As you know, we use Morningstar to produce our client performance reports. Until now, you needed to remember a separate web address to reach the web portal for a look at your current portfolios. You also needed to store performance reports as you received them for later reference.
No longer. Now, just go to www.portfoliowisdom.com and look at the menu line across the top of the page. At the left is a link directly to the Morningstar web site. From now on, your performance reports will be available there also, archived for your convenience and later reference.
For the life of me, the markets seem to be holding their collective breath. I really do not believe that anyone who really knows what happens behind the scenes is going to say anything on the news. So, I advise you to ignore most of what we are seeing and hearing on CNBC and Bloomberg. I doubt that any market movement is truly attributable to the after-the-fact “causes” and “reasons” they give each day for why the market went up or down.
We continue to be very cautious, currently holding a lot of cash, which we will move gently in to the market between now and year-end, unless one of these fiscal problems explodes.
You may notice some other posts to our web site. I’m creating a free section of the web site called portfolio wisdom to help individual investors who do not have financial advisors. I’m actually going to make available a limited but very useful version of the methodology to anyone who wants to learn from it. So, those posts you see may not apply to you, but if you have friends who need help with their 401k’s or IRA’s, send them our way.
Here are the current 6 asset model portfolio allocations. They will be updated every 4 weeks or so, depending on market behavior. For the sake of consistency, this table will use the same ETF’s as the PortfolioWisdom Mobile App. Be aware that the PortfolioWisdom Mobile App may produce slightly different allocation calculations, because the data updates to the App may not occur at exactly the same time as the data update to this spreadsheet. If you always want the latest allocation calculations for 6, 9, or even 12 asset classes, feel free to subscribe to the PortfolioWisdom Mobile App. Also, be aware that Mr. Beals will sometimes use different ETF’s for his client portfolios or otherwise customize the models to their specific situations. Use the tabs in the embedded spreadsheet to view the allocations for each different model.
Although the news continues to reflect great fear and uncertainty, volatility seems to be gradually diminishing in almost all asset classes (which is a good thing). Each peak of fear in the market is a little lower than the peaks of fear in August, September, and then October. If this trend continues, I expect to be fully allocated back into the model portfolios by the end of the year.
Rebalancing your portfolio means buying and selling shares to bring the asset allocation percentages back in line with the model portfolio you are following. It’s that simple. There are basically two big money-makers (or money savers) that we can put to work for us using this approach.
As the market fluctuates, some assets classes may rise while others fall. Most of the time, there is a lot of this “back and forth” movement which can make us money, depending on how much it costs us to trade a low number of shares. That’s why the clients of my firm use discount brokers, and why I recommend you do as well. Keep the transaction costs low enough that you can benefit from the weekly or monthly market fluctuations. If any high net worth or high income readers want to discuss the tax implications of this approach, feel free to contact me.
As different asset classes come into favor, become the hot performers (think stocks in 1998-1999, or gold in 2009-2010), and then lose their luster, people who do not have an investment plan or discipline get sucked into the losers game of chasing what has done well for the last 4-5 years… over and over. Our model portfolios adjust the target allocations to the different asset classes, like stocks, bonds, real assets and cash, based on mathematical equations I developed. My algorithms take a look at the behavior of each asset class and of the whole portfolio, and reduce risk when the market begins to stampede. This forces us to manage risk (avoid big losses), buy low and sell high, which how money is made in the long run.
Personal Observation: So much research has shown that almost all stock pickers, portfolio managers, mutual fund pickers, or even separate account management pickers, fail to consistently out-perform their target indexes after all the costs paid by the customer. No matter how great a stock picker is… when all stocks are going down, her picks probably will also. If you have too much allocated to stocks, whatever the reason, your portfolio will take a big hit, and you may have to completely change your retirement plans. The key to portfolio management, in my experience, is in the asset allocation decision… not the stock picking decision.
How often do we rebalance? Good question. The answer is “When appropriate”. Most people tell you to rebalance quarterly or annually. However, I recommend rebalancing when an asset class is off-target by more than, say, 0.5%. Most of the time, rebalancing monthly can work very well, but in volatile times, it makes sense to rebalance more often.
I plan to post model portfolio numbers at the end of the week every one to four weeks or so. You can decide, based on your own portfolio and your own trading costs, when you should rebalance. My theoretical backtests are based on weekly rebalancing, but don’t include estimates for trading costs and taxes. The disclaimers are listed with the backtest results, for your review.
This step is simple, but it represents the big plunge. Since you have already decided which portfolio model best suits you, simply check for the model portfolio’s latest target allocations, and buy the appropriate number of shares to meet the target allocations. We publish them about once each week, usually on a Friday morning.
