We have been measuring a number of different stock selections recommended by a number of different pundits. These selections have been measured against a portfolio of dividend bearing ETF's and we have seen a variety of results.
Our major thesis has been that asset allocation is key and that doesn't just mean allocating assets across US companies -- it includes worldwide equities, real estate and commodities.
|Fund in this portfolio||Asset Category|
|GLD (SPDR Gold Shares)||Commodity|
|DBC (PowerShares DB Commodity Index Tracking)||Commodity|
|CMG (Chipotle Mexican Grill, Inc.)||US Equity|
|SBUX (Starbucks Corp.)||US Equity|
|WMT (WalMart)||US Equity|
|JNJ (Johnson Johnson)||US Equity|
|DIS (Disney)||US Equity|
|NLY (Annaly Capital Management)||Real Estate|
|TEF (Telefonica SA ADRg)||International Equity|
|PTR (PetroChina Co. Ltd. (NYSE:ADS)||Emerging Market Equity|
- GLD -- a proxy for gold to provide a hedge for troubled times, the permanent portfolio has used this very effectively
- DBC to give access to a broad basket of commodities that are going to be a feature of our world with inflation and growing competition for resources
- Chipotle is part of the MacDonalds family that is seeing growth and popular with its approach to food selection
- Starbucks has worldwide presence and is woven into life
- WalMart, Johnson and Johnson and Disney are long term high quality stocks
- Annaly Capital Management gives access to real estate
- Telefonica and PetroChina give access to long term international markets
It's important to note that these are not particular recommendations. The purpose of this article is to investigate the impact of selecting long term equities with a focus on asset allocation. Each one of these could be replaced with others you prefer in a category. There is also room to increase the amount of international and emerging market exposure. However, US equities have known oversight and rules which some other markets may not.
We will compare this with our ETF dividend portfolio benchmark:
|Asset||Fund in this portfolio|
|REAL ESTATE||ICF (iShares Cohen & Steers Realty Majors)|
|FIXED INCOME||TIP (iShares Barclays TIPS Bond)|
|Emerging Market||VWO (Vanguard Emerging Markets Stock ETF)|
|US EQUITY||DVY (iShares Dow Jones Select Dividend Index)|
|US EQUITY||VIG (Vanguard Dividend Appreciation ETF)|
|INTERNATIONAL EQUITY||IDV (iShares Dow Jones Intl Select Div Idx)|
|High Yield Bond||HYG (iShares iBoxx $ High Yield Corporate Bd)|
|INTERNATIONAL BONDS||EMB (iShares JPMorgan USD Emerg Markets Bond)|
- Asset Allocated Stock Selections -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
|Portfolio/Fund Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Retirement Income ETFs Tactical Asset Allocation Moderate||8%||68%||11%||81%||10%||68%|
|Asset Allocated Stock Selections||37%||237%||17%||71%|
|Retirement Income ETFs Strategic Asset Allocation Moderate||9%||52%||4%||18%||4%||13%|
First we note that the stock selection doesn't have a long history and that may be a reason to pause -- but the point is not the individual stocks but the impact of asset allocation. Secondly, we ignore the one year returns, although good, as we are looking for long term returns. We note that the three year returns are good but the Sharpe ratio is lower than the ETF portfolio with tactical asset allocation indicating that there is more risk associated with the portfolio.
Three Month Chart One Year Chart Three Year Chart Five Year Chart
It's not clear that one wouldn't be better selecting a diversified ETF portfolio that would give you similar results. However, this allows you to select the stocks you know and in which you have confidence and, perhaps, see better returns. This will be an interesting portfolio to track to see how it does over the coming quarters.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.