Adjustments To The Alternative Number One Portfolio

by: Lowell Herr

In the following portfolio, slight adjustments are introduced. First, I made the correction of using VO instead of VOE. EXCEL™ automatically filled in the "E" when I intended to use the mid-cap blend ETF, VO. In this allocation arrangement, U.S. Fixed Income, BND, is reduced from 17% to 12%. In its place 5% is allocated to international distressed debt PCY. Domestic real estate, VNQ, is lowered by 100 basis points and we increase private equity, PSP, by 100 basis points. In the following slides we have the Quantext Portfolio Planner (QPP) analysis and the correlations.

Another portfolio one can reference or use for comparison is the "Swensen Six" as analyzed over on Seeking Alpha.

QPP Analysis: The following Strategic Asset Allocation plan raises the projected return to a little over 8%. This meets the goal of exceeding the projection for the S&P 500 by 100 basis points. We give up portfolio volatility as the projected standard deviation is now nearly 16.5% or 150 basis points higher than the desired upper limit.

The portfolio still lack diversification as indicated by the Diversification Metric (24%). The desired goal for DM is at least 40%. The Portfolio Autocorrelation is an acceptable value of 21.5%. We like to keep this below 20%, but PA is the least significant metric.

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Correlation Matrix: We pick up a little more diversification with the addition of PCY. However, most of the securities are still highly correlated. Note the high correlations among the first five asset classes.

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