- What asset classes should be included in the portfolio?
- What market factors should be included in the portfolio?
- What percentage needs to be allocated to each asset class?
- What software will be used to help manage the portfolio?
- What additional strategies to consider when managing the portfolio?
The following portfolio is not dissimilar to what I use to manage a number of portfolios at ITA Wealth Management (ITA Wealth Management |). Before getting into this basic portfolio, readers need to know that the ITA site will be free to all readers sometime this summer. If you wish to see more of the blog right now, signup as a Guest and wait to be elevated to the Gold level.
A Lifetime membership is available and that includes access to the Kipling spreadsheet or what I will be using in this blog post.
Basic Investment Quiver:
Below is the investment quiver for the Basic Portfolio. Asset classes include all different cap sizes, value, growth, blend and a variety of bonds and treasuries. Developed International Equities, Emerging Market Equities as well as domestic and international REITs are part of the asset mix. The only critical asset classes missing are Precious Metals and Commodities. Managers wanting to include those asset classes can easily do so.
To fill in critical market factors, I've added QUAL and IQLT for quality, MTUM for momentum, and SCHC for international small size. Check the third column from the left and you will see the Max Asset Allocation percentages are slightly skewed toward value.
To better understand how the Strategic or Max AA percentages work, take BNDX as an example. Suppose the recommendation fills BNDX at 15%, but there is still available cash left over. The software seeks out the top performing ETF and applies the excess cash to that security until it fills to its AA limit. The next screenshot will make this clearer.
These screenshots come right out of the Kipling spreadsheet (available to Lifetime members). Several investing models are available to the money manager. For this example, I am using the Buy-Hold-Sell (BHS) model. See the red arrow to the right. In addition, I am using a maximum of six (6) assets for this portfolio. Many times I reduce the maximum number to five. If using the Dual Momentum model, one needs to switch investing models and limit the number of assets to one (1).
The current recommendation (based on 12/31/2020 data) is to purchase shares of VTI, VBR, VB, VOT, VBK, and SCHC. VBK is ranked #1 (see 5th column from right) and it immediately fills to its maximum of 15%.
I don't worry about the fact that many of these ETFs are highly correlated.
The Kipling software informs the money manager how many shares are required for each ETF or asset. That number is found in the Difference column. Not shown in this blog post are several worksheets that further aid the money manager in how to adjust the portfolio for risk. The latest version of the Kipling includes Risk Ratios such as Jensen's Alpha, Treynor, and the Sortino Ratio.
Once shares are purchased to fill the recommended asset classes, Trailing Stop Loss Orders (TSLOs) are set for the held shares and no sell activity takes place unless a TSLO is struck. This "rule" is established to reduce portfolio churning.
If you check the black arrow in the above screenshot you will see it points to a 60- and 100-trading days look-back period. This is adjustable. For example, some managers prefer to use a one-year or 252 trading days as the look-back period. This longer look-back reduces portfolio churning.
There are many other options available within the Kipling, but I won't go into them at this time. More examples are available as there are over 20 portfolios tracked on the ITA website.
Investors interested in the Dual Momentum model will find numerous DM portfolios managed on the ITA site.
Analyst's Disclosure: I am/we are long VBK VBR VTI VOE VB.
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