If your retirement account (Rolled over 401k to IRA) was at a brokerage and you did have availability to all funds, would you still suggest the Core Portfolio for that or is the Satellite okay. You must have favored FXF over TIP originally for a reason.

Thanks

I’ve enjoyed studying your portfolio building process and related articles. However, even though I realize the process is proprietary, I’d appreciate your comments on the inclusion of the following in the allocation process. I thought there would be more info on this in discussion after I subscribed — maybe I don’t know where to find it on the website.

In any case, does the methodology incorporate the risk parity asset allocation concept? Secondly, is there provision for any type of momentum or ‘timing’ element for each asset class (on the website I noticed that there would be some situations in which an asset class would be sold/not held)? And lastly, why the inclusion of FXF vs. TIP in the strategic and conservative portfolios, respectively?

All these questions actually came from one person. Let’s go over the FAQs:

QUESTION
What does a paid subscriber get after he logs in? Just to change his profile, since all the log-in information is available to public? Just to participate discussion? There weren’t any constructive comments pertaining your portfolio strategies (I see only 5??). Am I missing something or get in wrong place? What are all those WordPress stuff has to do with your portfolios on Dashboard? in Blog Stats, I see “45 comments” and hundreds of posts, but when I clicked it, it says “You do not have sufficient permissions to access this page.”

ANSWER
The personal information is not available to the public. You have to log in to see your own user profile. The welcome email says NOT to use the dashboard. After logging in, a user can start or join a discussion. Comments are closed to everyone else. To date, few clients have left comments.

QUESTION
I expect more in your weekly report, as to what market condition changed that results such and such increasing or decreasing % of allocation, and why.

ANSWER
The algorithm is dynamic and adjusts the allocation according to market conditions. If you wish to read long-winded essays, you can get them all for free all over the the Internet. We don’t write essays here. We do R&D and make money. Besides, I wrote a eight-part series about the portfolio already.

QUESTION
It’s hard to tell by just looking at rough charts of historical allocations. I have no idea what you actually re-balanced to what funds (what’s % allocations in the past?).

ANSWER
Look closely at the graph. It tells you right there, in the legend.

QUESTION
Which ones you refer to as “risky” and “less risky”? Currency and bond being less risky? then by nature they always are, no matter what market conditions. What happen in the past week made them more of risky in my opinion. I am no professional but I didn’t feel right and understand when you use same generalized commentary for all 3 portfolios; and could not gain any insight anywhere after log-in. You don’t mean for us to follow your portfolios blindly, do you?

ANSWER
I use the term “risky” within the context of CAPM and the efficient frontier (More…). I don’t use the words as a qualitative description.

I spent 10 years on the internet teaching, and in the end, the clients just want me to tell them what to do. You selected our service based on performance against some high-profile managers, so why knock us?

QUESTION
I admire your energy with all those podcast/mad money trading stuff…etc. But I think more explanations of your rebalancing strategy for each portfolio are mush needed, as well as shown in numbers and portfolio balance after re-allocation and YTDs. You commented on creative accounting number used by other newsletters, show me your numbers that you are not like them.

ANSWER
I can’t explain it in an essay because we do not use any judgement on a week-to-week basis to change the allocations. All that has been factored into the algorithm and the allocations are updated dynamically. Again, eight chapters were devoted to such. Adding YTD numbers is a good idea. Will do that immediately.

But please do me a favor: do not insult me. There is no need. Seriously, would you really write to other people, speak like this and expect even the courtesy of a reply? Please, have some respect for our work.

QUESTION
I feel a bit wired with your % allocation like 13.71, 35.81…. is it really matter to be precise down to .01 in order to get result? It’s all determined by share price at time of purchase. If you say 10%, 35.5%… then that’s reasonable. Just tell me how’d I come to line up my portfolio to your 13.71%allocation after getting all the shares?? shouldn’t you show us how a 10K portfolio in numbers looks like per your % allocation?

ANSWER
The model portfolio has to provide for some detail. Some people are running these models with a lot more money and perhaps .01 does make a difference. In general, the commission you have to pay will be a bigger issue than one tenth of one percent. You might have a bit of cash left over when all is said and done.

QUESTION
Is bond, currency, commodity your only hedge if we are in bear market? any bear funds/ETFs?

