Setting goals for a portfolio tends to focus the mind when putting together an array of investment instruments. The following goals were set when these ETFs and individual stocks were compiled to form the following portfolio.
- The projected return for the portfolio would exceed that projected for the S&P 500 by 100 basis points.
- The projected Return/Risk ratio will exceed 0.60.
- ETFs and individual stocks will have low correlations resulting in the Diversification Metric (DM) exceeding 40%.
- The Portfolio Autocorrelation (PA) will be well below 20%.
- The portfolio is simple and easy to maintain.
- Individual stocks carry a low beta.
- The portfolio will include a few "Piotroski" stocks.
How well do these nine holdings meet the above goals? In the following analysis the S&P 500 is projected to return 7.0% annually over the next six to 12 months and this portfolio is projected to return over 12.6%. That certainly satisfies goal #1. The Return/Risk ratio is 0.67 or well above the goal of 0.60, thus meeting the second goal.
Scrolling down the page one finds the percentages for DM and PA. The diversification is as high as it is due in large part to selecting low beta stocks [Abbott (NYSE:ABT) and Procter & Gamble (NYSE:PG)] and isolating low beta "Piotroski High F-Score" stocks. PFIN currently holds an F-Score rating of nine, the highest, while GAI has a rating of eight. These Piotroski stocks are held in the portfolio so long as they maintain a rating of seven or higher.
The one negative of this portfolio is the projected high standard deviation. This is not a low volatility portfolio so one might want to introduce a portfolio collar such as the ITA Risk Reduction model. Even though the beta for this portfolio is low (0.77), the volatility is high. The two Piotroski stocks bear responsibility for this apparent contradiction.
What about historical performance? The following portfolio topped the S&P 500 by over 10% annually. Keep in mind that the S&P 500 is a poor benchmark for most portfolios and that is certainly the case for this set of core ETFs and individual stocks.
Correlation Matrix: Goal three is to put a portfolio together so that the combination results in low correlations among the holdings. Looking down the Portfolio column, no holding carries a correlation above 77%. Most portfolios have a few holdings with 90% or higher. Further, we accomplish a low correlation among the assets with no bonds although [[PCY]], an emerging markets sovereign debt holding, behaves much like a bond ETF. The 15% allocation to the TLT Treasury also falls into the same general area as a bond holding.
This simple portfolio of five basic ETFs and four stocks meets all the requirements laid out in steps 1 through 7.