Smartest Portfolio You'll Ever Own?

Includes: BWZ
by: Lowell Herr

Below is a portfolio I extracted from Daniel Solin's recent book, "The Smartest Portfolio You'll Ever Own." Before I run a QPP analysis on one of the suggest portfolios, let me point out that the BWZ ETF did not have a three-year record. As a result, the following analysis runs for only 31 months. Under current market conditions, my preference is to use 48 months as that goes back beyond the market crash of 2008.

In addition, I selected the portfolio Solin classifies as Medium Risk. Note that 40% of the portfolio is invested in bonds. One last thing to keep in mind is that it is currently difficult to create a portfolio that meets all our projection goals. I'll follow up what I mean in the analysis below.

The fund names or investment vehicles were taken from Solin's latest book. As mentioned above, I selected the Medium Risk asset allocation plan and I am using a 31 month period for the analysis. In this QPP analysis I set the S&P 500 projection to 7.0%. It is important to know this percentage setting as it has a direct impact on the projected return.

The projected return for this portfolio is only 6.1% or about two percentage points below our goal of 8.0%. The uncertainty is a low 12.8% or well below 15%. That is the good news and not unexpected since 40% of the portfolio is allocated to bonds. However, the Return/Risk ratio is a rather low 0.47 or well below our goal of 0.60. Part of this low value is related to the index funds and ETFs selected by author Solin, part is due to the asset allocation mix, and a lot is related to the relatively high market conditions. While the market may not seem high to readers, based on the last 31 months of data it is very high making it difficult to come up with a respectable Return/Risk ratio regardless of the investment vehicles selected or the asset allocation plan.

The Diversification Metric is a very low 16%. This is unacceptable. On the positive side, the Portfolio Autocorrelation is a very low 7.0%. This "Smartest Portfolio" is a mixed bag. In summary, the portfolio will likely outperform most active money managers, but it leaves the investor with too many performance question marks. Think of this portfolio as a baseline or starting point. The challenge is to come up with something better.

(Click to enlarge)