The following article is designed to help investors use the Strategic or Maximum Asset Allocation percentages that are optional in the Kipling spreadsheet. The default setting is to adjust all percentages to 100% and let the Kipling determine the allocation percentages for each security. There are some asset classes where I prefer not to let the percentage run up to 100% of the portfolio. Gold (IAU, GLD, or SGOL) is such an example.
The percentages set in the sample portfolio below are examples. Depending on the risk an investor is willing to take, these percentages vary. Set all percentages to 100% if you wish to remove all risks for a particular asset class as I’ve done with U.S. Total Market Equities (VTI).
Sample Investment Quiver
Investment Quiver is a term I use to describe all the securities one might use to populate a portfolio. If SHV is included, we have 23 investment “arrows” in this sample quiver.
In the third column from the left, identified by the red arrow, I’ve made my percentage adjustments for this sample portfolio. ETFs that represent small- and mid-cap asset classes are to receive a smaller percentage of the portfolio. Note that I limit gold (IAU) to 10%.
At the bottom of the list you see VBK and VBR. Both are small-cap asset classes but VBR is a value asset class while VBK is a small-cap growth asset class. I favor value over growth and that is why VBR is given a higher potential percentage. The same logic is true for VOE and VOT.
These percentages are judgment calls based on my experience working with a large endowment fund.
Continuing with the analysis of this $100,000 sample portfolio, we want to see how the above maximum asset allocation setting are impacting the Buy, Hold, and Sell recommendations. Let’s first go through the settings for this portfolio.
- I am using the Buy-Hold-Sell (BHS) model (right red arrow).
- The Maximum Number of Assets is set to five (5) (Yellow arrow). Why are only three securities recommended as a Buy? To be explained in a moment.
- Over on the left you see a red arrow pointing to the Target Filter, which is turned on. When the Target Filter is set to Yes, an ETF to be recommended for purchase must have a higher Rank (see black arrow) than the Target Filter ETF which is VTI in this portfolio. Since VTI holds a rank of 3, only ETFs with a rank of 1, 2, or 3 will be recommended for purchase. That limits the Buy recommendation to QQQ (#1), MTUM (#2), and VTI (#3). Were I to turn the Target Filter off, VWO (#4) and SLV (#5) would be recommended for purchase. That would give us the maximum five (5) securities. If an investor wished for more diversification, the number five would be raised to something higher. However, only those ETFs with a rank of 9 or 10 are ever recommended for purchase.
How does the Maximum Asset Allocation percentage play a role in the recommendations? If you scroll back up to the investment quiver, you will see that the maximum allocation for QQQ is 35% and for MTUM it is 25%. Those two ETFs have reached their maximum, but they only total 60% of the portfolio. VTI is the other recommendation and I have the max asset allocation set to 100%. Therefore, the remaining percentage will roll into VTI, or in this example 40% of the portfolio is automatically allocated to VTI. Had I limited QQQ to 30%, VTI would end up with 45% of the portfolio.
Had VTI been ranked #1 and other ETFs ranked some steps down, the entire portfolio would be invested in VTI.
If an ETF fills its asset allocation percentage, the excess flows into the highest ranking ETF. Should that ETF fill up its percentage, the software selects the next highest ranked ETF and begins to fill it – and so on until 100% of the portfolio is accounted for or used.
Sample Manual Risk Adjustment Recommendations
ITA readers are very familiar with the following manual risk adjustment worksheet. Users of the Kipling know how to work with Position Sizing or portfolio risk. From the Position Sizing (Auto) worksheet flows the following data. The recommended shares are identified by the black arrow. In the 8th column from the right the money manager determines how many shares to hold. For example, I’ve selected 225 shares to be allocated to VTI. Since there are already 200 shares of VTI in the Sample Portfolio, we need to buy another 25 shares or the amount found in the 5th column from the right as identified by the right red arrow.
MTUM is shy 10 shares so we would purchase 10 more shares of MTUM to fill its “requirement.”
Sample Performance Data
Just to polish off this sample review, a performance data set is included in nearly all ITA reviews. This is a sample screenshot showing the Internal Rate of Return (IRR) for the portfolio with several benchmarks included for comparison. I use VTHRX as the benchmark for the ITA portfolios as it is approximately a 70/30 stock/bond index fund.
This post provides an overview of how the Kipling handles different percentages allocated to different ETFs or securities.