If I Were Starting A New Portfolio Today

Includes: DVY, IDV, VIG, VTI
by: Lowell Herr

What would a portfolio look like if I were starting from scratch today? Here are a few basic principles to consider before making the initial Strategic Asset Allocation decisions.

  • Begin by using index funds or index ETFs. My preference is to use "non-managed" index ETFs. Yes, someone needs to make a decision what goes into the ETF, but for practical purposes the Vanguard and iShares ETFs can be considered to be non-managed index Exchange Traded Funds.
  • Include a minimum of 10 to 12 asset classes. This does not mean one will be invested in all asset classes at all times, but the option to construct a global portfolio is available. The one ETF I always include in every portfolio is Vanguard's Total Market ETF, VTI.
  • Asset classes will include U.S. Equities, Developed International Markets, Emerging Markets, U.S. REITs, International REITs, Precious Metals, U.S. Bonds, International Bonds, Commodities, and Cash.
  • Break the U.S. Equities Market up into different cap sizes, value, and growth asset classes.
  • Consider adding sector ETFs provided they rank higher than the U.S. Equities (VTI) standard. See ranking screen shot below.
  • Consider adding dividend oriented ETFs such as VIG, DVY, and IDV as potential investments.
  • Understand how to use either the ITA Risk Reduction model or the Momentum-Optimization Model (NYSEARCA:MOM) to hold down portfolio volatility.

The following array of ETFs is a starting point for investors. Many of the ETFs can be purchased commission free if one is a TDAmeritrade client. Other discount brokers provide many commission free ETFs so do your own research in this area. Controlling costs makes a huge difference over a lifetime of investing.

Rankings: The 31 ETFs selected for this "Starter" Portfolio are ranked below. With a little discrimination one can decrease the number of securities down to 25 without significantly reducing diversification.

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Efficient Frontier: The follow graph paints a quick picture of the Return/Risk ratio for the Starter Portfolio. Minor adjustments in the asset allocation plan moved the current portfolio a small amount from the former or saved portfolio (blue dot). The asset allocation plan for this portfolio was set up such that the current portfolio (diamond dot) lies on top of the optimized portfolio (red dot not visible). In other words, this is an optimized portfolio based on 7/16/2013 data.

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Buy-Hold-Sell Recommendations: This portfolio was set up following the optimizer with no consideration given to the momentum factor. If one were following the ITA Risk Reduction model we would sell VWO and DBC. Note how few ETFs are recommended when the price of the ETF drops below its 195-Day Exponential Moving Average (EMA).

The best buying opportunities are those ETFs with a Buy signal showing up in the far right column.

Further investigation of the Momentum-Optimization Model (MOM) is required to see if it works going forward. For example, does a portfolio managed using MOM outperform an appropriate benchmark. Right now I am testing MOM with five portfolios and thus far each is picking up small percentages each month on the ITA Index, a customized benchmark designed for each portfolio. Results for each portfolio are posted every 33 days on this blog site.

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Disclosure: I am long VTI, VOE, VNQ, VEU, VWO, RWX, VTV, DBC, BND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.