Asset Allocation
Before Doug Weimer's version of Growth and Momentum Investing was brought to my attention during the "Roaring Nineties", I was convinced that the market could not be beaten. Now I believe that it is possible to beat the market, but it is EXTREMELY difficult. I have included this section on asset allocation because it may be of interest and/or because it may be used as a metric by which the Growth and Momentum's portfolio performance can be gauged. You may wish to use the Growth and Momentum Portfolio as a component of this Asset Allocation Model.
During the "Roaring Nineties" asset allocation as an investment strategy in the "pop" financial media went from being the "new, new thing" to something only feeble minded academicians did in their ivory towers if they weren't wired. After the tech debacle that began in 2000, diversified portfolios are once again in vogue.
I back-tested numerous asset allocation models since 1969 and I am convinced that it is EXTREMELY difficult to beat the risk adjusted return of a well designed asset allocation model. Four simple Asset Allocation Models that I designed have been tracked on websites that I have managed since 6/30/2001 and they are shown below.
What is Asset Allocation?
Simply stated, it is a value oriented system of diversified investing that encourages and counsels you to "Buy Low and Sell High". Easy to say - impossible for many to do.
What are Asset Classes?
Groups of assets, that on average, will move together. For example, when an economy is healthy and growing, then the stock market represented by that economic system will generally perform well and vice versa. You can create asset classes yourself e.g., real estate in your home town, or you can invest in broadly diversified markets e.g., global stock or bond markets.
What is meant by "a well designed Asset Allocation Model"?
A well designed Asset Allocation Model contains asset classes for which there is a reasonable expectation of satisfactory performance AND it contains asset classes that are not always expected to move in tandem i.e., when one zigs, the other should zag.
How frequently should the portfolio be rebalanced?
The portfolios representing the asset allocation models on this page were rebalanced every quarter thru 2010.
NEW REBALANCING STRATEGY
After 2010, the four model portfolios will
be rebalanced every December instead of quarterly.
The chart directly below shows that rebalancing once a year returns more than quarterly rebalancing. This is consistent with data gathered by others and me over considerably longer periods. The only problem with rebalancing yearly instead of quarterly is that larger amounts of money are going to have to be rebalanced. This may be psychologically challenging for many investors, especially those who have not had much experience with asset allocation.
It is extremely difficult to optimize rebalancing frequency. During periods in which stocks are rising or falling, it is best NOT to rebalance. The problem, of course, is that you will never know when stocks have stopped rising or falling until you have the wonderful benefit of hindsight, so it is probably best to develop a disciplined timetable for rebalancing. If you are new to asset allocation, you may wish to begin by dollar cost averaging every month. After you have allocated sufficient assets, I recommend rebalancing quarterly until you are confident the system performs satisfactorily. After that you may wish to begin rebalancing yearly.
The Chart directly below shows the TOTAL value added by rebalancing to a Buy and Hold strategy over the TEN Year Periods ending with the years shown in the chart. The Six Asset Global Portfolio described in detail below on this page, was rebalanced either Annually, Bi Annually (Twice per Year), or Quarterly.
In which Asset Classes should I invest?
You should invest in asset classes within your personal "comfort zone". That means that if you are not comfortable with stocks, then you should NOT invest in stocks. It means that if you are xenophobic (and most folks are), then you should NOT invest in foreign stocks.
Why not?
Because when they crash (and they will), you're gonna say, "I knew that was gonna happen." And then you're gonna sell them. And THAT, is exactly the wrong thing to do. So, in order to save yourself some time and money, determine your comfort zone and/or cure your phobias before you do anything else. For more go to Stock Bond Ratio.
The Strategies
These are a long term strategies, meaning the longer the term, the better they will work.
What do I mean by long term?
The short answer is a minimum of ten years, because a ten year period will generally include a bear market and a bull market, but longer is better. In fact, a ten year period is probably the minimum period that should be examined in order to evaluate a strategy with a reasonable degree of confidence.
