ITA Wealth Management

Over the next few days (There are six (6) entries in this series.) I will take investors through the process of portfolio construction.  This will be a “virtual portfolio” whereas the portfolios over on the Premium Content side of ITA Wealth Management are real portfolios where actual dollars are invested.  The purpose of these blog entries are to walk investors through the thinking process of building a portfolio around Exchange Traded Funds or ETFs.

Several goals are set as we being this process.

1. The projected return should be at least 8% points annualized.  Anything higher will be a plus.
2. We strive to keep the annualized projected standard deviation, or risk below 15%.
3. The Diversification Metric (DM) for this portfolio should exceed 30%.

With these goals in mind, we begin.  It is assumed investors have a broker account.  This is not mandatory.  If one were building a portfolio around index funds, then opening an account at Vanguard makes sense.  In fact, this is what we recommend for investors putting away small amounts each month in a 401(k) or 404(b) tax deferred savings plan.  In this portfolio construction example, we are assuming the investor is saving amounts in excess or $1,500 before making an investment.  The reason for the $1,500 amount is so we keep commissions to well below 1% of the total investment.  That is just a side note as we will not use dollar amounts in this portfolio building exercise.  Instead we will stick with percentages.

In this portfolio construction example, our first investment is Vanguard’s Total Stock Market ETF, VTI.  This will give us coverage over the entire U.S. equities market.

In the screen shot to the left you will note the total annualized projected return is 7.48% or rounded to 7.5%.  This is a little below our goal of 8%, but we can make that up by careful selection of future purchases.

The projected annualized standard deviation (SD) is 15.54% or rounded to 15.5%.  These annualized projection figures are found in the boxes with the dark blue background.

If you move down the screen shot near the bottom of the page, you will see something called Diversification Metric.  With only VTI in our portfolio, the DM is 0% or a non-diversified portfolio.  Remember our goal for DM is to exceed 30%.  As we add additional asset classes to the portfolio, the DM value will rise.  It is our job to move the projected annualized return up to over 8%, bring the projected annualized SD down under 15%, and push the DM up over 30%.  Watch this blog next week to see if we can make this happen.

Lowell Herr

Photograph:  Photo by Dennis Dean.  This image was captured in the Sacred Valley of Peru.  Peruvians are very proud of their stone work.  Some of the Inca walls are the very best I’ve ever seen.  The dark blue sky comes from the very high altitude.

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