ITA Wealth Management

In the process of using a portfolio planning software program, I am finding I can increase return, reduce risk, and enhance the diversification by including as many as five individual stocks from the “Creme List.”  The core of the portfolio (75%) is made up of the “Big Six” ETFs, developed international, emerging markets, REITs, bonds, and commodities.  When I speak of the “Big Six” I am including the following ETFs: VTV, VOE, VBR, VUG, VOT, and VBK.  Since VOE and VOT do not have three-year records, I substitute iShares IJJ and IJK for the mid-cap value and mid-cap growth asset classes.

One would think ten to twelve ETFs including REITs, commodities, bonds, developed and emerging international countries would constitute a well-diversified portfolio.  This is not necessarily true.  Ben Stein and Phil DeMuth point this out in their book, “Yes, You Can Supercharge Your Portfolio!“  Constructing a portfolio requires considerable patience to find stocks, ETFs, bonds, etc. that work well with each other to provide an acceptable return with reduced risk.

Another asset I include in larger portfolios is timber.  Some investors will include timber under the commodities asset class.  Adding this asset will frequently increase return while reducing risk, a goal of portfolio planning.

Inclusion of “Creme List” stocks tends to bring down the projected standard deviation.  Even though most of the stocks are found in the S&P 500, the stocks I am selecting are not coupled closely with the S&P.  This means they have R-Squared values that are below 70% when measured against the S&P 500.

While each individual needs to build a portfolio that fits their needs, where to begin is a problem for beginning investors.  Examples of workable portfolios can be found on the Premium Content side of this blog.

Lowell Her

Photograph:  Cayman Island

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