Eleven ETFs and five stocks make up this mosaic portfolio, a slight revision of the "Holy Grail" portfolio discussed seven months ago. The five individual stocks (Annally (NLY), Expeditors International Of Washington (EXPD), Qualcomm (QCOM), C H Robinson Worldwide (CHRW), and T. Rowe Price Group (TROW)) were selected for their dividend orientation over the past seven years. The eleven ETFs are frequently used in portfolios I track for a variety of investors.
Portfolio construction requires a set of goals. The building blocks I use are the following:
- The projected return for the portfolio should exceed the projected return for the S&P 500 by 1% point.
- The projected standard deviation should be less than 15%. The goal is to reduce volatility. Reaching this goal is difficult in the current market environment.
- The desired projected return/uncertainty ratio exceeds 0.60.
- The diversification as measured by Diversification Metric should exceed 40%. Those are the four basic analytical goals I use when laying out a potential portfolio.
In the following portfolio analysis, I assumed the S&P 500 will have a return of 7.0% over the next year. Seven percent is likely on the high side. Four years of data were selected as this time frame includes the most recent bear market.
The "Sweet Sixteen" mix of ETFs and stocks do not meet all the goals stated above. While the projected return of 9.4% tops the 7% projected for the S&P 500, we pay for that excess with a high 18% standard deviation. This gives rise to a return/uncertainty ratio of 0.52, or below our goal of 0.60. Scrolling down the page one sees the Diversification Metric comes in at 31%. Once more, we miss the goal of 40%.
This combination of ETFs and stocks indicates the market is fully valued, if not overvalued. Scroll down to the second screen shot for confirming evidence.
Click to enlarge
The following screen shot is a data table I call, the "Delta Factor." Using historical results and future projections, the "Delta Factor" is nothing more than a possible probability that the investments will outperform the broad U.S. Equities market over the next six to twelve months. Anytime one is dealing in future projections, extreme caution is in order.
These results are greatly influenced by the time frame selected (4 years) and 7.0% future projection for the S&P 500. Examine three of the five investments that show up as a "Buy" in the Delta Factor column. VEA, VWO, and RWX have all had recent miserable performance records. Eventually, these market areas will reverse their recent poor trends, and that is where the probability projections come into play.
Investors holding cash and looking to build a portfolio using the above Sweet Sixteen would do well to begin by adding shares of those investments with a "Delta Factor" showing up as a Buy. RWX is my first choice.
Performance data with similar ETF combinations can be found on my blog.