Creating The Family Portfolio

Aug. 23, 2022 4:14 PM ET25 Comments
Lowell Herr profile picture
Lowell Herr


  • Should I use stocks or index securities to populate the portfolio?
  • How risky is an all-equity portfolio?
  • Taking a close look at the Dual Momentum model.
  • How well is The Income Factory model articulated by Steven Bavaria working?
  • Should I consider a computer-managed Robo Advisor portfolio?

Business on Wall Street in Manhattan

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Many factors go into setting up a portfolio, be it for an individual or a family. In this article I'll lay out a plan that can be taken as a whole or broken into parts, depending on how deep or complex one wishes to go when constructing portfolios.

One of the first decisions an investor makes is whether to use individual stocks or index instruments. I've used both. In this article readers will find I currently populate portfolios using Exchanged Traded Funds ('ETFs') and Closed-End-Funds ('CEFs'). While the reasons are many, I've been influenced by writers such as: William J. Bernstein, William F. Sharpe, Charles D. Ellis, Burton G. Malkiel, Larry E. Swedroe, Michael Edesess and many others.

Diversification generally focuses on investing in stocks that cover different industries or sectors of the market. International companies, bonds, emerging markets, commodities, treasuries and the like are part of the diversification discussion. In this plan, these different asset classes are covered. In addition, I am adding another level of diversification and it has to do with portfolio models.

Here are investing models I use when putting together a family portfolio.

  • Robo Advisor or computer managed portfolio. These are sometimes called, Intelligent Portfolios. On my blog this is the Schrodinger portfolio.
  • An equity only portfolio or the Young Investor portfolio. I'll explain more in a moment. At ITA this portfolio is the Copernicus.
  • The Relative Strength or Relative Momentum portfolio. These are more complex and require more explanation than I can go into in this article. In general, RM portfolios are an expansion of the Dual Momentum model.
  • CEF driven portfolios or The Income Factory portfolio as explained here on Seeking Alpha if you look up articles by Steven Bavaria.
  • Dual Momentum model as developed by Gary Antonacci.

On the ITA site I track 18 portfolios and there is a co-author who tracks several other portfolios. The portfolios are reviewed every month or every 33 calendar days. Performance and risk data is posted approximately each month so readers can track the different portfolios. All portfolios use real money so these are not virtual accounts. The portfolios are "owned" by different individuals and go by scientific or mathematical names such as Gauss, Kepler, McClintock, Bethe, Huygens, etc.

Robo Advisor Portfolio (Schrodinger)

On the ITA website this portfolio goes by the name, Schrodinger. Launched several years ago, the idea behind this portfolio was to answer the question, who will manage the family portfolio if I have no interest in the stock market? Or put another way - Who will manage the family portfolio if you die? After months of research and investing in several computer managed portfolios with different brokers I decided to go with Schwab's "Intelligent Portfolio" model. There is zero cost to managing this portfolio and the only disadvantage I've found is that Schwab always carries approximately 7% to 8% of the portfolio in cash. This is a drag in an up market and an advantage in a down market. I keep detailed performance and risk records on all portfolios. When updated a few days ago, the Schrodinger ranked #7 out of 18 portfolios based on Internal Rate of Return ('IRR') and #12 when risk enters the equation. More on how risk is calculated later in this article.

Equity Only Portfolio (Copernicus)

I assume every Seeking Alpha reader has heard how difficult it is to beat the market. With this in mind, I recently launched an equity only portfolio or what I think of as The Young Investor portfolio. On the blog, this portfolio goes by the title, Copernicus.

The concept behind this portfolio is to invest only in U.S. Equities and never sell. The two primary ETFs to use are either ESGV or VTI. A young person will continue to save and each month will use the available cash to purchase more shares of either ESGV or VTI. This is a simple approach to investing. It does not have quite the diversity of the Schrodinger, but it still provides broad diversification.

As for performance, the Copernicus currently ranks #8 based on IRR data and #2 when risk is calculated. How can an all-equity portfolio maintain such a low risk rank? Exactly what goes into the risk calculation? Here are the factors I use to calculate portfolio risk.

  • The IRR of the portfolio.
  • The Sortino Ratio.
  • The Jensen Performance Index. Sometimes called Jensen Alpha.
    • This includes the IRR of an appropriate benchmark.
    • The portfolio beta.
    • A risk-free U.S. Treasure percentage.
    • The IRR of the portfolio.
  • The slope of the Jensen over the last year so a trend is included.
  • The Treynor Ratio.

Performance and risk data is posted on a semi-regular basis on the ITA blog site.

Relative Strength or Relative Momentum Model (Kepler, Einstein, Millikan, and Gauss)

Relative momentum portfolios are a little more complex to manage and I suggest readers check out portfolios with the above names for more information. The basic idea is built around the Dual Momentum model developed by Gary Antonacci, only with the RM portfolios we use more asset classes and Fama-French market factors for additional diversification. Of the many RM portfolios the Kepler ranks #3 based on IRR calculations and #6 based on risk. These rankings tend to shift from month to month.

Dual Momentum Model (Gauss, Franklin, McClintock, and Pauling)

Seeking Alpha readers likely know a great deal about the Dual Momentum model as I've written numerous Seeking Alpha articles on this model.

Performance and risk has been erratic for the Dual Momentum portfolios I track. For example, the Franklin has been one of the worst performers while the McClintock ranks among the top performers. About the best explanation I can come up with is that the difference has to do with the luck-of-review-day. When the various DM portfolios come up for review impacts the results.

The Income Factory Model (Huygens, Curie, Newton)

I am new to the Steven Bavaria model as I only learned of this portfolio population method a few months ago. For more information, I highly recommend interested readers purchase Steven Bavaria's book, The Income Factory. Using the book as reference, I now populate three portfolios using Closed-End-Funds (CEFs). While it is still much too early to come to any conclusions, the three portfolio listed in the header rank #4, #1, and #10 based on IRR calculations and #5, #1, and #7 based on the risk calculation.

As mentioned early in this article, one can set up a family portfolio using multiple portfolio models or select one and stick with that single approach.

If I were to drop one of the five out of contention it would be the Relative Strength or Relative Momentum model as it requires more work and decision making. For a young person working and concentrating on their job, I highly recommend the Schrodinger and Copernicus portfolios as they are simple and require almost no time to manage. Both provide more diversification than one finds in nearly all stock portfolios.

This article was written by

Lowell Herr profile picture
Retired physics instructor and now editor of the ITA Wealth Management investment blog.

Disclosure: I/we have a beneficial long position in the shares of ESGV either through stock ownership, options, or other derivatives. 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.

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