One Basic Portfolio, 5 ETFs

I previously detailed some basic portfolios as well as trading ideas. In an effort to be more user friendly, I will be updating the portfolios and trading strategies monthly. The first portfolio to be featured for October is a 'basic portfolio' of 5 ETFs: BND (Vanguard Total Bond Market), DBC (DB Commodity Index Tracking Fund), VEU (Vanguard FTSE All-World ex-US), VNQ (Vanguard's US REITS Vipers) and VTI (Vanguard Total US Stock Market).

One could take multiple approaches to the portfolio, from buying and holding to actively managing it; or an investor could use a combination of different approaches. Listed below are the month end results for September of the 5 ETFs listed above. One could purchase the top 1,2, or 3 performing ETFs based on momentum as judged by the 3-6-12 returns or just the 6 month returns. In this case, that would indicate a purchase of VEU, VNQ, and VTI (3-6-12 strategy), and the same VEU, VTI, and VNQ (based on 6 month returns). Another twist an investor could add would be to purchase the underlying securities based on momentum only if they are also trading above their 200 day moving average. At the end of August, all of the securities listed were above their 200 day simply moving average.

Many of the strategies listed here were inspired in part by Mebane Faber, author of The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. For an even better explanation of some of the strategies, I recommend the book. Also, he has a new project which allows users to replicate the best performing hedge funds, AlphaClone. The returns speak for themselves.

Ticker	Company	Free Trend Analysis	Perform-ance (Quarter)	Half Year	Year	Sum	200-Day SMA	Price
BND	Vanguard Total Bond Market ETF	Here	2.74%	3.92%	7.88%	14.54%	3.18%	79.5
DBC	PowerShares DB Commodity Index Tracking	Here	-2.09%	10.58%	-33.87%	-25.38%	3.52%	22.06
VEU	Vanguard FTSE All-World ex-US ETF	Here	18.19%	49.43%	4.42%	72.04%	27.90%	43.2
VNQ	Vanguard REIT Index ETF	Here	32.68%	73.36%	-27.89%	78.15%	31.41%	41.45
VTI	Vanguard Total Stock Market ETF	Here	15.67%	33.37%	-6.39%	42.65%	19.64%	53.59

No disclosures

Comments

[Scared Stiff:]

Are you sure you want to invest like Harvard? Losing $11 Billion can be a tough pill for anyone to swallow.

Oct 01 10:35 AM

[Scott's Inv...:]

Hi - If you combine the allocations with a moving average system (Faber used the 10 month), the portfolio has not had a losing year since 1974, which includes 2008. Thus, the subtitle of the book may be a little misleading since you're not exactly investing like the endowments, but are taking some allocation ideas from them. I would suggest checking out the book if you have not done so to gain a deeper perspective. Thanks for the comment -

Oct 01 11:54 AM

[Geoffrey Lordi:]

As someone who builds non correlated models for a living, the difficulty with these low count packages is reconciling the fact that VTI and VEU, even over ~2.5 years, trade as a team. Sure: one's outperformed the other at times, and active trading could've benefited from this. But this kind of "domestic" vs "international" diversification is a misnomer: when the correlations are in the neighborhood of 97%+, that's not a diversified strategy.

DBC got you a little out of the norm (+) prior to May '08; VNQ got you a little out (-) through the same date. But a portfolio with so few elements really can't diversify into enough classes that would've generated positive returns when the majority (not all) of investable classes neared an r^2 of 1.

Oct 01 09:56 PM

[JG Savoldi:]

We support this idea but we use specific predictions from our model in order to build a global macro directional product--the "BAM Model Portfolio."

We especially like to exploit the occasional mis-pricing that occurs coincident with low $VIX readings.

We're long the $FAZ, $DUG, $FXP and a few others that provide exposure to currencies and other commodities.

We welcome you to join us on twitter to watch our real-time predictions. twitter.com/baminvestor

Oct 02 09:11 AM

[Scott's Inv...:]

Geoffrey - Those are valid points. This type of portfolio is geared towards smaller account which may not either have access to certain types of products only available to institutions or which do not have the capital to justify holding more positions. A couple of points:

1 - During a crisis, all correlations gravitate towards 1, which is what we have seen over the past year +; however, employing a moving average system *may* allow an investor to avoid significant drawdowns.

2 - A momentum based system, as explained, will offer different returns then just buying and holding all 5.

3 - I'll try to put together a portfolio of 5 liquid ETFs or mutual funds that offer lower correlation then the 5 mentioned (again, we're picking 5 here to keep it realistic for smaller retail accounts). Sounds like a fun challenge!

Oct 02 10:53 AM

[Kinabalu:]

"he has a new project which allows users to replicate the best performing hedge funds, AlphaClone. The returns speak for themselves."

When it comes to hedge funds the last thing you want to do is accept return figures. Most mutual funds have adopted the GIPS (Global Investment Performance Standards) standards for investment performance calculations. Hedge funds, with their limited required disclosures, still calculate performance in their own subjective, and often misleading, ways. There are no true performance calculations for the hedge fund universe and calculations for individual funds are questionable, as evidenced by the many after the fact lawsuits by investors against principals.

Oct 02 11:49 AM

[Scott's Inv...:]

Kinabalu - I think you may be confusing holding individual stocks vs. tracking some type of hedge fund index. Alphaclone uses the reported stock holdings of hedge funds to compose stock portfolios. Thus, you are not tracking an index but holding actual stocks using quarterly filings of various hedge funds. There are limitations with this system but the historical performances w/ lower volatility speak for themselves. Of course, with anything, past performance won't guarantee future success. I would, however, suggest checking out their site if you are interested in understanding the product and strategy more thoroughly.

Oct 02 12:06 PM

[Kinabalu:]

Sorry if I wasn't clear. My observation is that hedge fund returns have been greatly exagerated by improper calculations. Investors may be attracted to products like Alphaclone because they read about great hedge fund returns. However there are no properly calculated returns for the hedge fund universe and very few individual hedge funds use proper calculation methods for the returns they promote.

I would endorse your comments about ETFs but when they are extended to hedge funds I have to object. The fact of the matter is that hedge fund marketers are far more adept at their jobs than hedge fund managers.


On Oct 02 12:06 PM Scott's Investments wrote:

> Kinabalu - I think you may be confusing holding individual stocks
> vs. tracking some type of hedge fund index. Alphaclone uses the reported
> stock holdings of hedge funds to compose stock portfolios. Thus,
> you are not tracking an index but holding actual stocks using quarterly
> filings of various hedge funds. There are limitations with this system
> but the historical performances w/ lower volatility speak for themselves.
> Of course, with anything, past performance won't guarantee future
> success. I would, however, suggest checking out their site if you
> are interested in understanding the product and strategy more thoroughly.

Oct 02 05:19 PM

[Scott's Inv...:]

I would tend to agree that hedge fund returns are shrouded in ambiguity, but I think you need to look at Alphaclone's historical returns - they are calculating returns based on actual stock holding performance (not hedge fund performance). The stocks are determined by representation in various hedge funds.

Oct 02 05:34 PM