The following “movie” walks the viewer through an R-Squared look of a portfolio considered to be well diversified. In fact, the 10-asset class portfolio is highly correlated with the S&P 500 when using historical data over the last three years. Particularly surprising is the high correlation between the international index, EFA, and the S&P 500 benchmark.
The second section of the “movie” focuses on the projected annual returns for each of the iShares that represent an asset class, and the projected annual return for the overall portfolio. The standard deviation, or risk, is also calculated.
Using information from a portfolio made up of the “Big Six” asset classes, REITs, international, and bonds, the objective is to do further analysis to see how one might increase the projected annual return while reducing risk. This is the challenge for the passive investor.
Over the last two years this portfolio under performed its VTSMX benchmark by 0.4% points and the S&P 500 by 0.3%. The portfolio, as shown by the analysis, is highly correlated to the S&P 500.
Lowell Herr
Photograph: Government building in Budapest, Hungary
Premium subscription available for $6.99 per month. Track the construction and management of several passive portfolios.
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With the 20% run up in the market since the lows of late November, is it time for a slight correction? While no one knows for sure, there is a reasonable probability the market will correct over the next several months and take back some of these gains. It always seems to happen. Assuming a correction will take place, one should have a strategy in place and here is a suggestion for setting limit orders as one repopulates asset classes that may be under target.
If you are fully invested and all asset classes are within the target ranges, this post or bit of advice is not for you. However, most of the seven portfolios tracked on the Premium side of the blog are not in this position. There are plenty of asset classes under target in a number of the portfolios. In order to bring the asset classes back into balance, consider the following. Break the problem up into two groups. Group one is made up of those asset classes that are empty or significantly under target. The second group consists of asset classes that are a few percentage points under target. Below are limit order suggestions.
For those asset classes that are empty or under target by the greatest percentage, set limit orders at 3 to 6 percentage points below the current price. We are interested in populating empty asset classes on any type of market decline. For example, yesterday I picked up VNQ for one portfolio that had no REITs. For the remaining asset classes, set the limit orders somewhere between 7 and 10 percentage points below the current price of the ETF. I don’t think I would go much below 10% as I doubt if we will see more than this as a correction. These are general suggestion readers will want to modify to fit their situation.
What percentages are you using to set limit orders?
Lowell Herr
Photograph: Back lit wall hanging in a home near Gearhart, Oregon.
Premium subscription is available for $6.99 per month. Follow the development and management of seven portfolios. Short “movies” are now available showing users how to impliment the T/L/H spreadsheet for portfolio tracking.
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