack of diversification. Many investors enter the stock market without a plan for their eventual portfolio. The purpose of this blog is to help investors plan and manage their portfolio. One misconception investors have is that they think investing in all the market sectors will provide diversification. This is a common mistake and let me explain. It is possible to cover all the market sectors and do this with stocks from one asset class, say the large-cap growth asset class. This is not portfolio diversification.

If an investor will diversify over several asset classes, all the sectors will automatically be covered. Even the “Portfolio for Dummies” will provide sector diversification. For example, if one selected ETFs such as VV (Large-Cap Blend), VEU (International including emerging markets), BND (Bonds), and Cash, one would have a very diversified portfolio.

We think there is merit in breaking down the total market into more slices to take advantage of or play the probability game of how we think the market will perform going forward. Historically, value asset classes tend to outperform growth asset classes.  We want to take advantage of that information by skewing the portfolio toward the value side of the market spectrum.  However, if we were to see a string of good value years, combined with poor performance for growth stocks, we would be inclined to apply some Tactical Asset Allocation (TAA) and tilt the portfolio toward growth with the idea the market will show its natural tendency to revert to the mean. TAA is more difficult to accomplish if one invests in a Total Market Index such as the VTSMX or sets up a “portfolio for dummies” as suggested above.

TAA should be done with great care and it does take experience and good data. The novice should stick with a basic asset allocation plan such as we are developing with the AA-Mosaic, Mosaic2, and the new GLW portfolio.

Risk management is another reason for diversifying over eight to fifteen different asset classes. We are always seeking for asset classes that show a low correlation with existing asset classes. The idea is to increase the Information Ratio. This means increase return while reducing risk.

Lowell Herr

Photograph: Street Art in Lake Oswego, OR

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