Monday, February 19, 2007
After reading Charles Kirk's lazy portfolio work I felt motivated to take a stab but I wanted to do it with a slightly different twist. I did not want to just come up with something that had similar weights in similar funds found in other variations on this theme. I also I think it is constructive to encourage the exploration of different funds.
I can't offer a three fund mix but maybe seven funds can fit the bill? I feel like we need a minimum of two funds to cover domestic equities, two for foreign, one for commodity exposure and two for fixed income.
We have a problem already for some; no REITs.
First the list;
iShares DJ Dividend Select Index Fund (DVY) 25%
Rydex S&P Small Cap 600 Pure Value ETF (RZV) 15%
WisdomTree DIEFA High Yielding Equity ETF (DTH) 25%
BLDRS Emerging Market 50 ADR ETF (ADRE) 5%
DB Gold ETF (DGL) 5%
iShares TIP Fund (TIP) 20%
Advent Claymore Convertible Bond Fund (AVK) 5%
Now some commentary;
The first assumption is that whatever cash for emergencies or the three to six months worth of expenses is already set aside. I also wanted to try to spread around exposure to different ETF companies.
According to PortfolioScience the standard deviation of this mix is 6.28, the correlation to the S&P 500 is 0.86 and the beta is 0.74. As I figure it the yield of this mix could be 3.32%. As long time reader SLMasker noted the other day TIP's payout is quirky and the trailing yield may not be the same going forward. For DGL I assumed 4% but I think at current rates DGL might pay out closer to 4.5%.
Morningstar notes a very heavy weighting to the financial sector. I'm not certain if the 34% cited by Mstar is right but the sector weighs in at 35% of DVY, 18% of RZV, 42% of DTH and 15% of ADRE. As I figure it that works out to 22.7% of the total portfolio and 32% of the equity portion. The mix is light on healthcare, energy and tech and very heavy on telecom and utilities.
These skews just go with the territory of using broad-based products like the ones listed here.
I chose DVY because I use it for a few clients; it has a good track record compared to other similar ETFs. Small cap value does better than broader small cap over long periods of time. I chose RZV here because it has done well compared to its peers and introduces a different fund company into the mix. DTH has smoked iShares EAFE (EFA) with about twice the yield. ADRE (personal and client holding) has smoked its competition but it only owns 50 stocks so you should expect more volatility than from funds with hundreds of stocks.
For the fixed income portion I believe in the inflation protection concept. As noted above the pay out for TIP (client holding) is quirky but an underlying assumption is that this is for a person not yet investing for income. AVK is held by a lot of clients. I think this is a great part of the market for some exposure but I could have just as easily gone foreign which would have been client holding Aberdeen Asia Pacific Fund (FAX).
I included gold so as to have one thing that has an obvious chance of going higher if something bad, terror or war wise, ever happens again. The reason for DGL as the choice is for the potential that it could pay some interest. I am giving this some time to season before actually buying it for clients.
Lest anyone adds two plus two and gets 22 I have not implemented this for anyone nor am I going to. It ignores a lot of themes that I believe are important for the next several years and that I think will add value. All lazy portfolios ignore things like Chindia, water and the other things I have touched on and other similar themes that I do not mention and don't invest in.
In the last few days we had some chatter on the blog about the portfolio put forth by John Serrapere on IndexUniverse. His portfolio is nothing like a lazy portfolio; just wanted to avoid that confusion.
Lastly, if you want to use this type of portfolio fine but I would still advise a little bit of follow up time. Maybe a lazy portfolio investor could devote one or two Sunday afternoons a year to look for better mousetraps and to square away the occasional rebalancing that might need to be done.
You should feel free to offer your own lazy portfolio or maybe some tweaks to mine.
Glad to hear so many readers are dog people too.
The above picture is from our last trip to Kauai in 2003. It is the Hanalei Bay at sunset.