A common question, if one is holding a large amount of cash, is when to begin putting it to work in the market. This question came up several times recently with readers who are beginning to lay out a Strategic Asset Allocation (SAA) plan and have selected ETFs they will use to populate the different asset classes. Arguments can be made to invest all cash immediately since the assumption is that the market will rise over the long run. Personally, I've never felt completely at ease with that approach. Instead, I'm one to move cash into the market over a longer period of time. How long is a debatable issue. Taking this gradual approach has not always worked to my advantage as there were times when the market just walked away from me and I was left holding too much cash.
Not only is the time frame a problem for the cash rich investor, but which ETFs should one invest in first? Those paying attention to the ITARR model are fully invested in the eight critical ETFs we are using in that model. Those ETFs were a better buy a few months ago compared to today. That fact complicates what one should do now. The following analysis is designed to help investors know which ETFs have the highest probability of doing well over the next six to twelve months.
In the following "Delta Factor" analysis I compiled a list of popular ETFs that cover all sixteen equity and bond asset classes used in the ITA Portfolios. Cash is the 17th asset class and is not included. In many cases, the ETFs overlap particular asset classes. For example, VOT and IJK are both mid-cap growth ETFs, one from Vanguard and the other from iShares. When offered these choices, I use the one that is commission free, has the lowest expense ratio, and deviates least from its stated index goals. The first two are easier to identify and understand compared to the third goal. No one is going to use all these ETFs so be selective.
In the following Quantext Portfolio Planner analysis, I stretched the time frame out to four years. This includes most of the last bear market. The standard or reference used for all equity ETFs is the VTSMX index fund. For bond and treasury (beginning down at BND) the reference is AGG, and that is why I did not include it among the selected income style ETFs.
If the market were near a bottom, we would see the table filled with a green background in the Delta column while the "Delta Factor" column would show almost nothing except Buy signals. That was the view three years ago. This is not the case as the market tilts toward the overbought condition. Recognizing this fact, I would still populate each asset class of interest with approximately 10% of the available cash. Then I would purchase more shares of any ETFs showing a Buy in the "Delta Factor" column, if those are ETFs that fit into the SAA plan. For example, VEU, DBC, and RWX are three of the critical ETFs I use in the ITA Risk Reduction plan. While I would not fill those asset classes to capacity, I would consider filling those asset classes to 20% of capacity instead of the original 10% investment.