Building That First Portfolio

Summary

• Thinking through a portfolio business plan.
• Finding a tool to measure portfolio performance.
• Link to portfolio tracking spreadsheet provided in article.

Whether one is launching their very first portfolio or considering revising an existing one, the thought process is similar. Consider the following questions.

• What goes into a portfolio business plan?
• What asset allocation is appropriate?
• Will stocks or index funds be used to populate the portfolio?
• Will a particular investing model be followed?
• What tools are available to track portfolio performance?
• How does one benchmark the portfolio?
• What broker will best serve my needs?

Answers and actions to these questions will vary widely from investor to investor. Below is an approach one might use to build that first portfolio or revise an old one. To get started, I am using the asset allocation plan recommended by David Swensen in what I call the "Swensen Six." This is a good place to start as the six ETFs provide for global diversification, equity orientation, and inflation protection. The percentage allocations are sufficiently large so they have an impact on the portfolio while small enough not to adversely influence the portfolio in case of a major bear market. More on portfolio protection will show up later in this article.

The following portfolio dashboard provides a visual business plan for a portfolio in that it specifics an asset allocation model and the percentages to allocate to each asset class. If we follow the "Swensen Six" as our starter plan we allocate it as follows using non-managed index ETFs.

• U.S. Equities - VTI (30%)
• Developed International Equities - VEA (10%) Originally, Swensen recommended 15% for this asset class.
• Emerging Market Equities - VWO (10%) Originally, Swensen recommended 5%.
• REITs - VNQ (20%) Another option is to allocate 15% to VNQ and the remaining 5% to International REITs RWX.
• U.S. Treasury bonds, bonds, and inflation-protected securities - A combination of TLT, BIV, and TIP (30%) will work for this asset class.

Here we have a basic asset allocation plan that can be seen in the following Dashboard with one modification. I shifted 5% from the bond and income asset class over to International REITs . Otherwise it follows the "Swensen Six" recommendations.

Note how the portfolio business plan is progressing. 1) An asset allocation plan is evolving using the "Swensen Six." 2) We are using ETFs to construct the portfolio instead of individual stocks. 3) The percentages allocated to different asset classes, a most difficult decision, is in place. These percentages can easily be adjusted later, but for now we have a starting point for six critical asset classes.

Management Styles: Each investor needs to make a decision as to what management model to follow. Broadly speaking, these break into passive and active. Even passive managers make active decisions. To decide to set up a portfolio along the lines of the "Swensen Six" is an active decision. Once that decision is made, a passive manager will keep the asset allocation percentages within target and that is what the above Dashboard (found within the TLH spreadsheet) seeks to do.

Personally, I use three broad management models. One is passive where an asset allocation plan is set up using specific ETFs for each asset class. All that is required thereafter is to keep the percentages for each asset class within the target ranges. A second model is what I call a Tranche Momentum Model (TMM). Examples of this model are found in a number of prior articles I've written for Seeking Alpha. A third model is what I call the Mosaic Model. This is where a percentage of the portfolio uses the passive approach while the remaining portion of the portfolio is managed using the TMM.

Tranche Momentum Model: What might the TMM look like for the "Swensen Six?" Based on 8/19/2016 data, VWO and TLT are the top ranked ETFs.

Position Sizing Recommendations: In the following worksheet, the investor takes control over what risk to accept for the portfolio. For example, the Max Trade Position Risk is set to 1.5% so the Maximum Portfolio Risk comes in at 6.0%. Based on the variables controlled by the money manager, the Suggested Portfolio Risk is a modest 3.8%.

Portfolio Tracking Spreadsheet: Keeping track of investments, portfolio performance, and how well one is doing compared to a benchmark is critical for serious investors.

Here is the link to the TLH Portfolio Tracking Spreadsheet. Be forewarned, learning how to use this spreadsheet takes a little time as it is a powerful tool. Not only will the TLH spreadsheet track portfolio performance, it will keep a record of the Internal Rate of Return for each security. Four benchmarks are maintained. The ITA Index benchmark is customized for each portfolio rather than using a broad, and frequently inappropriate, benchmark such as the S&P 500.

As for choosing a broker, find one that carries a large number of commission free ETFs so you can reduce expenses. I am also partial to brokerage houses that provide monthly statements that are easy to understand.

Whether you are a beginner or a veteran, develop an investment plan. The example above uses index ETFs that cover the globe. An asset allocation plan is presented plus the outline of three investing models. Finally, a portfolio tracking spreadsheet is included. This information is a starting point and should provide material for further discussion.

Disclosure: I am/we are long VTI, VWO, VNQ, TLT. 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.