I’ve already covered the reasons I recommend using a discount broker, but here’s a quick review. Our methodology is based on broad diversification and rebalancing frequently when the markets move away from the model’s target asset allocations. Unlike the rebalancing frequency recommended or offered by traditional brokers and advisors, this might mean rebalancing monthly, or even weekly. So, trading costs are a huge issue and must be minimized to gain the benefit of our approach.
Many of my firm’s clients use Interactive Brokers, Charles Schwab, or Scottrade. There are other fine discount brokerages out there, and you can find comparisons and evaluations of them elsewhere. You would do well to research their commissions and fees to find which one best suits you. Firms like Schwab, Scottrade, Fidelity, Interactive Brokers, and others, even have Exchange Traded Funds (ETF’s) that are commission free for their clients. Find out which firm has the most commission-free ETF’s that correspond to the ones we use in our portfolio, and you may have found your discount broker! Don’t forget financial strength and stability, customer service, small-print fees, and other criteria for your evaluation! Do your homework.
After selecting the Custodian of your choice, open and fund the account, and you’re ready for the next step!
For your 401k, you may have investment selections that closely correspond to the asset classes represented by the ETF’s I have chosen. If so, then you can simply match your choices to the ETF’s I use, and follow the percentage allocations in the model portfolio most suitable to your situation. If your 401k choices lack one of these asset classes, please let me know what all of your choices are. It may take me a week, but I may be able make a couple of suggestions.
Also, if there is a large group of readers who have the same plan, let me know who you are and what your plan offers.
OK, for you do-it-yourselfers or those allocating your own 401k’s, this is the first step in constructing your portfolio using our tools. You need to develop a feel for your risk tolerance, or your ability to handle the financial ups and downs the market will produce in your portfolio. Most brokers, advisors, and financial web sites have free online tools or questionnaires to help you assess your own risk tolerance, based on your investment time horizon and your financial situation. Feel free to look around at any of those free online tools.
For our purposes, once you have availed yourself of those other options, we want you to know how big a drop in your portfolio you can handle before you feel pressured to make some change. Making bad decisions under the pressure of losses is probably the second biggest reason people blow up their retirement accounts, so this risk assessment is important. The biggest reason people blow up their retirement accounts, in my view, is greedily or naively allocating too much of their portfolio to a hot stock, sector, mutual fund or asset class that has really been doing well for 2-3 years and is catching big news headlines as a result.
I’ll provide theoretical backtests that will give you some idea of how our six portfolio models might have done over a 5-6 year period. Note that the time frame of these backtests is from 2004 through late 2011. If you want access to backtests and charts current as of the prior week, feel free to subscribe to the PortfolioWisdom Mobile App. Please select the model portfolio (1-6) that best suits you based on the overall behavior of that portfolio over time (not only looking at which one ended with the most money). Look at how much each portfolio model lost during the crash of 2008 and during other market downturns. Look at how much each model portfolio lagged the stock market, when it was going straight up! Decide which model is the one that best balances your family’s desire to avoid big losses with your family’s desire to see nice gains when the market is rising. You will see that portfolio model 1 is the most conservative with the smallest drawdowns (and gains) and portfolio model 6 is the most aggressive with the biggest overall gains (and drawdowns). Most people would not be able to sleep very well at night if their entire retirement account was down 35%, as the aggressive portfolio might have been during the crash (stocks were down 50%). Update 1/13/2014 Models 1 and 2 have been discontinued because they were too conservative. Based on subscriber requests, a model 7 with no bonds was added (more aggressive than aggressive growth). So, for risk tolerance purposes, choose between models 4-6 below. So, look carefully at the portfolio drawdowns shown in the charts and the spreadsheet below before choosing your risk tolerance and portfolio model.
If you are a 401k investor, you can return to the previous page showing the asset allocation matrix.
If you are curious about our mobile app and or managing your own account, then go On to Step 2…
“OK”, you say, “How do I do this?” Well, here are the basic steps… each with a link to a more detailed explanation of who, what, how, and when.
Before we start, keep in mind that portfolio wisdom.com does not know about your individual situation. You may need to modify this approach based on your current life situation. If you do not have sufficient cash in accessible savings for emergencies, you may need to choose a more conservative model, or keep ira funds out of the markets altogether. Please read the disclaimers about our models. Over time, they have worked well for others and should work well for you, but, past performance is no guarantee of future results. Diversification is no guarantee of profits. Also, markets change… these models may work better or worse over the next few years than they did in the last five years.
I believe in these models and use them, but they are for your general information and not to be construed as investment advice specific to you. OK? Here goes…
Step One – Choose your portfolio model by assessing your risk tolerance.
Step Two – Choose your investment vehicles if they are not already chosen (as in your 401k).
Step Three – Choose a Custodian (discount broker) if one has not already been chosen, open, and fund your account.
Step Four – Invest your money according to your chosen (and modified) model … either all at once or gradually … your choice.
Step Six – Rebalance as needed (huh?) … Don’t worry I’ll explain 🙂 .