You Don't Hear Too Many People Say This

The other day I mentioned a model portfolio that I use to be representative of client portfolios. It gives some sense of performance for the quarter or the year, although for most people the reality is that is too short of a time period. As I often say; quick how'd you do Q3 2005?

This model portfolio is a good proxy for client accounts but not perfect there are a few caveats that go along with the idea but another thing that it does, and this would obviously be the case if I picked a client account to do the same thing, is that it gives a sense of whether the various effects I am trying to capture are actually behaving in the way I hope. If so great, if not then perhaps a change needs to be made.

I've written a lot of posts about trying to capture nuance in things like volatility characteristics by blending together stocks and some ETFs with different attributes. I get the sense that some readers try to do this or something similar and some do not. If you do use narrow based products not only for their own merits but for how they interact with your other holdings then you should probably looking at your portfolio every day. If you don't then you don't really know whether the combo you have assembled is working in the manner you expect/hope.

People are generally encouraged to not look at the portfolios very often, in fact depending on where we are in the cycle jokes get made about not even opening the statements. If you expect your combo to be more volatile than the market how can you know if it is if you don't check it regularly like every day?

People seem more interested in a portfolio that is less volatile than the market and generally it is easy to know where to look for things that should be less volatile like absolute return funds or stocks from sectors like utilities, ma bell telecom and staples. Generally speaking these sorts of things are less volatile and most people know this but back when things were unraveling there were certain things, absolute return especially, that did not actually dampen volatility. For example in September and October of 2008 the Schwab Hedged Equity Select Fund (SWHEX)fell 20% right in line with the S&P 500 and there were more absolute/alternative funds that struggled at different points.

Anyone owning that fund who didn't look at their portfolio would not have known that the fund was struggling. It is not fair to assume that the typical person, upon realizing that SWHEX wasn't "working," would have actually sold the fund but it is much easier to understand what is or is not working in a portfolio by following it closely. I can imagine that some people in pursuit of lower volatility simply did not assemble their portfolio correctly. Again, how can anyone know this if they do not look at what they own regularly.

You may recall that in March 1989 the Exxon Valdez spilled a bunch of oil in Prince William Sound. This caused the stock to decouple from the Amex Oil Index (XOI) which is the only oil stock proxy I know of from back then. Exxon finished 1989 up 15% versus a 33% gain for XOI. Looking at the chart it appears as though the spill caused the stock to decouple from the index and then lag behind by a meaningful amount. Exxon certainly would have been a reasonable proxy for domestic oil and could have offered several effects to the portfolio but the news of the spill had an immediate and obvious impact that would have been missed by the person not closely following their portfolio.

A modern day application of this could be something bad happening to a stock that is a large constituent of a narrow ETF for a big sector. For example someone overweighting tech versus the S&P 500 by using iShares Technology ETF (IYW) would be adversely affected by a Valdez-like event at Microsoft. BTW most clients own IYW.

This is probably irrelevant for people who own some combo of SPY, EFA and IWM but for the rest of us; ignore the advice of not looking at your portfolio every day.

The Dakar Rally started a couple of days ago. This is a pretty neat thing to watch. It is no longer in Africa because the safety of the participants was threatened a couple of years ago (they canceled it in 2008) so they moved it to South America but kept the name. The drivers are flying and the scenery is awesome. I have it on my life list to go watch in person one year. For some reason the big trucks are my favorite thing to watch. Since we have Directv we do not have the Versus channel anymore so I'm limited to 3-4 minute webcasts to keep up.