ITA Wealth Management

As you prepare for 2009, take time to review all the posts on this blog related to asset allocation.  Off on the right-hand side you will find a category so named.  Go back, if you have never done so, and read the very early posts on this subject.  Search for names such as Ibbotson, Brinson, Fama, French, Bernstein, and Hebner.  Keep in mind that when you do such a search, you will also come up with this post as the search engine will find the name in every post.

Do not forget the Golden Rule of Investing, “Invest As Much as You Can As Early As You Can!” Remember the importance of asset allocation.  We have data available over on the Premium Content side of this blog that demonstrates the importance of asset allocation. Moments ago I updated each portfolio and the results are rather amazing.

The spreadsheet used to calculate the IRR values for each portfolio is titled the Thomas/Lalla/Herr spreadsheet, so named after the three authors.  Jim Thomas, of the Seattle area, is the prime architect of the spreadsheet with two of us adding features that expand its use for measuring asset allocation.

Getting back to portfolio performance, here are the results of seven portfolios as measured against Vanguard’s Total Market Index, VTSMX.  The AA-Mosaic Portfolio is outperforming the VTSMX by a whopping 14.3%.  The AEM Portfolio, now nearly two years in operation, is squeaking out a 1.1% victory.  The Gauss Portfolio is outperforming the benchmark by 69.4%.  No, that is not a typo.

The Jane Portfolio, formerly the GLW Portfolio, is 12.3% ahead of the VTSMX benchmark while the Mosaic2 is now leading the benchmark by 18.9%.  This is the one portfolio that was behind the benchmark for several months.  Holding a significant percentage in cash while the marked declined helped this portfolio.  The Scrappy portfolio is the newest portfolio and it is outperforming the benchmark by 33.7%.  Again, this is largely due to holding over 50% in cash.

Note: The above portfolios, for the most part, have not been in existence that long so  the large percentage differences need to be examined in that light.  The numbers will definitely come down over time.  The objective is to retain a lead over the index.  As 2009 progresses, we will see the performance between the VTSMX and the portfolios narrow.

The most significant portfolio I will save for last, and it is the Passive Portfolio (PP).  This portfolio just passed its eighth birthday and it is outperforming the VTSMX benchmark by 2.3%.  This is particularly significant considering the portfolio is not as well diversified as we once thought, now that we have a new tool to measure diversification.  The PP has managed to do better than the total market due to two different tilts.  1) The portfolio is skewed toward smaller cap.  Small-cap stocks tend to outperform large-cap stocks. 2) The portfolio emphasizes value over growth and this tilt paid off over the last eight years.

Premium Content readers have access to the spreadsheets that detail all the transactions.  As I’ve mentioned many times, these portfolios belong to different foundations, individuals, and to our family.  One portfolio no longer being tracked is the Colter Portfolio.  That portfolio also was outperforming the benchmark when I last updated it.  Including Colter, that is eight for eight in outperforming the VTSMX.  We selected the VTSMX as a benchmark over the VFINX, the S&P 500 equivalent, since the VTSMX tends to outperform the VFINX and is therefore a tougher index to beat.  Also, the VTSMX index covers the total market and is a better, but not perfect, benchmark for our portfolios.

So there you have it.  Asset Allocation does work, at least it has for the last eight years from my personal data. Research by Brinson and Ibbotson confirm these conclusions over longer periods.  However, their research does not include as many asset classes as we hold in all the portfolios mentioned above.

The seven portfolios listed above vary in size, were launched at different periods, and have slightly different philosophies.  What do I mean by that?  Several of the portfolios contain only ETFs.  Others are Mosaic in nature in that they contain both stocks and ETFs.  Personally, I think the Mosaic Portfolios have an advantage in that highly selected stocks provide additional diversification, lower the average R^2 value, and reduce risk.

Faced with an uncertain market in 2009, I highly recommend investors take a serious look at asset allocation principles.  Follow the continuing development of the seven portfolios over on the Premium Content side of the blog.  The cost is minor compared to the value received, assuming one sets up a portfolio along the lines of the Mosaic philosophy.

Wishing every one a Merry Christmas.

Lowell Herr

Photograph:  Ice covered tree in our front yard.

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Link to 2008 Photos

Whether or not it is time to reenter the market is a personal call.  Long-term investors never sold their holdings despite the bear market.  Others took tax losses and therefore have available cash to reinvest.  For those who have available cash, when and where to put it to use is a burning question.  The best advice I can give is to tell you what I am doing.