The Four Model Portfolios:
1. The US Portfolio
50% Vanguard Intermediate Term Bond Index Fund (Ticker VBIIX)
50% Vanguard Total US Stock Market Index Fund (Ticker VTSMX)
This portfolio will be re-balanced on the final trading day of every quarter.
A Table and a Chart comparing the performance of the four portfolios to the S&P 500 and
WEIMERandWIRTH is shown at the bottom of this page.
2. The Timed US Portfolio
This portfolio will be re-balanced on the final trading day of the
quarter, however, its Bond-Stock allocation will change as market conditions change. Go to the
Fed Stock Valuation Model for an explanation of the methodology used to determine its Bond-Stock allocation. The new composition of this portfolio will be specified after the market closes on the penultimate trading day of every quarter.
A Table and a Chart comparing the performance of the four portfolios to the S&P 500
and WEIMERandWIRTH is shown at the bottom of this page.
The Stock portion of the timed portfolios will be limited to 25% MIN and 75% MAX regardless of the Fed Stock Model results. Note that the stock portion of the timed portfolio will be 50% when stocks are fairly valued. The stock portion will be higher when stocks are undervalued, and lower when stocks are overvalued. If a more or less aggressive portfolio were desired, then the neutral stock allocation could be changed and the recommended limits would shift accordingly.
My model still shows stocks are slightly under valued based on forecasted reported earnings. However, if there is a recovery, then stocks should continue to do reasonably well, but be prepared for some volatility. Last quarter I recommended the same allocation I'm recommending this quarter.
REBALANCE AS SHOWN BELOW on December 31, 2010
25% Vanguard Intermediate Term Bond Index Fund (Ticker VBIIX)
75% Vanguard Total US Stock Market Index Fund (Ticker VTSMX)
3. The Global Portfolio
50% Vanguard Intermediate Term Bond Index Fund (Ticker VBIIX)
10% Vanguard 500 Index Fund (Ticker VFINX)
10% Vanguard Extended Market Index Fund (Ticker VEXMX)
10% Vanguard European Index Fund (Ticker VEURX)
10% Vanguard Pacific Index Fund (Ticker VPACX)
10% Vanguard Emerging Market Index Fund (Ticker VEIEX)
This portfolio will be re-balanced on the final trading day of every quarter.
A Table and a Chart comparing the performance of the four portfolios to the S&P 500
and WEIMERandWIRTH is shown at the bottom of this page.
4. The Timed Global Portfolio
This portfolio will be re-balanced on the final trading day of the
quarter, however, its Bond-Stock allocation will change as market conditions change. Go to the
Fed Stock Valuation Model for an explanation of the methodology used to determine its Bond-Stock
allocation. The new composition of this portfolio will be specified after the market closes on the penultimate trading day of every quarter.
A Table and a Chart comparing the performance of the four portfolios to the S&P 500
and WEIMERandWIRTH is shown at the bottom of this page.
The Stock portion of the timed portfolios will be limited to 25% MIN and 75% MAX regardless of the Fed Stock Model results. Note that the stock portion of the timed portfolio will be 50% when stocks are fairly valued. The stock portion will be higher when stocks are undervalued, and lower when stocks are overvalued. If a more or less aggressive portfolio were desired, then the neutral stock allocation could be changed and the recommended limits would shift accordingly.
My model still shows stocks are slightly under valued based on forecasted reported earnings. However, if there is a recovery, then stocks should continue to do reasonably well, but be prepared for some volatility. Last quarter I recommended the same allocation I'm recommending this quarter.
REBALANCE AS SHOWN BELOW on December 31, 2010
25% Vanguard Intermediate Term Bond Index Fund (Ticker VBIIX)
15% Vanguard 500 Index Fund (Ticker VFINX)
15% Vanguard Extended Market Index Fund (Ticker VEXMX)
15% Vanguard European Index Fund (Ticker VEURX)
15% Vanguard Pacific Index Fund (Ticker VPACX)
15% Vanguard Emerging Market Index Fund (Ticker VEIEX)
The Table and Chart below show YEARLY data, and will be updated after the end of this year. If you would like to see quarterly data or if you have any questions, then write to Henry.Wirth@yahoo.com
