The following recommendations are only guidelines as each investor needs to be comfortable with the number of ETFs used to diversify a portfolios. For example, I’m not comfortable concentrating a one million dollar portfolio in one or two ETFs. If the ETF were VT or VTI, then it is not so bad, but suppose the top ETF turned out to be PCY or GLD. If this were the case, reservations kick in – at least for me.
Here are broad guidelines readers of ITA might consider as appropriate for portfolio diversification.
- Portfolios between $0 and $100,000 might diversify from one to three ETFs. For example, in the Galileo I am now using three ETFs. This could easily be reduced to one or two ETFs.
- Portfolios between $100,000 and $250,000 might diversify using two to four ETFs.
- Portfolios greater than $250,000 might diversify using three to five ETFs.
The underlying assumption is that the absolute momentum is always positive. Simply put, the ETF of interest is outperforming SHY.
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What about much larger portfolios? .eg Newton is over 700K but last I saw had a lot more that 5 ETF.
Bob,
My goal is to sell off ETFs in the Newton as they under-perform SHY. The goal is to simplify. I expect this to begin in July after the second quarter closes.
Lowell
Isn’t a solution to the “pure momentum” problem (ie. am I willing to go all-in on a fund I may not like, even if the model I’m supposed to trust is calling for it ?) to use separate asset-class boxes (ala Antonacci).
He had 4 boxes, equity (US/intl), bond (IG/HY), “stress” (LoT/Gold), Real Estate, and the cash filter cutoff for each of them. So in this model, you could never be more than 25% invested in each asset class (well, besides “cash” of course), which may allay some some hestitations people have about putting all their money into commodities, for example. Of course, the standart diversification disclaimer applies, lower volatility at the cost of lower returns.
Similarly, you can construct all sorts of “arbitrary” (but which have their utility in helping you sleep at night and stick to the strategy) additional rules, like “invest in the top 3 ETFs, BUT at least one of them has to be from a different asset class (as long as they have positive momentum of course, else cash), or weighting schemes (like inverse volatility) to tame the model.
Bert,
Using different boxes is a viable approach to reducing “mental risk.” This model or approach is quite similar to employing a cluster analysis where one is investing in ETFs that have low correlations.
Using different boxes is also similar to some of the Couch Potato portfolios.
Lowell
lowell in a larger Portfolio if you used 3-4-or 5 etfs would you Equal Weigh or put more percentage in the top etf and less in the 4rd and 5th
Joe,
If I were to favor any ETFs it would be those that have the highest absolute acceleration percentage.
Lowell