One place to begin is with some technical indicators as exhibited in this link.  The VV Exchange Traded Fund (ETF) is Vanguard’s large-cap blend fund that closely tracks the S&P 500.  If you examine the lower three graphs, RSI, MACD, and CMF are all positive at the time of this writing.  The one remaining negative signal is the 26 and 52-Day EMA combination.  Investors who acted upon the RSI, MACD, and CMF going positive are back in the market.  Those a tad more cautious, and I am among that group, are waiting for the 26-Day Exponential Moving Average (EMA) to move from below to above the 52-Day EMA.  Some investors may even want to wait for the 26-Day EMA to move from below to above the 190-Day EMA or 200-Day EMA.  The longer one waits the less chance there is for a whipsaw to occur.  The trade-off is that one will lose a higher percentage of the potential gain.

Actually, I am a combination investor as I did pick up a few different stocks and ETFs when the RSI and MACD turned positive.  Then I added more when the CMF went positive, and I have a number of limit orders in place as I wait for the fourth signal to turn positive.

Make no mistake, the risks are still high when it comes to investing in equities.  In no way are we clear of the mess left by this administration.  Unemployment will likely continue to rise for at least another six months and we are in for another wave of mortgage foreclosures.  This market still lacks commitment and bad news of any significance will drive it down another 10% to 20%.

Be prepared with your portfolio plan and have it in place.  I’ve been working on laying out plans for several portfolios over on the Premium side. Planning requires one to select asset classes and what percentage to invest in each asset class.  Selecting what ETFs and stocks to use to populate the portfolio is the last step.

Lowell Herr

Link to 2008 photos

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If you want to know where some of your financial bailout dollars are going, click on this link.  Try to keep your blood pressure down as you read this article and remember - it is the season for giving.  The U.S. taxpayer did their part this year for the financial executives as you can read in the Frank Bass & Rita Beamish article.

Unfortunately, our “scoliosis” Congress did not serve us well.  Why did they not require execs to give up large percentages of their salary, all bonuses, and all perks before any bailout money was made available?

Lowell Herr

Snow in Portland, OR

Link to 2008 photos

Yesterday, I mentioned I would show a situation, where a portfolio rich in cash will have a low probability of outperforming the S&P 500 over next few years.  What problems might a cash heavy position pose going forward if we continue with the same asset allocation rather than investing the cash in a variety of equities and bonds. Click on this short “movie” to see what the projected future return is for a cash heavy portfolio.  One thing I failed to mention in the movie is that the asset classes now populating the portfolio are highly correlated.  That is the reason for the low diversification metric percentage.

Keep in mind that the software used to analyze the portfolio is not aware of the second wave of mortgage failures that will occur over the next two to five years.  The software is not cognizant of rising unemployment and the debt left by the Bush administration. As investors, one needs to play the risk game of whether to wait for better news or to rely on the laws of probability and conclude the market will return to the mean.  If there is a reversion to the mean, then it behooves the investor to work toward cash reduction and become fully invested in the market.  How to play this game will be explained in more detail over on the Premium side of the blog.

Lowell Herr

Link to 2008 photos

Photograph: Christmas decorations by neighbor.

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We are snowed in with freezing rain.  That is the condition of Portland for the next few days.  Assuming we do not lose electrical energy, tomorrow I plan to lay out the situation of a portfolio that is holding over 50% on cash.  Readers will see what happens when one is heavily invested in cash, particularly with a market positioned to move higher.  In fact the broad market is beginning to move off the November lows.

The portfolio I will use in my example is one of the seven portfolios tracked over on the Premium Content side of this blog.  While I will explain the problem here, I will pose a solution for Premium readers.

Link to 2008 Photos

Lowell Herr

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Photograph: Image taken off the back porch about an hour ago.

This is my last Christmas CD recommendation for 2008.  As readers know, I am a big fan of anything under the baton of Robert Shaw.  I first heard his Collegiate Choir back in the mid to late 1950s.  At that time, I was taken with the clarity and diction of his singers, a hallmark of Shaw’s musical work.

“Christmas with Robert Shaw” carries on that tradition. The recommendation this week features The Atlanta Symphony Orchestra and Chorus and a few seasonal favorites included on this recording are: Adeste Fideles, Lo How a Rose, Et In Terra Pax, and the Hallelujah Chorus.

