ITA Wealth Management

If any single concept were the focal point of this blog it would be Asset Allocation.  Therefore, it is time to review this all important topic.  While each investor will set up an asset allocation plan to fit their financial needs, we do need to be reminded that too many folks pay little if any attention to this all important application of investing.

Strategic Asset Allocation (SAA) is the “normal’ mix of assets given the objectives of individual investors and their willingness to accept certain levels of risk.  The AEM portfolio is one of the best examples I know where the portfolio is made up of a basic group of ETFs with no tilting of the asset classes.  In other words, value and growth are given equal weight and the portfolio does not stray too far from the very basic asset classes.  The portfolio is skewed slightly toward smaller cap stocks and the percentage allocated to bonds (5%) is a rather aggressive posture.  Otherwise, the AEM portfolio is a very basic SAA style portfolio.

The AEM portfolio follows a rebalancing discipline so it is not a buy and hold portfolio.  The portfolio is easy to understand and implement.  The asset classes all have R-Squared values within 70% of the S&P 500 so the portfolio returns will align with those of the S&P 500.

If we move away from SAA and apply a little activity to our asset allocations, we will end up with something closer to the Passive Portfolio (PP).  Active asset allocation is sometimes called Dynamic Asset Allocation (DAA). Note: Details of the AEM and PP are laid out on the Premium Content side of this blog.  Active management with the PP is confined to portfolio tilt.  This tilt toward value was established back in 2000 when the portfolio was launched.  The PP asset plan is skewed toward value and small & mid-cap size.  The reason for this is based largely on the research of Fama & French.  One also sees the F & F influence in the make-up of the DFA funds and the portfolios one sees on the IFA web site. DAA sometimes takes on movement between equities and bonds.  The PP is not such a portfolio.  Activity took place when the portfolio was born and that decision remains in place today, eight years later.

Tactical Asset Allocation (TAA) is our third and most aggressive approach to this general subject.  Many wise advisors tell investors to stay completely away from TAA as it is nothing more than market timing and it flies in the face of the efficient market theory.  In general, I agree with that point of view.  However, within the last year I came across a new software tool called Quantext Portfolio Planner (QPP).  Using reversion-to-the-mean techniques, this software aids the user in making projections as to which ETF or stock is likely to generate a higher return.  In addition, one can see how correlated the investment is with the S&P 500 and what risk is involved in setting up a portfolio with a particular asset mix.

Of the seven portfolios tracked over on Premium, five are still holding cash positions.  Little by little that cash is being invested.  The approach I am taking with each portfolio is a combination of the three basic strategies, with a little more emphasis on DAA and TAA.  Thus far all five portfolios are performing better than the VTSMX benchmark, but all data is in the infant stages and therefore not conclusive.  All we can say at this point is that the budding results are positive for an approach that relies on strategic asset allocation, rebalancing, and tinged with a little tactical asset allocation.

Lowell Herr

Photograph: Ship leaving Dubrovnik, Croatia

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