ITA Wealth Management

Even though our commodities ETF (GSG) is in a swoon, we want to maintain our target in those portfolios that include this asset class.  Check out this article which provides support for our position.  For those of you who have read Roger Gibson’s book, remember how commodities rarely led the four major asset classes, but when it did it made a major impact on the overall portfolio performance.

To review Gibson’s four-factor model, you will recall he use the S&P 500, EAFE, NAREIT, and GSCI for his four indexes over the 27-year study.  Commodities (GSCI) had 5 first-place finishes while International (EAFE) and REITs (NAREIT) had 7 and 10 first-place finishes respectively.  By comparison, the S&P 500 also came in first only five times.

What is interesting in the Gibson study is that a four-factor model ends up with a better return/volatility ratio than any one, two, or three-factor model.  Diversification works whether or not you want it to.  Do a search for Information Ratio to learn more about the return/volatility ratio.

In our seven portfolios, we take the multiple factor model to a new level as we hold a minimum of eight (and usually higher) different asset classes.

Going back over Gibson’s material, I see where he recommends one not hold less than 5% in any asset class.  We have 3% set for some of our asset classes so that may require another look.  The idea is that if one does not hold at least 5% in an asset class, whatever that asset class does, it will not have a significant impact on the overall portfolio.  When Gibson ran his four-factor model, he placed equal percentages in each of the four asset classes.

Coming back to the original argument, do not abandon commodities even though they are in a correction faze.  Stay the course and be consistent with your asset allocation strategy.

Lowell Herr

Photograph:  Villefranche, France

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The following information is normally published on Premium Content, but today I thought I would show the data for the seven portfolios under management.  In the last four portfolios, beginning with AA-Mosaic, the portfolios are young and still under construction.  Don’t pay much attention to the percentage figures as the IRR values are exaggerated due to the short time in existence.

The Passive Portfolio (PP) is coming up on its eighth birthday at the end of November.  This portfolio received an infusion of new cash and that has yet to be recorded.  Depending when that cash was inserted, the IRR value for the VTSMX benchmark will change.  I do have Risk data for this particular portfolio, and as you will recall, it is very low.  The Information Ratio for this portfolio is unusually high, a very good sign of a well managed portfolio.  The asset allocation percentages are available upon request over on Premium Content.

Colter is an older portfolio that went through the transition of moving to ETFs from an entirely stock portfolio.  Before this move, the portfolio was trailing the VTSMX benchmark.  Here is partial proof that index investments and asset allocation work to the advantage of the small investor.

The AEM portfolio, nearly two years old, is the one portfolio that is balanced between value and growth rather than tilting the assets toward the value side of the equity spectrum.  This portfolio also holds a small position in bonds.

The remaining four portfolios are all less than a year old.  Hence the exaggerated IRR values.  The one relative disappointment in the group is the Mosaic2 portfolio.  It is the only portfolio not outperforming its benchmark.  This portfolio has been hurt by the dip in international (developed) and emerging markets. It will take considerable care to get this portfolio performing at a level higher than its benchmark.

Looking at the infant portfolios, one can tell what a mess the market has been over the last ten months.

Portfolio Performance

Lowell Herr

Photograph: Celebrity Cruise Line logo

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