ITA Wealth Management

Normally, I begin portfolio design around eight to twelve index vehicles, mainly ETFs as I prefer them to straight index funds.  Then I will sometimes add a few individual stocks until I have accumulated 20 different tickers.  This morning I took a different approach to portfolio development.  Instead of the ETF approach, I selected the top 15 stocks from the nearly 150 I track.  This sample portfolio was built on the base of those 15 stocks and I then added five ETFs giving exposure to international, REITs and a few other specialized classes.

What is surprising is that the projected annual return is competitive with portfolios built around ETFs.  Further, the standard deviation or risk factor is a little lower than I generally see when using a total ETF portfolio.  And for good measure, the diversification metric turned out to be above 40%, a very acceptable value.

The point of this exercise was to show one can construct a well diversified portfolio, with relatively low risk, and acceptable projected annual return by using stocks instead of index ETFs.  Do note that risk protection was added by inserting 25% in broadly diversified ETFs.

Selecting entry points for the tickers that make up this sample portfolio is another problem that faces any investor.  Once the portfolio is beyond the design mode, how does one go about implementing or populating the portfolio.

There are several approaches to solving the problem.  One is to buy at the market price.  In this volatile market, that is not my recommendation.  A second option is to set different limit orders where the percentages are positioned at different levels below the current price.  This approach assumes the broad market is moving lower and the investor will pick up different equities or bonds at different levels.  A third approach is to use the StockCharts graph I’ve mentioned on several occasions and select entry points depending on market behavior.  As I write this post, many of the ETFs show positive RSI, MACD, and CMF graphs.  What is still missing is the 26-Day EMA moving from below to above the 52-Day EMA.  A fourth suggestion is to wait until (and if) the DJI breaks below 800 or we see a retesting of the November 20-21 levels. If this were to occur, then a prudent investor will begin to dollar-cost-average back into the market.

The details of this Mosaic Portfolio are available to interested investors.

Photograph: Rothenberg, Germany