ITA Wealth Management

Below you will find a Monte Carlo analysis of a very conservative portfolio using Quantext Portfolio Planner [QPP].  This is Portfolio #5 from Index Funds Advisors and the portfolio is made up of Dimensional Fund Advisors index funds.  To see a greater description of these index funds, go to this site.

Focus on the Portfolio Stats or the area with the blue background.  The projected annual return is 2.22% and the projected annual standard deviation (SD) is 2.21%.  Keep in mind this is a very conservative portfolio and one that is populated predominately with bonds.  Those are the last four index funds.

Now focus your attention on the yellow background data or the Historical Data.  I selected a three-year period or the time frame recommended by the author of QPP.  The annual return was a modest 1.81% with a SD of 2.75%.  Since the projected annual return is higher than the historical return, there is a probability this portfolio will show a positive performance going forward.  While the absolute difference in these percentages is not great, the percent difference is significant.

The Diversification Metric at 52% is respectable.  This is a well diversified portfolio even though it is concentrated in bonds.  The Portfolio Autocorrelation is a low 12.51%.  If you need further definitions of these terms, do a search on this blog and then look for the early entries.

Most investors will not select such a conservative portfolio as the projected return is much too low.  However, someone interested in protecting existing assets will find this portfolio a possible choice.

Before you leave this portfolio analysis, look at the projected annual return for each index fund.  That is the column that begins with DFLCX projected to return 7.27%.  As one increases the percentage in the equity funds, the investor is taking on more risk and the projected return is higher.  Once more, one needs to balance out return with risk.

Over the next several weeks I will be analyzing portfolios with increasing risk over on the Premium Content side of this blog.

Lowell Herr

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Have you ever found yourself in a situation where you read something, only to come back to it later and wonder how you managed to overlook essential information?  If you are at all like me, there seems to be a time when the mind is ready and prepared to learn something, whereas only a month or so before this was not the case.  One of those articles I needed to re-read is Geoff Considine’s “Tactical Asset Allocation – Part II.”  Take some time to read this article in light of some to the SS clips I’ve posted recently.

Lowell Herr