ITA Wealth Management

Analysis for the seven portfolios actively tracked on Premium Content started today.  Initial information for the AA-Mosaic Portfolio is available for clients to view and the updated spreadsheet is available.

Over the last few weeks I’ve done a modest amount of buying.  Several portfolios did receive an influx of cash providing the opportunity to both work toward the projected asset allocations and rebalance existing allocations were necessary.

If the November 20-21 lows are not retested over the next several weeks, we can expect to see higher market numbers through April of next year.

Now is an excellent time to finalize your portfolio plans and prepare to populate or rebalance the portfolio.

Lowell Herr

Photograph: Old Town - Bratislava, Slovakia

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In this “movie” I divided the portfolio into eleven different asset classes.  The reason for using only eleven is to match the same number of sectors used in the prior post. Note that the projected annual return increased, the standard deviation decreased, and the diversification metric increased. When the portfolio is diversified across asset classes rather than sectors, all three important metrics move in the preferred direction.

Another important lesson to take home is that one can improve on each of these portfolios by not investing equal amounts in each ETF.  Using the Quantext Portfolio Planning software, one can make tactical moves so as to increase projected return while reducing risk.  These tactical asset allocation decisions will be shown over the next few weeks in Premium Content.

Lowell Herr

Photograph: View of the Rhine River from atop the Marksburg Castle.  As one can see, it was a dreary day.

When the market opened this morning, two ETFs in the AA-Mosaic Portfolio hit the limit order I set weeks ago thinking the price was so low they would never be struck.  This morning they were hit and I picked up blocks in emerging markets and large-cap growth.  The details will be available on Premium Content along with the spreadsheet later today.

We must be getting close to a market bottom as there will be lots of tax selling over the next few weeks.  Once this selling wanes, it is my hope the market will stabilize and begin an upward climb. We will need to see some positive earnings reports and that many be several months away.

Lowell Herr

Photograph: Clock on Central Station - Amsterdam, Holland

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By the end of the week all the tax selling will take place in the taxable accounts and the restructuring of these portfolios will begin.  The asset allocation plan will require looking for assets that have low correlation, better than average projected return, and low historical R^2 values as measured against the S&P 500.  The combination of asset will provide for a well diversified portfolio as measured by the Diversification Metric.

Premium Content readers will be able to follow the restructuring of the GLW Portfolio in particular as this is one of the several portfolios that will require reworking.

Lowell Herr

Photograph: Canal travel, Amsterdam, Holland

Most investors are holding bond or equity investments that are well below the purchase price.  Now is the time to look over those losses and sell to take advantage of tax losses.  If one is holding an ETF such as Vanguard’s Large-Cap Value VTV, one could wait 31 days to repurchase the same ETF or substitute the IVE iShare that covers the same asset class.

Examine all tax portfolios and see if there are investments that can be sold for a loss.  Sell either at market, place a limit order, or put in a trailing stop-loss order (TSLO).

Photograph:  Great Blue Heron

I spent time this last weekend updating the AA-Mosaic spreadsheet, a portfolio launched in late December of 2007.  Had I been able to keep the portfolio on target, I would not have done as well as the actual IRR value and the reason is tied to cash in the portfolio.  During a market decline, holding cash will enhanced portfolio performance.  Holding cash is the reason the AA-Mosaic is outperforming the VTSMX index by 11.7% points over the last eleven months.  Even so, the IRR for the portfolio is well into negative territory.

I did notice, and Premium subscribers can check this out, that a fully invested portfolio would still have outperformed the VTSMX benchmark by over one percentage point over the last 10.5 months.  Over time, that difference begins to add up.

Over the next several weeks, I will be performing additional analysis on the AA-Mosaic in order to determine which asset classes to emphasize over the next year.  Right now five asset classes are under weighted and I want to see if those are the asset classes where cash needs to be put to work.  Readers interested in portfolio construction and management will find this analysis of interest.

Photograph:  Typical scene just outside of Wertheim, Germany.

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Premium Content subscribers now have access to the updated spreadsheet for the GLW portfolio.  While the IRR looks awful, one needs to remember when this portfolio was started and the severe market headwinds since launch.  At least the portfolio is doing better than the Total Market Index fund (VTSMX).  Check the SS for the latest cash additions, ETF purchases, and dividends.

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Photograph:  Canal boat in Amsterdam, Holland.

To learn more about Quantext Portfolio Planner, click on the link.  Serious investors should at least take a look at a demo version, if it is still available.  QPP allows the user to enter up to 20 tickers (basic version) of stocks, ETFs, or mutual funds.  Once the tickers are in place, you then enter the percentage allocated to each investment, select a period for analysis and update the information.  As output, you receive a projected annual return, standard deviation, diversification metric and much more.

I highly recommend this Excel program.

Lowell Herr

Photograph: Woofie

Stick with your asset allocation plan and add to asset classes if they are under target and the indicators turn positive.  The last time I looked, the RSI graphs had moved from below to above the 30% level for most of the ETFs of interest.  The 13-week EMA was still below the 26-week EMA and the MACD graph was still negative.  This is always a dangerous time to rely on these indicators as they easily could “whipsaw” and trend back down, should the market retest the lows of last Friday.

The most conservative approach is to simply pay attention to the percentage you have invested in a particular asset class and where that percentage is with respect to your target percentage.  Over time, continue to add to the asset class that is trailing its target by the greatest percentage.  Rebuild the portfolio using new cash and cash dividends.  Those readers using the Thomas/Lalla/Herr spreadsheet have the tools available to monitor this information.

Premium subscribers have access to the T/L/H spreadsheet.

Lowell Herr

What do we do now?  The S&P 500 is down around 40% to 50% from its high.  Once the market is cut in half the probability of going lower is shrinking to a smaller and smaller percentage.  Cash seems to be king and there is no reason not to sit on it a little longer.  However, there is something the investor can do.  Take a little time to examine the StockCharts for each asset class in your portfolio.  Set out four changes you are going to look for in the StockCharts.  Don’t move back into the ETF until all of the following four indicators turn positive, and here they are.

1. In the top graph, the 25-Day EMA must move from below to above the 50-Day EMA.
2. In the RSI graph, the line must move from below to above the 30% line.
3. In the MACD graph (third down from the top), the histogram must turn positive.  The black line will cross from below to above the red line.
4. Wait for the CMF graph to turn positive.

When all four technical indicators turn positive, the probability of moving forward is higher.

Note that I extended the EMA values in the top graph from 13/26 to 25/50.  This slows the action and is an attempt to make sure the broad markets are turning around before making a move back into the ETF of interest.

The reason for waiting for all four indicators to turn positive is to avoid that old nemisis of the whipsaw.  Even so, it can easily happen in this market environment.

Lowell Herr

PS  I wrote this a few days ago, but the information still applies.  There is no reason the 8,000 DJI will not be retested when additional negative economic information hits the wire.

Photograph:  Chinese rug