Just a reminder to tune into KBPS (http://www.allclassical.org) to hear the Top 100 countdown for 2008.  This will begin the day after Christmas and conclude before we are into 2009.  As web users, you can stream this music through your computer.  Set it up in advance so you are ready to go on December 26th.  When the countdown is complete, I plan to make the latest spreadsheet available and I will again send it into the station.

Lowell Herr

Photograph: Rothenburg, Germany

Link to 2008 Photographs

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As we enter this season of giving, I remind readers to consider a gift to those less fortunate than most who come to this site for financial information.  While there are many charities seeking your help, one unique opportunity is to provide capital to someone so they can begin a business and sustain their family.  One writer, Phil Smith, claims that by helping one person to launch a business, you help an additional 100 people.

MEDA Trust is one place for you to set up your own little endowment fund.  If your charitable contribution is sufficiently large, one can fund an entire business.  Some businesses require only a little over $100 to start.  The largest request is now $70,000.  MEDA now makes it possible for the “lender” to partially fund projects.  If you are a partial lender, you will be paid back the percentage you loan.

Keep in mind that when I say, “paid back,” the money is returned to your account to be reused to fund another business.  If the money is not reused within a specified period, the money will be used by MEDA.

My wife and I are now involved in 67 businesses and we expect to top 100 sometime in 2009 or 2010.  In addition, we are going to help our grandchildren become involved in MEDA Trust businesses this Christmas.  We consider it our responsibility to teach the young what it means to not only receive gifts, but to give as well.

Another program similar to MEDA is Kiva.  Kiva operates on a larger scale and money given to Kiva is not a charitable contribution.  We chose to go with MEDA Trust for two reasons.  1) We know the leadership running MEDA and have the utmost trust in their integrity.  2) We wanted our gifts to be a charitable contribution.

Even though the gifts are charitable contributions, when the businesses begin to payback their loans, the money is returned to the donor account so one can fund new businesses.  The latest information I have is that there is a 3% default rate.  Over the short time we have been involved with MEDA, 27 loans have been paid back and 40 are still active.

I consider this to be a worthwhile program and I highly encourage others to become involved in helping to eliminate poverty in this world.

Lowell Herr

Photograph:  Taken near Harpers Ferry, West Virginia

Click here for 2008 photographs

Friends and family - Here are the photographs of our family and a few more from our 2008 travels.  Click on this link and step through the pictures if interested.

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Jeremy Grantham’s market calls have been well above average and we can only hope he is right as he peers into his 2009 crystal ball. Click on this link to see where he thinks specific areas of the market are heading.  One might conclude he is using Quantext Portfolio Planning software to come up with his projections as there is a high correlation between Grantham’s projections and what I am seeing with QPP.

Lowell Herr

Photograph: Curry condiments

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Link to 2008 Photos

For many years, Grace and I included book and film recommendations with our annual Christmas greeting.  Below are a few suggestions for 2008 that we think are special. This year we are directing friends to this blog site to see what is on the list and by doing so, we are opening up these suggestions to the thousands of readers who stop by for investment information.  We hope you enjoy a few book and film ideas from our 2008 list.

A special feature this year includes photos of the family and a few more pictures from our travels.  Just click on the word, pictures, for the link to the photographs.  Then step through them one at a time.

Books

• (For young adults) “Lock and Key”
• “Twilight” (and New Moon, Eclipse, and Breaking Dawn)
• “The Book Thief”
• “Animal Vegetable Miracle”
• “Alexander, Who Used to Be Rich Last Sunday”
• “If I Had $1,000,000″

For more “adulty” adults - but notice there are some cross-over titles.

• “What is the What” by Dave Eggers
• “A Voyage for Madmen” by Peter Nichols
• “The Book Thief”
• “3 Cups of Tea”
• “Eat Pray Love”
• “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindaur, and Michael LeBoeuf
• “1,000 Recordings to Hear Before You Die” by Tom Moon
• “The Zookeeper’s Wife” by Diane Ackerman
• “The People of The Book”
• “The Adventures of Kavalier and Clay”
• “Animal Vegetable Miracle”
• “Finding Beauty in a Broken World”
• “Kiss My Math” by Danica McKellar
• “Math Doesn’t Suck” by Danica McKellar

Films

• Believe in Me
• Nowhere in Africa
• Joyeux Noel
• The Man Without a Past
• Monsieur Ibrihim
• The Visitor

Lowell Herr

Photograph:  Grace with Woofie