ANSWER
The trader’s mentality of selling to avoid the downside has an equivalent in the world of investment portfolios; that is, diversification = hedging because asset classes behave differently under changing economic conditions. IMHO, bear funds were invented by the ETFs families to increase fees and give people something to ‘play’. You should read the prospectuses of the bear funds to understand what they are really trying to match AND read David Swensen’s book. In all seriousness, if you wish to hedge, there are much better ways to do it, but it requires using futures. And money.

QUESTION
Can I use 2x ETFs in place of margin? of course they are not available for every funds. Did you take into interest charges when you calculate your leveraged return?

ANSWER
If you wish. But remember your volatility of return will double. No, interest charges and commissions are not factored in because each client has a different deal with their broker. These charges are generally not included in ANY return numbers.

I have no idea what happens with taxes, but yes, I can provide a spreadsheet that gives the blow by blow starting next week.

And thanks for the heads up re: margin.

rvo: Seems people must learn for themselves firsthand that “if it sounds too good to be true, then it probably is…” Thanks for the referrals!

1. LOL! On first glance, I saw “Frankenstein’s Lab” and nearly spit out my tea!

2. Smaller font size is certainly preferable from an esthetic point of view. I just hope my readers know they can adjust the font size on the fly.

3. The assumption is that most people will have a portion of their money in the Conservative Retirement model portfolio, so owning VXF in the portion allocated to the Strategic Performance model would round out their holdings of U.S. stocks. In a perfect world (with more money) a portfolio would own SPY and VXF to represent the entire Wilshire 5000.

4. He-he. Wentz is Mr. Ashlee Simpson. He’s got nothing on our Pete, the Human RSS Feed Reader. :)

Thank you for posting!

Stop losses are not used for the portfolio because the allocation is adjusted dynamically in response to market conditions. That said, you may wish to hedge certain portions of your portfolio, but that would drag on the return.

Kirk:  I think your research here is helpful Teresa and I look forward to the direction you are now taking your website into. I very much appreciate your desire to build and share portfolios that go beyond your indicators and market analysis (i.e. how to craft an all-weather investment portfolio). You’ve done a lot of work on this recently, so can you provide some basic concepts that you think readers could gain from reading this series of posts you have done?

Teresa Lo:   The major concept here is that the trader’s mentality of selling to avoid the downside has an equivalent in the world of investment portfolios; that is, diversification = hedging because asset classes behave differently under changing economic conditions. And if the assets are allocated correctly, the volatility of returns will be lowered so that it doesn’t feel like we are on a roller coaster ride, that the tortoise can stay the course and come out way ahead of the jackrabbit.

I can’t provide any tax advice, but in general, the trades in a taxable account would be treated like any other short-term trade.

No problem. Ben also asked me to provide a spreadsheet with the allocations and I’ll make that happen starting this week.

I don’t anticipate making symbol changes unless something dramatic happens, such as the U.S. becomes a creditor nation again.

Check out Part 4 again. In order to lower administrative and transaction costs for the portfolio (and this is where the costs hit smaller portfolios the most) I chose that single ETF that best embodied each of the asset classes we wish to own.

With regard to a “gross asset dislocation”, let’s use a mindtrick that my quant friends love doing: the extreme case.

Imagine that stocks AND bonds both went to zero overnight. Commodities would presumably be priced at near infinity, offsetting the losses (and then some) from stocks and bonds. We would do an emergency rebalance — sell some commodities and deploy cash — that would buy up more stocks and bonds, and on the rebound, the gains would be tremendous.

Let’s hope it never comes to that. I also suggest reading David Swensen’s Unconventional Success. The link to the book is on the right sidebar under “In My Library”. He mentions how Yale’s endowment fund reaped excess profits from rebalancing during the Crash of 1987.

Sorry for the late reply Daniel.

Yes, I understand that people have a problem with selling a winner and buying more of the loser, but please remember that academics and David Swensen refer to rebalancing of QUALITY assets such as S&P 500 and Treasury bonds.

You hear this all the time: an individual investor will buy a ton of Stock XYZ (maybe CROX or TASR or DRYS) and lose all their money. Then they say, they will NEVER “buy and hold” again.

