Blending an Aggressive Stock Portfolio With a Balanced Dividend ETF Portfolio

by: MyPlanIQ

As we close in on the midpoint of the second quarter with the market giving mixed messages about future direction, we continue on our quest for ideas to maximize risk adjusted returns for long term investors. Every day there is a siren email seeking to have you get in on the best kept secret for some stock that is going to change your life. One wonders what happens to those stocks and those that invest in them.

Long term investors need long term solutions that have hedges built in to offset unexpected or unwanted events such as the sudden selloff in commodities that occurred recently.

We recently published an article on a stock portfolio suggested by Bespoke Investment Group co-founder Paul Hickey. He recommended the following nine equities.

1. Verifone Systems (NYSE:PAY) - 5/26/2011 - 9.20%

2. Dice Holdings (NYSE:DHX) -4/28/2011 - 8.69%

3. MWI Veterinary Supply (NASDAQ:MWIV) - 5/6/2011 - 6.27%

4. Opnet Technologies (NASDAQ:OPNT-OLD) - 5/9/2011 - 5.80%

5. First Cash Financial (NASDAQ:FCFS) - 4/20/2011 - 4.24%

6. Raymond James (NYSE:RJF) - 4/21/2011 - 4.12%

7. Barrick Gold (NYSE:ABX) - 4/27/2011 - 3.24%

8. Horace Mann Educators (NYSE:HMN) - 4/28/2011 - 2.61%

9. Anadarko Petroleum (NYSE:APC) - 5/3/2011 - 1.82%

Source: Bespoke Investment Group.

We entered the nine stocks in a portfolio on our system and started tracking from the end of 2007. This is limited by the age of the youngest equity. We show the current holdings with no rebalancing since the middle of 2007.

We compared this with our benchmark dividend retirement ETF portfolio. The stock portfolio blew away everything else with one year returns around 96%. However, with that sort of return, there is going to be volatility. What we are attempting here is to create a core-satellite portfolio where 60% of the assets are in the more stable and diversified dividend ETF portfolio and 40% is in the high growth, high volatility stock portfolio.

The MyPlanIQ system allows you to rapidly create such a portfolio where you can assign different percentages to each portfolio and it will manage both to give you a single, integrated portfolio. We create this portfolio and here are the results.

Portfolio Performance Comparison

Portfolio/Fund Name

1Yr AR

1Yr Sharpe

3Yr AR

3Yr Sharpe

5Yr AR

5Yr Sharpe

Dividend ETF-Stock Core Satellite Portfolios 51% 285% 22% 114%
P 9 Stocks That Gain Every Earnings Day 96% 360% 36% 91%
Retirement Income ETFs Tactical Asset Allocation Moderate 8% 100% 9% 73% 9% 64%

The more detailed analysis and graphs give a better idea of the returns over time and you can see the drawdown and other key parameters of the portfolio.

The stock portfolio returns are hard to beat over the short term but notice that the Sharpe index for the combined portfolio is higher over the three year window even though returns are lower -- that is the goal -- to significantly reduce risk while trying to capture as much of the upside as possible

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

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.