Photograph: Small Gorge on the Yangtze River, China. This area was not available except on very small boats before the Three Gorges Dam was constructed. The cliffs are approximately 800 to 1000 meters high. Note the boat just making the bend of the river near the center of the page.
What does an average risk portfolio look like? How are the assets allocated for an average portfolio? Here is the breakdown from Hebner’s Index Fund book. These results are the “Risk Capacity 50 – Sea Green” portfolio.
- Large-Cap Blend – 12%
- Large-Cap Value – 12%
- Micro-Cap Blend – 6% (This is one asset class where there is no ETF (yet) to match the DFA Index Fund)
- Small-Cap Value – 6%
- REITs – 6%
- International REITs Value – 6% (The third asset class that is difficult to match with DFA)
- Small-Cap International – 3% (This is another asset class that is hard to match up)
- Small-Cap Value International – 3% (Another index difficult to match with an ETF)
- Emerging Markets Value – 1.8%
- Emerging Markets – 1.8%
- Emerging Markets Small-Cap – 2.4%
- One-Year Fixed Income – 10%
- Two-Year Global Fixed Income – 10%
- Five-Year Government Income Index – 10%
- Five-Year Global Fixed Income Index – 10%
There are several asset classes in the recommended DFA portfolio that are hard to replicate using ETFs. As the number of ETFs expand, we should find it easier to match DFA recommendations.
Photograph: Warrior in the hills over looking Ollantaytambo, Peru.
The Monday edition of the Oregonian published Paul Krugman’s article, “We’ve been partying like it’s 1929 again.” Here is a reference to the entire article.
http://economistsview.typepad.com/economistsview/2008/03/paul-krugman-pa.html
As passive investors, what do we do with this information? Holding more than 1% of the portfolio in cash is not the worst idea. Reducing exposure to growth stocks is another prudent tack. Although I have not done so with the AA-Mosaic Portfolio, a tactical move would be to increase the percentage in large-cap value asset class. Whatever moves one might take, be prepared for a rough ride over the next 12 to 18 months.
The “Special Projects” portfolio is one of seven or eight passive portfolios I watch over. What is unusual about this portfolio is the cash it carries as the money will be needed for “special projects,” hence the name of the portfolio. Despite the high cash level, the portfolio has done quite well since the early 2000s due in large part because of the flat market over this long period.
Even with one-third of the portfolio in cash, it managed to outperform the VTSMX benchmark by approximately 4 percentage points. What is not so unusual is the low risk involved, and that is due to all the cash in the account. This portfolio has a sigma percentage that is well below 10% for all periods. Since inception, the sigma value is approximately 7%, an extremely low value. With an alpha value of 10.3%, the Reward/Risk ratio is an unusually high 1.48. Ratio values over one are rare indeed. In all my active investing days, I have never been able to match this high Reward/Risk ratio.
Lowell Herr
Photograph: Parthenon, with a crane or two removed. If you look carefully, you will see scaffolding through the pillars on the left side of the building. Athens, Greece
