Overall, this portfolio carries too high a risk, even for an aggressive portfolio.  Note the results listed under Historical Data.  Over the last three years this portfolio lost an annual 4.5% and the standard deviation was a wild 22%.  The portfolio is not all that well diversified [DM = 21%] and the asset classes are highly correlated leading to a DM value below our goal of 40% in this market.

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My copy of these works had none of the recording problems discussed by one Amazon reviewer.?????? It could be that individual received a poor copy.?????? If readers are fearful of the pressing of this CD, look for other recordings of these major sonatas as they should be in every classical music collection.?????? I have different versions by different pianists.

I found this review of interest.

“This is a disc you should buy immediately if you don’t have Arrau’s complete Beethoven sonatas set already. Arrau gives truly superb renditions of these three sonatas: the Pathetique is stormy and dramatic in its outer movements and intensely peaceful at the center, his Moonlight sheds a new light on this too often played sonata, but the real prize of the disc is the Appassionata, where Arrau plays with more angriness and drama than anyone I’ve yet heard. Hear how he assaults the chords of the third movement! These three sonatas, especially the last, are Arrau’s territory and it shows in all aspects. You’d best get the whole set but for a good introduction this single disc is indispensable.”

Photograph: Lancaster County – Pennsylvania

A few portfolios managed to show a relative increase when measured against either the ITA Index or VTSMX benchmarks.  New readers to ITA Wealth Management will note that the ITA Index is a customized index individualized to fit the Strategic Asset Allocation plan for each portfolio.  This unique benchmark is only available for portfolios monitored by the TLH spreadsheet.

As you look over the portfolios updated on 06/04/10, which of those nine portfolios do you consider the best performer?  Is it the longest running portfolio with the best IRR, the one with the absolute highest IRR, or the highest SR value?  Or is is some combination of measurements?  Think about it.    

Portfolio Performance: 4 June 2010

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Serious investors take the time and make the effort to know if they are adding alpha or value to the portfolio based on their investment decisions.  If the portfolio lags the benchmark, and this is the case for the vast majority of investors who build their portfolios through the selection of individual stocks, what are some possible reasons for under-performing the benchmark?  We are going to approach this mathematically, so hang on and see this argument through to the end.

Posit that you are using 10 metrics to determine which stock to purchase.  Ten metrics can easily end up with 10 strategies. [I use over 20 metrics to come up with my "Creme List."]  But it does not end there as the statistics of combination come into play.  Granted, not all metrics are of equal importance.  Let’s begin with the problem of combining two metrics from the 10 available for analysis.  How many strategies arise when we combine two of the 10 metrics.

Using the mathematics from the link show above we have the following.

Combinations = n!/[r!*(n - r)!]

where n = number of metrics or strategies.

r = options taken at a time.  Two in this example.

The answer is as follows.

Combinations = 10!/[2!*(10 - 2)!] = 10!/[2!*8!] = 45

Example of 10! = 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10

Using three characteristics or metrics we have the following number of combinations.

Combinations = 10!/[3!*(10 - 3)!] = 10!/[3!*7!] = 120

The complexity quickly ramps up to where it becomes exceedingly difficult for any investor to get their arms around all the variables wrapped up in an individual stock.

Let me quote extensively from William J. Bernstein’s “Investor’s Manifesto” book – beginning on page 40.

“The reason why 90 percent of investors and fund managers cannot pick stocks is simple:  Whenever you buy or sell a stock or bond, there is someone on the oher side of that trade, and that someone most likely has a name like Goldman Sachs, PIMCO, or Warren Buffett.”

“There is even something worse than trading with Buffett, and that is trading with a top executive of the company whose stock you are buying or selling, and who likely knows more about its condition and prospects than even the smartest and best-informed security analyst.  Trading individual stocks is like playing tennis against an invisible opponent; what you don’t realize is that you are volleying with the Williams sisters.“

Other than the very occasional stock we might add to a larger portfolio, we are going to turn stock picking over to those wishing to participate in “the losers game” or the true experts.  For those who do not have a clue as to how well their portfolio is performing with respect to a benchmark, index investing is highly recommended.  Portfolio performance ignorance is no excuse to continue playing the stock picking game.

Photograph:  Boyhood home in Pennsylvania

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Overall, the investment vehicles selected for this portfolio do not enhance the return, risk, and DM values to justify building the more complex portfolio.  Superior portfolios are being created over on the Premium side of this blog, particularly those that go by the title, “New Normal” portfolios.

Scroll down the page to view two more screen shots, one of the correlation matrix, and the second slide showing asset classes that might be ripe for purchase.

The following correlation matrix provides information as to why the DM value comes in at 35% or a tad lower than we prefer.  Under the current market conditions, our goal is to come up with portfolios that show a 40% Diversification Matrix percentage.  Asset classes with a yellow background are highly correlated.  The white background indicates moderate correlation, and the blue background is our clue to low correlated asset classes.

The three asset classes that show promise at this time are REITs (VNQ), Europe (VGK), and Small-Cap International (VINEX).  If the VSS ETF had a four-year track record, we would have used it instead of VINEX.  The logic behind the “Delta Index” and “Conservative Delta Index” is available to Premium subscribers.

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