Dec 24
Asset Allocation: A New Beginning
As you prepare for 2009, take time to review all the posts on this blog related to asset allocation. Off on the right-hand side you will find a category so named. Go back, if you have never done so, and read the very early posts on this subject. Search for names such as Ibbotson, Brinson, Fama, French, Bernstein, and Hebner. Keep in mind that when you do such a search, you will also come up with this post as the search engine will find the name in every post.
Do not forget the Golden Rule of Investing, “Invest As Much as You Can As Early As You Can!” Remember the importance of asset allocation. We have data available over on the Premium Content side of this blog that demonstrates the importance of asset allocation. Moments ago I updated each portfolio and the results are rather amazing.
The spreadsheet used to calculate the IRR values for each portfolio is titled the Thomas/Lalla/Herr spreadsheet, so named after the three authors. Jim Thomas, of the Seattle area, is the prime architect of the spreadsheet with two of us adding features that expand its use for measuring asset allocation.
Getting back to portfolio performance, here are the results of seven portfolios as measured against Vanguard’s Total Market Index, VTSMX. The AA-Mosaic Portfolio is outperforming the VTSMX by a whopping 14.3%. The AEM Portfolio, now nearly two years in operation, is squeaking out a 1.1% victory. The Gauss Portfolio is outperforming the benchmark by 69.4%. No, that is not a typo.
The Jane Portfolio, formerly the GLW Portfolio, is 12.3% ahead of the VTSMX benchmark while the Mosaic2 is now leading the benchmark by 18.9%. This is the one portfolio that was behind the benchmark for several months. Holding a significant percentage in cash while the marked declined helped this portfolio. The Scrappy portfolio is the newest portfolio and it is outperforming the benchmark by 33.7%. Again, this is largely due to holding over 50% in cash.
Note: The above portfolios, for the most part, have not been in existence that long so the large percentage differences need to be examined in that light. The numbers will definitely come down over time. The objective is to retain a lead over the index. As 2009 progresses, we will see the performance between the VTSMX and the portfolios narrow.
The most significant portfolio I will save for last, and it is the Passive Portfolio (PP). This portfolio just passed its eighth birthday and it is outperforming the VTSMX benchmark by 2.3%. This is particularly significant considering the portfolio is not as well diversified as we once thought, now that we have a new tool to measure diversification. The PP has managed to do better than the total market due to two different tilts. 1) The portfolio is skewed toward smaller cap. Small-cap stocks tend to outperform large-cap stocks. 2) The portfolio emphasizes value over growth and this tilt paid off over the last eight years.
Premium Content readers have access to the spreadsheets that detail all the transactions. As I’ve mentioned many times, these portfolios belong to different foundations, individuals, and to our family. One portfolio no longer being tracked is the Colter Portfolio. That portfolio also was outperforming the benchmark when I last updated it. Including Colter, that is eight for eight in outperforming the VTSMX. We selected the VTSMX as a benchmark over the VFINX, the S&P 500 equivalent, since the VTSMX tends to outperform the VFINX and is therefore a tougher index to beat. Also, the VTSMX index covers the total market and is a better, but not perfect, benchmark for our portfolios.
So there you have it. Asset Allocation does work, at least it has for the last eight years from my personal data. Research by Brinson and Ibbotson confirm these conclusions over longer periods. However, their research does not include as many asset classes as we hold in all the portfolios mentioned above.
The seven portfolios listed above vary in size, were launched at different periods, and have slightly different philosophies. What do I mean by that? Several of the portfolios contain only ETFs. Others are Mosaic in nature in that they contain both stocks and ETFs. Personally, I think the Mosaic Portfolios have an advantage in that highly selected stocks provide additional diversification, lower the average R^2 value, and reduce risk.
Faced with an uncertain market in 2009, I highly recommend investors take a serious look at asset allocation principles. Follow the continuing development of the seven portfolios over on the Premium Content side of the blog. The cost is minor compared to the value received, assuming one sets up a portfolio along the lines of the Mosaic philosophy.
Wishing every one a Merry Christmas.
Lowell Herr
Photograph: Ice covered tree in our front yard.
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