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As world wide deleveraging process is in full swing, investors are facing a big dilemma for their retirement investments including 401K investments, IRA investments or taxable investments. On one hand, companies with high growth perspective (such as small companies) are expected to slow down in their earnings growth. With current not too cheap stock market valuation, high growth stocks are losing their appeal in the coming decade. On the other hand, bonds are now offering meager yields. The two traditional portfolio growth assets will not only not do well, they will also subject investors to highly volatile portfolio capital swing.

Companies that pay steady dividends usually have solid cash flows and wide moats in their business. In equity investing, these high quality companies are the only place to be in the coming decade, as advocated by great investors Bill Gross, Jeremy Grantham and others.

We maintain an investment plan called Retirement Income ETFs that consists of 36 funds. These funds enable investors to gain exposure to 5 major assets: US Equity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income.

Asset Class Ticker Name
LARGE BLEND VIG Vanguard Dividend Appreciation ETF
LARGE VALUE DVY iShares Dow Jones Select Dividend Index
MID-CAP VALUE PEY PowerShares HighYield Dividend Achievers
MISCELLANEOUS SECTOR PFF iShares S&P U.S. Preferred Stock Index
Foreign Large Value PID PowerShares Intl Dividend Achievers
Foreign Large Value IDV iShares Dow Jones Intl Select Div Idx
REAL ESTATE IYR iShares Dow Jones US Real Estate
REAL ESTATE ICF iShares Cohen & Steers Realty Majors
Global Real Estate RWX SPDR DJ Wilshire Intl Real Estate
High Yield Bond HYG iShares iBoxx $ High Yield Corporate Bd
Long-Term Bond LQD iShares iBoxx $ Invest Grade Corp Bond
Long-Term Bond VCLT Vanguard Long-Term Corp Bond Idx ETF
Intermediate-Term Bond CIU iShares Barclays Intermediate Credit Bd
Intermediate-Term Bond CORP PIMCO Investment Grade Corp Bd Index ETF
Short-Term Bond CSJ iShares Barclays 1-3 Year Credit Bond
Short-Term Bond VCSH Vanguard Short-Term Corp Bd Idx ETF
Intermediate Government IEI iShares Barclays 3-7 Year Treasury Bond
LONG GOVERNMENT IEF iShares Barclays 7-10 Year Treasury
SHORT GOVERNMENT SHY iShares Barclays 1-3 Year Treasury Bond
LONG GOVERNMENT TLT iShares Barclays 20+ Year Treas Bond
Inflation-Protected Bond TIP iShares Barclays TIPS Bond
Intermediate-Term Bond MBB iShares Barclays MBS Bond
Muni National Long MUB iShares S&P National Municipal Bond
Muni National Short SHM SPDR Lehman Short Term Municipal Bond
WORLD BOND BWX SPDR Lehman Intl Treasury Bond
Emerging Markets Bond EMB iShares JPMorgan USD Emerg Markets Bond
Emerging Markets Bond PCY PowerShares Emerging Mkts Sovereign Debt
LARGE VALUE VYM Vanguard High Dividend Yield Indx ETF
LARGE VALUE FVD First Trust Value Line Dividend Index
WORLD BOND WIP SPDR DB Intl Govt Infl-Protected Bond
DIVERSIFIED EMERGING MKTS DEM WisdomTree Emerging Markets Equity Inc
Equity Energy AMJ JPMorgan Alerian MLP Index ETN

More detailed breakdown is as follows:

Asset Class Number of funds
Balanced Fund 0
Fixed Income 19
Commodity 0
Sector Fund 2
Foreign Equity 2
Emerging Market Equity 3
US Equity 6
Other 0
Total 36

With these income producing ETFs, two asset allocation portfolios are constructed using asset allocation strategies: strategic and tactical asset allocation strategies (SAA and TAA for participants in Retirement Income ETFs).

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies, compared with SPDR S&P 500 SPY ETF and Vanguard's balanced fund index (MUTF:VBINX)

Portfolio Performance Comparison (as of 12/13/2011)

Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Retirement Income ETFs Strategic Asset Allocation Moderate -1% 5% 13% 83% 2% 5%
Retirement Income ETFs Tactical Asset Allocation Moderate 3% 14% 9% 72% 8% 54%
SPY -0% 4% 13% 23% -1% -9%
VBINX 3% 14% 12% 46% 3% 10%

Five Year Chart

To avoid big losses, tactical asset allocation strategy on these high income producing ETFs have done well. Such a strategy will safeguard a portfolio in various market cycles by rotating to more stable asset classes. This is evident even in the past 12 months, which has seen a wide swing amid government intervention in a fragile economy.

Disclosure: We do not have any business relationship with the company or companies mentioned in this article. It does not set up retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

Disclosure: I am long SPY, TLT.