ITA Wealth Management

On November 1, 2008, the Gauss Portfolio was launched.  To follow the construction and management of this portfolio, subscribe to Premium Content.  Readers will also find a spreadsheet available for monitoring their own portfolio.

The portfolio is totally in cash at this point, but that will change over the next few months as we slowly invest in a variety of ETFs.

Lowell Herr

Photograph: Benedictine Abbey at Melk.  Unfortunately, it was a very cloudy day so the colors are muted.

Asset Allocation refers to the diversification or the allocation of investments within a portfolio across asset classes or market sectors.  I favor diversification across a minimum of 10 asset classes vs. using market sectors as I think it provides for superior diversification.  For example, one could allocate various percentages of their assets to each of the following asset classes: Large-Cap Growth, Mid-Cap Growth, Small-Cap Growth, Large-Cap Value, Mid-Cap Value, Small-Cap Value, REITs, International (developed) Markets, Emerging Markets, Bonds, Commodities, etc.  Academic studies show that, on average, over 90 percent of the variability of a portfolio’s performance over time is solely attributable to the portfolio’s asset allocation.  This comes out of the Brinson et. al. papers.  That material has been moved over to the Premium Content side of this blog.  Further, on average about 100% of the level of a portfolio’s total return is due to asset allocation.  These results come from the Ibbotson & Kaplan research.  Different research papers answer different questions. Therefore, the asset allocation decision is by far the most important in the financial planning process and it should be the first plank in your portfolio construction plan.  Here at ITA Wealth Management, we consider asset allocation to be fundamental in the investing process.

Lowell Herr

Photograph:  Image is found just above the entrance to the Benedictine Abbey at Melk, Germany

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This video parody on the housing bubble says it all.  View and enjoy.

http://www.youtube.com/watch?v=bNmcf4Y3lGM&eurl=http://www.bubbleinfo.com/

Photograph: Stadium where Hitler held his rallies. Nuremberg, Germany

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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I thought it appropriate to include Schubert’s statue with this Sunday’s classical music recommendation.  The recording (Schubert: Greatest Hits) I am recommending includes the allegro from the “Unfinished” (Symphony #8), Ave Maria, Serenade, Rosamunde Overture, and many more selections.  If you are not a fan of Schubert, this recording will help convert you.  I have 1.7 days of Schubert’s music and plan to add more as he is the greatest tune writer of all time.

No one seems to be sure why Schubert did not finish the 8th symphony.  Speculation has it that he was writing the early movements of the 8th when he contacted syphillis, making his return to this work odious.

After listening to part of the 8th on this recording, you will likely want to purchase the “complete” work.  While there are many recordings of the “Unfinished” (and I have more than one), I think classical listeners will enjoy this Sony recording even though it is only a small portion of what Schubert wrote.

Check other recordings of the “Unfinished” and read reviews of the recordings.

Photograph:  Image was captured in Vienna.

Additional portfolio analysis is coming to Premium Content subscribers.  To learn a more about this, read the page, New Service for Premium Content Readers.

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Photograph: Bicycles and canals everywhere in Amsterdam, Holland.  Note the sign indicating a child needs to hold the hand of an adult.  This is to prevent the child from dwadling in front of a fast moving bicycle.

Walking through the technical indicators for each of the “Big Six” ETFs, I see where all are positive with exception of VOT.  This Mid-Cap Growth ETF is not quite showing a positive CMF.  The RSI and MACD graphs are positive for all the basic equity ETFs.

If one is still skittish about this market, then there is one additional indicator to wait on and that is the 25-Day and 50-Day EMAs you see in the top graph when using the link provided above.  Don’t purchase the ETF or stock until the 25-Day Exponential Moving Average (EMA) moves from below to above the 50-Day EMA.  That would be the final indicator to wait on.  However, if you are beginning to have confidence in the market, then rely on the RSI, MACD, and CMF graphs.  Those are showing positive signs for the “Big Six” equity ETFs.

Photograph:  Near main transportation center in downtown Amsterdam, Holland

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.

Premium Content subscriptions available for $6.99 per month.

Photograph:  Canal boat in Amsterdam, Holland.

Nearly six years have passed since the initial debate between two individuals over whether a portfolio based on individual stock selection can double in five years.  To attain this performance level a portfolio must generate an annual return of 14.9%.  For several weeks the debate was mainly between the developer of a software program Take $tock and a college professor from Michigan.

The discussion/debate went something like this.  The professor argued how difficult it is to outperform an index such as the S&P 500 while the software developer contended that following his program, an investor could double their money in five years.  Those are two very different standards as the S&P 500 does not have a historical record of doubling in five years.  To double in five years requires an annualized return of 14.9% and the long-term performance of the market is  closer to 9%.  The current bear market has now lowered that percentage.  So we had two positions.  1) Follow the guidelines of Take $tock and you can double your money in five years.  2) It is difficult to outperform the S&P 500 let alone double your money in five years.

How to settle the debate was a challenge I was interested in so I offered to invest a non-trivial amount of money using the principles laid out by T$.  If the portfolio did not double in five years, the software developer would pay me $100 and if it did double, I would pay him $100.  This is a wager I was interested in losing as I knew I could well afford the $100 if the portfolio doubled in five years.

One needs to know a little about the software program, Take $tock.  The software will rank a stock using three standards, Quality, Mood, and Price.  1) Many parameters are involved in determining Quality and I will not go into them.  Suffice it to say, the program does identify high quality stocks.  2) A “mood indicator” identifies if the current P/E near its historical P/E value.  3) Price is the third factor and the software uses a detailed calculation to see if the stock is properly priced.

These three indicators are color coded green, yellow, and red.  An “all green” stock is preferred.  Note:  When one is using the program, it is possible to override some of the parameters.  In this wager, the agreement was to not do so unless special permission was granted by the software developer.  The argument was - follow the conservative guidelines of T$ to see how well it performs over a five-year period.

The wager agreement permitted purchase of stocks that only had an “all green” rating and to sell the stock if the Quality Rating dropped into the red zone.  Otherwise, I was to hold the stock even if its Quality Rating moved into the yellow zone.  The portfolio was fully populated on October 31, 2003 so that became the starting date.  The wager ended on October 31, 2008.

The data for all transactions is still available on Bivio. I don’t know how long this information will be available.

Did the ICLWager Portfolio double in five years?  Not even close as it managed an IRR value of 1.9% while the VTSMX benchmark ended with an IRR of 0.7%.  The portfolio did outperform an appropriate benchmark, a rather remarkable result considering most mutual fund managers are not able to do this in any give year let alone a five-year run.  However, the portfolio fell short of the wager goal, that of doubling in five years.  If anyone has questions, I will try to answer then for you.

Photograph:  Sculpture in Amsterdam, Holland

We just returned from an extended vacation in Europe so expect to see images from that part of the world over the next several weeks.  The stock market was convulsing while we were absent, so it was a good time to be away from the computer lest one begin to make poor decisions.

Over the next several weeks I will be updating portfolios on the Premium Content side of the blog. It will be interesting to see how the different portfolios are performing as I was hands-off during this erratic period. It appears as if we may have seen the bottom of the market as the volatility is somewhat reduced.  With the election now over, perhaps we will return to what one may classify as a normal market.

Photograph:  One of the few remaining windmills in Amsterdam, Holland.