ITA Wealth Management

Setting up an appropriate benchmark for a portfolio is something I have been seeking for years. As yet, I have not found one, although I did come up with something I call a “Blend Benchmark” for the AA-Mosaic, Mosaic2, and GLW portfolios. Thus far the benchmark we are using to compare with portfolio results is the VTSMX index fund. However, the VTSMX is Vanguard’s Total Market Index fund and it does not represent our investments in REITs, commodities, international, and emerging markets.

How does one go about setting up an appropriate benchmark for portfolios as broadly diversified as the ones mentioned above? The “Blend Benchmark” is an effort to measure the performance of a portfolio vs. how well the portfolio would do had one been able to keep the portfolio exactly on target.

The “Blend Benchmark” takes the target percentage for each asset class in the portfolio and applies that target percentage against the actual ETF performance for that asset class. If the investor allows style drift or applies Tactical Asset Allocation (TAA), one can easily tell if the decision was a positive or negative move. All one needs to do is compare the portfolio performance vs. the “Blend Benchmark.”

Broker houses could easily provide this service to clients. To do so would encourage investors to begin to take a look at the asset allocation plan of their portfolio, the most important investment decision they will make. If you don’t recall how important, do a search for Ibbotson on this blog. Then look up Fama, French, and Brinson. Those entries should fill in the blanks.

Investors interested in seeing how the “Blend Benchmark” works are invited to subscribe to Premium Content.  The cost is $6.99 per month or about three cups of coffee.

Lowell Herr

Photograph: Experimental aircraft

As the debate between index investing and selecting stocks using Take $tock continued, I offered to set up a sample portfolio that would following the recommendations of the T$ program. When the Quality rating of the stock turned red, it would be sold out of the portfolio and a new “all green” stock would be selected as its replacement.  As long as the Quality rating maintained a green or yellow rating, the stock remained in the portfolio.

The wager portfolio was fully populated on October 31, 2003 and was turned loose to run five years. We are about two and one-half months from ending the wager. The complete details of all the trades over the past four plus years can be found at this URL.

If the ICLWager portfolio does not double in five years, I win the wager, but if it does double, then I lose the wager.  This was a wager I wanted to lose as I could easily afford to pay if I lost.

As I write this entry, the ICLWager portfolio is outperforming the VTSMX benchmark, but it is not doubling, and likely will not reach that lofty goal.  Nevertheless, it is significant that the portfolio is doing better than the total market, as measured by the VTSMX index.

Photograph: Hillsboro, OR air show