During the month of July I am going to scale back my writing on ITA Wealth Management and take a much needed break. In place of new information, I am picking up prior posts of note and “tweaking” them or updating where needed. Below is one such post.
Always remember the advice of Brinson, Ibbotson, Gibson, Bernstein (if you have read his works), and many others to be quoted later. Asset allocation is the key to portfolio performance. If you find this difficult to swallow, dig into the academic research for yourself rather than take the word of those who have a financial interest in investors not understanding how Wall Street works.
We will begin by dividing the stock market into six fundamental asset classes. Three of the divisions are based on the capitalization or size of stocks. We slot them into Large-Cap, Mid-Cap, and Small-Cap. These three divisions will be determined by Vanguard and/or Barclay. Do not assume both firms will come up with identical definitions or the same basket of stocks in each asset class.
The next division will be between what is called growth and value. These divisions are even murkier than the size divisions. One common division point is the Price/Book value. If a stock has a low Price/Book ratio, it will fall into the value class, whereas a stock with a high Price/Book ratio will be tagged as a growth stock. The number tends to fall around 2 to 2.5, but that number will float up and down depending on overall market conditions. I have seen the division or cut point hover around a ratio of 3.5. We are not going to worry a great deal over these definitions as Vanguard and Barclay will take care of building the various asset classes as they have ETFs constructed to follow each index of interest.
Our launching point is Large-Cap stocks. From this cap size we will extract value and growth Exchange Traded Funds (ETFs). For more information on ETFs, go to this web site.
http://www.ishares.com/home.htm
or
https://personal.vanguard.com/us/funds/etf/bytype
An ETF is a basket of stocks that fit a particular description or track a particular index. For example, we might seek an ETF that specializes in nothing except high dividend paying stocks (IDV). For our first moves, we are looking for ETFs that satisfy requirements for Large-Cap Value and Large-Cap Growth. These are the first two asset classes of interest as we begin to fill up the “Big Six.”
We will limit our choices to the two major firms that supply ETFs, Vanguard and Barclay. The choices for Large-Cap Value are Vanguard’s VTV and Barclay’s IVE. These ETFs are bought and sold the same way one would purchase or sell a stock. Instead of one stock, you are buying a basket of 300 to 500 stocks.
https://personal.vanguard.com/us/FundsSnapshot?FundId=0966&FundIntExt=INT Vanguard site
http://www.ishares.com/product_info/fund/overview/IVE.htm Barclay site
In the following steps we will move into the four ETFs that fill out the “Big Six.” They are: Mid-Cap Value, Mid-Cap Growth, Small-Cap Value, and Small-Cap Growth. Remain tuned for details.
Lowell Herr
Photograph: Thais’ ceremony taken by Ivan Hodiny in Phuket, Thailand. (Note: The colors in the original are much richer and the clarity of the image is reduced by the web compression process.)
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