ITA Wealth Management

On September 4th, I will be giving a talk on the benefits of Asset Allocation. The presentation is titled, “Passive Investing Through Asset Allocation.  For a limited time, I’ve made the Passive Portfolio spreadsheet available under “Links” over on the right-hand edge of this page. Click on Passive Portfolio and then download the SL.xls file. If Excel asks you whether or not you wish to activate the macros, do so. Also, the password is physlab. The spreadsheet seems to work better on Windows than it does on my Mac Leopard operating system. You may not be able to see all the IRR calculations as the macros are not always available to remote users.

If I can manage to upload a SS where the macros are accessible, I will do so.

Lowell Herr

Photograph: Backside of farm house near Martinsburg, Pennsylvania

Are you procrastinating over whether or not to set up a passive portfolio based on the award winning research of asset allocation? Are you still convinced you can pick stocks in asset classes that cover the entire investing spectrum? If so, ask yourself these few questions.

• Do I have a plan for my portfolio?
• Do I have software to accurately track portfolio performance?
• Am I allocated in asset classes that include international markets, emerging markets, and REITs?
• When I check the asset classes for my investments, what percentage is allocated to value asset classes?
• Check to see what percentage is allocated to mid-cap value and small-cap value.
• Am I comparing portfolio performance vs. an appropriate benchmark?
• How am I measuring portfolio risk?

Most investors shy away from portfolios that are built around the concept of asset allocation through the use of index funds and their first cousin, index ETFs. Why is this the case? Perhaps the primary reason is tied to the thinking that one can pick stocks that will outperform the index of which they are a part. How many times have I heard the expression, “Why be satisfied with an index when I can select the best stocks from that index?” The question remains, why do so few investor miss out on selecting the stocks within an index that show the greatest price appreciation? Remember, the best companies do not necessarily the best stocks.

Another reason investors do not build their portfolios around asset allocation is that they do not understand the full power of diversification and what it means to hold non-correlated investments. Take for example the years 2000 through 2007. Those were very poor years for large-cap growth stocks while they were exceptional years for REITs. If one did not have REITs in the portfolio during that period, one suffered and missed an opportunity. Now we see REITs in the tank and LCG coming to life. This is just an example why we need to spread out our investments over a wide range of asset classes. Most of us cannot predict which asset class will have the next positive run.

Just this morning, and Internet friend reported results of his passive portfolio after 2.75 years of operation. The IRR for the portfolio is 6.8% while the VTSMX benchmark turned in an IRR of 4.3%. The 2.5% annual return increase above the benchmark is significant.

Lowell Herr

Photograph: Lancaster County, Pennsylvania