A Mr. Len Nikadimo (Seinfeld reference) left a long question that you can, in detail, read here.
First, he wants to know where the weightings come from. Yes, my starting point is the sector make up of the S&P 500. I then try to overweight and underweight each sector based on what tends to do well in similar periods as we have now, combined with an attempt to assess current events. I hope that studying both leads to a reasonable forward-looking analysis.
He goes on to ask what would make me change weightings. I recently cut back on energy because it grew to too large of a weight in the portfolio. I still target a slight over weight, vs. the S&P 500. My target did not change but the accounts did so I scaled back.
Toward the start of June I reduced the targeted allocation to tech as I have become less and less optimistic about the sector. I am sure I will miss the bottom in that group but with a little exposure I will capture some of a move up, if it comes.
He asks how passive or active the portfolio is. I have written before that I would love to have a portfolio be exactly right for the rest of time but that is not going to be the case. In the way I think an account should be managed, I am ready to make any type of change at any time.
One example of this might be the water theme. I own the PowerShares water ETF personally and for clients. The theme seems clear and obvious to me. I would sell the ETF at anytime if something convinced me I was wrong about water demand or I would swap it for a better mousetrap at anytime.
Lastly, the reader questions the value of using the S&P 500 as a benchmark. Any criticism is valid and the reader does note that other benchmarks have their flaws too.
Some of the candidates for better benchmark can be difficult to track. Keep in mind, like other PMs I have clients that have some level of interest in knowing how they are doing. One thing I stress here is that the market will get you to where you need to be if you have saved properly. Most people that hire someone like me have saved enough and so a manager just needs to not get in the way too badly.
Someone that has to have better returns will probably not have an account that looks like a broad based index regardless of what they benchmark.
No portfolio, strategy, benchmark or investor (professional or otherwise) can be perfect. The 30,000 foot concept of the portfolio laid out is fine, even if at the ground level it is wildly flawed.
The point with all of this is that a lot can be recreated using ETFs but not everything (yet?) so don't limit yourself to one product.
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6 comments:
I still like a broad based ETF or fund for 10 to 40% of a portfolio depending on risk tolerance and the rest of the portfolio. I know you disagree, but I think this makes sense for many people.
Roger...was there a point about the question designated as being from the Seinfled character?
Re if there should be a core diverse postion, this is what quantitative analysis, I assume, can answer. When allocation is trying to reach for above average returns, what does one do to manage risk? I do not know where that skill is taught, but something tells me that most asset account managers follow the herd. If they are wrong, they are not alone.
to comment 1, fair point. for some folks it is the best way to go. not ideal for me but no arguement.
to comment 2, the Seinfeld reference was just to amuse me, similar to the Mel Brooks reference in another post.
It will be a log day for anyone who reads this site with that type of granularity.
The rest of your post has a lot of meat on the bone and I may not follow it completely.
In the big picture, top down analysis says just being in the market or not (getting that decision correct) will determine 70% of your ultimate return. The rest, a core portfolio holding that is broad based that is, say, 30% of your account is valid and may be ideal for some folks.
I would think the herd issue woudl apply more to analysts or strategists at the big firms but it certainly could apply to portfolio managers at small RIAs too.
I like etfs and the top down preference that goes with the teritory. I get to avoid the chaos of a single stock but I am still stuck with managing risk, and to do so is harddd work. Market timing is one way, and I certainly try to rely upon it but it is fraught with creating a chain of difficult decisions that lead to an accumulation of stress and loss.If you are using mkt timing, and doing so successfully, I applaud you. Few admit it and mkt timing has been sent to the back of the bus. When the mkt traded in a range a few decades ago, mkt timing was accepted. If the shoe falls again, and the currect correction goes deeper, timing may work its way back into our thinking. Meanwhile, among retail asset managers being diversified and passive is the dominant mind set. At least, it seems that way to me.
Risk Management
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- several brokers now offer risk-analysis tools.
Risk Analyzer - Understanding Risk Course was helpful :-
http://riskcourse.wb.riskmetrics.com/
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RiskMetrics
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- the Etrade version offers a "What-If" screen
. . . this displays the smoothing effects of "Short" Open-End funds [ like URPIX ], or, having a few short-positions in say TLT , SPY , & QQQQ
Next, one can Stress-Test the portfolio simulating the effects of past crises like Sept 11, the Tech-Wreck, & Black-Monday.
. . . & one can test how ones portfolio would have behaved if the general indices rose +15% or what effects the Yield-Curve changes might have produced
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