Well, what they were doing was 1. engaging in momentum trading of beauty contest winners and 2. bet all on one spin of the roulette wheel. They lost a big gamble, which is not quite the same as “buy, hold, rebalance” of broad asset classes in a properly constructed portfolio. ;-)

I use the InteractiveBrokers Trader Workstation rebalance function: see IB User’s Guide, search the term “rebalance”.

I just enter the percentages, click and send the orders. It’s is done just like that.

One thing that you should keep in mind is a rule of thumb: the larger the account, the more often it can be rebalanced. A 1 percent change in allocation for a $25K account is only $250 while the same percent change in a $250K account is $2,500.

Smaller accounts might be better off to rebalance less in an effort to reduce transaction costs. That said, everyone should do their utmost to reduce commissions anyway. I’ve been told that FOLIOfn offers a very competitive deal.

Well, I do not have account with IB. Is this the only way to effectively apply your portfolio strategy?

Would you please offer some rebalancing guidience for accounts at other brokers that don’t seem offer such function? I am with Wells Fargo and I don’t think it has such.

Dannie: It would be rare for prices to change more than 1 percent from Friday’s close to Monday’s open, so perhaps you could calculate the value of your account and allocate 95% of the equity based on Friday’s closing value. You would have some cash left over in your account, but that’s OK, particularly if you are deploying the Strategic Performance portfolio on margin.

Thanks for the numbers.

The reason to exclude stocks is that 1. someone would have to pick them because I can’t, and 2. they are unlikely to provide us with additional diversification.

Rebalancing more often is always a good thing but the benefit might be outweighted by the transaction costs. As usual, the more money under management, the more frequent the rebalancing is a good rule of thumb.

No, I haven’t, but one thing that I do know for sure from analyzing the models is that there are small calendar effects.

Using the Strategic Performance portfolio for example — if transactions costs were not a factor — one would certainly go to cash at the closing price on Friday and then redeploy it at the opening price on Monday.

How would a new account be put into play? Plow the cash in at the next rebalance or use some kind of dollar cost or value averaging scheme?

T, thank you for the podcast on active trading in small time frames vs. adopting an asset-allocated, dynamically-rebalanced portfolio.

One of the advantages of the latter is the freeing of many hours to devote to other aspects of one’s life. Charles Kirk wrote about that in his January 2008 entry on retirement portfolios, and if I may, I will quote him:

The time, energy, and lost money that so many people give to the market can often be better spent in raising their children, keeping and stick to a good exercise regimen, and ultimately achieving a good work/life balance so many now desire.

This has been my experience since moving the vast majority of my funds from active day trading of futures to the Strategic Performance Portfolio. I estimate I have freed 20 hours per week. This means that I can spend several hours morning and evening being with my baby daughter. It means being able to exercise regularly. It means having the slack to take on more responsibilities in my professional career.

In terms of return on money, time and energy, the SPP offers outstanding value. So, no more bull riding for me, at least not until my life changes dramatically. Thank you for providing such a service.

Ben

Good points you guys make. I think it was in one of the Market Wizard books that Trader Vic said he regretted not paying more attention to his daughter when she was preschool aged. That has always stuck in my mind especially when any of my kids wander into my office. Teresa, you’re the “Madonna of Trading Bloggers” lots of makeovers but still the best to listen to. :-)

FXF hasn’t been over $100 since mid-April, so my suggestion is to check your exchange subscription at IB. You might also check to see if you are looking at FXF only on a certain exchange to make sure you’re using the most liquid one.

Using SP w/leverage would incur margin interest expense. Is this factored in or could it be?

Can you calculate the income portion of total return?

Hi Teresa, I am a new subscriber and having problem getting started. My questions are:

1. On the initial setup should I setup my orders with the percentage allocation per one of your portfolio, using limit-order based on last Friday’s closing prices? What if the limit order did not hit, should I then change that to a market order? What is your recommended strategy.
2. My IB account takes a while to get funded. Once the funding got clear for trading, can I start the portfolio setup on mid-week or should I wait until the following Monday?
3. On rebalancing, if limit order is used and failed to hit, what is your recommended strategy?
4. Can you tell me more of your “high net worth” portfolio and TSP portfolio.