ITA Wealth Management

Below is a comprehensive data table showing the performance of seventeen portfolios and comparing their performance with different benchmarks.  All seven portfolio tracked using the TLH spreadsheet are performing better than the VTSMX, Vanguard’s Total Stock Market Index.  Four of the seven are topping the ITA Index.  As you will recall, the ITA Index is a customized index designed to accurately track the performance of the portfolio compared with its Strategic Asset Allocation plan.  A careful look at the table will show that Einstein and Kepler are significantly lagging their ITA Index.  In both cases, this is due to one or two asset classes performing very well during the period when the portfolio itself was below target in those asset classes.  In other words, the portfolio is lagging due to my not keeping all asset classes of the portfolio on target.

While it will be very difficult to turn those negative numbers into positive ones, the huge differences will narrow over time.  Also, the magnitude of the numbers is due to the short period some of these portfolios have been in operation.  An older portfolio, such as Schrodinger, is showing rational values and more what we expect to see as the younger portfolios mature.

Overall, the performance of these portfolios is quite remarkable considering they were launched during the “lost decade” of investing.  To outperform the VTSMX is better than 75% to 80% of the professional money managers do in a given year, and the Schrodinger and Projects portfolios have been doing this for nearly ten years.   The Jane and Gauss portfolios have been performing better than the VTSMX for over twelve (12) years.  That is a record most professionals cannot match.  Of course, I do not have the overhead that a professional manager incurs so I immediately have a 1% to a 2% point advantage.  This is why the small investor should be managing their own money following guidelines laid out in this blog.

Portfolio Performance: 8/28/09

Lowell Herr

Photograph: Canterbury, England – Image by Ken Appel

Would you pay a financial advisor $4500 per year (or more) to manage a $500,000 portfolio made up of a mix of U.S. equities, international, and bond ETFs?  Several days ago I picked up information of a Strategic Asset Allocation plan showing a breakdown of asset classes listed below.  In this portfolio, one does gain access to very specialized index funds in the international arena.  Without access to a DFA advisor, one will not gain access to DFIVX and DISVX.  Is the cost worth it to gain access to these specialized funds?

The main thing this portfolio (analysis listed below) has going for it is the low projected Standard Deviation of 11.2%.  However, the projected return is lower than that of the S&P 500 and the Diversification Metric is a rather low 22%.  Remember, we prefer the DM to be above the 40% mark.  To improve this portfolio, and by improvement, we want to increase DM and the Return/Risk ratio, we need to find ETFs that will bring additional diversity to the portfolio while increasing the return.  If the client requirement is that 50% be in bonds, as it is in this portfolio, then it will be difficult to increase the return, but it is possible.  We are working on such a “new paradigm” portfolio over on the Premium Content side of this blog.  And the cost is much less than 90 basis points per year.

As I look over the portfolio below, I cannot get excited about paying an advisor close to 100 basis points for such advice.  With a little self-education investors can control costs and construct their own portfolios using carefully selected ETFs as shown by examples on this blog.

ITA Wealth Management readers will want to check in this weekend to view the portfolio comparison data table. As for the portfolios beating their benchmarks, I predict all will outperform Vanguard’s Total Market Index Fund, the VTSMX.  This is a higher bar than what most managers use as the VTSMX does better than the S&P 500.  It will be interesting to see how many of the eight portfolios out shine the ITA Index.  I know one or two portfolios will not do better than this new customized index as a few of the portfolios were under target in emerging markets.  When a portfolio is not aligned with the target percentage and that particular asset class performs very well, the performance of the portfolio will fall behind.  This is what happened in several cases where the portfolio did not carry sufficient percentage in emerging markets.

This data will be made available sometime this weekend.  In addition, look for the CD recommendation for the week.  We have a good one coming up.

Photograph:  Train station at the base of Machu Picchu.

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