Marvin Appel's One-Decision ETF Portfolio

There is a post on Seeking Alpha about the portfolio put forth by Marvin Appel in his book. I touched on this once before.

The portfolio calls for S&P 500 20% using (SPY) or (IVV), REITs 20% (ICF), Small Cap Value 10% (IWN), Investment Grade Bonds 30% (AGG), and Cash 30%. The ticker symbols are the ones suggested in the SA post.

Clearly, as with any type of all weather concept, there are gaps but there are positives too. As some of the comments on the SA post note there is no foreign exposure and no natural resource exposure. I have not read the book but the post gives me the impression than these segments of the market are covered elsewhere in the book than from this one excerpt.

A positive is the recognition that small cap value is an important asset class and clearly anyone could implement this and rebalance it. I wonder if the large reliance on REITs because of how they have performed in recent times might be a mistake going forward. I think 20% in something this narrow is a lot. It is much more exposure than I have ever thought about using and as some readers have pointed out recently, REITs are looking pricey by most historical measures.

The yield of this mix is 1.95% (per Morningstar) which is not that high given only 30% is in stocks (here I am excluding the REITs). I am not sure if that number takes in the yield from cash or not. If not, assuming 5% on the $30,000 the overall yield would then go to 3.45%. Again, only 30% is in regular equities so the yield strikes me a low. Morningstar also says the mix has 55% in financials which if correct (and it may not be) is very high, and so is underweight everything else.

Generally I think simple is better but I am wary of too simple. None of us can know what will become of things like social security or Medicare (and I concede nothing bad may happen here). Will we have some sort of economic collapse in the US? Or will the next big boom allow the country to grow out of all the various deficits and short comings? Certainly this is not impossible.

These things are beyond our control. So it makes sense to focus on what is in your control -- which is your savings rate and taking an active role in the management of your portfolio (here this can mean doing it yourself or hiring someone).

From what I can tell, this mix is not forward looking; it appears to be based on how these asset classes have done in the past. I would not be willing to bet the future of my financial security solely on a strategy that has worked well in the past. The belief in a more proactive approach might be more of a philosophical thing, but markets all evolve. I think history is important to understand and incorporate into what is hopefully a forward looking analysis.

Comments

[David Jackson:]

You wrote: <em>From what I can tell, this mix is not forward looking; it appears to be based on how these assets classes have done in the past. I would not be willing to bet the future of my financial security solely on a strategy that has worked well in the past. The belief in a more proactive approach might be more of a philosophical thing but markets all evolve. I think history is important to understand and incorporate into what is hopefully a forward looking analysis.</em>

Roger, this is the best paragraph you've ever written! You put your finger on the reason to be cautious about back-testing asset classes: the world has changed! The Soviet Union is no more, China is totally different, India is growing rapidly, Turkey might join the EU... So judging emerging markets, for example, based on historical data is exactly that: backward looking.

2006 Dec 11 02:55 AM

[Roger Nusbaum:]

Thank you David. It'd be great if we <em>could</em... manage in the rear view mirror.

2006 Dec 11 09:35 AM

[Paul Meisel:]

I agree that history is not always a valid guide to the future -- but in some cases it is the best one we have, so it makes sense to use it for some input, appropriately modified with other insights you may have.

And I absolutely agree with the paragraph about "things we can control", except it misses one underlying point -- the appeal of these types of portfolios are to people that have ALREADY DECIDED that they are not going to hire an asset manager, and they are not going to spend 8 or 10 hours a week looking at their investment results. Many of these people, with mid and high six figure portfolios, don't want to spend more than 10 or 20 hours a year.

A predetermined decision not to spend much time on investment analysis changes the game -- but that is reality for many investors. Of course, asset managers and investment authors will try to convince these people to spend more of their resources on managing their investments, whether it be through asset management fees, the purchase of a book, magazine, or newsletter, or what have you -- that is the way of our world. But I think there is some value in recognizing some simple strategies for "no time, no study" investing for those people who choose to do it, regardless of how much we may disagree with the correctness of the approach.

2006 Dec 11 09:46 AM

[Roger Nusbaum:]

I don't think your comment is wrong but mid to high six figures not wanting to spend any time? Yikes.

2006 Dec 11 11:06 AM

[Paul Meisel:]

There are many people who are intimidated by the financial markets -- there are many who have a folk wisdom view that professional market participants are evil speculators who are morally flawed -- there are many who are ignorant about finance are do not want to regularly subject themselves to exposing that ignorance. Just like I tend to avoid the dentist, they avoid dealing with their finances.

It would be wise financially for them to be more involved, but at what psychic pain? People make choices, and the flaw in many economic theories is the assumption of rationality -- or possibly the inability to recognize some intangible psychic utility in apparently irrational behavior.

2006 Dec 11 11:33 AM

[Geoff Consi...:]

Hi all:

In fact, developing a portfolio based on what has been best in the past is proven to be a bad technique. You need forward looking knowledge as Roger states. The Intelliegent Asset Allocator by William Bernstein has some devastating examples.

2006 Dec 11 03:08 PM

[Internet2k4:]

Groucho Marx once wisely said, "I don't want to belong to any Club that would have me as a member." Exactly the situation of the typical six-figure investor looking for professional advice, who has enough to be sought after but not enough to remain an advisor's priority. Once moved to the back of the advisor's filing cabinet, the only way to Alpha is to work hard enough to make the advice redundant anyway. "Hey, that's a good idea, Groucho, let's do it!" With respect to Meisel above, that's not folk wisdom but rather most minor leaguers' hard bought experience.

2006 Dec 12 09:26 AM

[Internet2k4:]

End of conversation, I guess. Happens to me at Xmas parties all the time. Please go on while I refill my punch cup.

2006 Dec 12 09:29 PM

[Alan Young1:]

Hi Roger

I am wondering how you got an annual return of 1.5%. I did a look up and I got data going back, respectively; ICF 5yrs,11 months ; IWN 6 yrs 6 months; AGG 3 yrs 4 mos; IVV 6 yrs, 8mos;

They have 3 yrs, 4 mos in common so the avg annual yield over that time period is , according to my calculations , 11.19%.

What am I missing?

I do not have MorningStar, I simply downloaded the data from Yahoo Finance and ran the numbers.

2006 Dec 20 12:04 PM

[Roger Nusbaum:]

I'm sorry I don't follow. What 1.5% annual return. I say the yield (not return) is 1.95% not 1.5%. I plugged the components into Morning star to get the yield. annual return implies price appreciation and the dividend. I don't think we are talking apples to apples.

2006 Dec 20 05:54 PM