Katydid – Recently found on a Chicago Peace rose.
ITA readers frequently find me referencing investment writings by William J. Bernstein, Richard Ferri, Charles Ellis, Larry Swedroe, David Swensen and a few others. Bernstein is at the top of my list based on the soundness of his information and humorous writing style. Embedded in the writings of all these authors is the fundamental principle of Asset Allocation when it comes to portfolio construction. Kepler is such a portfolio. There are two basic decisions a portfolio manager needs to make when setting up an Asset Allocation portfolio.
- What asset classes to use.
- What percentage to invest in each asset class.
What I’ve done with the Kepler is to follow guidelines recommended by Swensen and Bernstein.
Kepler Asset Allocation Portfolio and Holdings
The Kepler holds 13 different index ETFs in an effort to cover asset classes across the globe. Two missing asset classes are commodities and precious metals (gold). Gold does not have a stellar long-term track record and I don’t enjoy messing with special tax forms when it comes to commodities. Therefore, I eliminated them from all the Asset Allocation portfolios. If readers want to include those two asset classes then follow Hedgehunter’s Rutherford portfolio. If I recall correctly, the Rutherford portfolio closely follows recommendations by another sound investment writer, Mebane Faber.
In the following screenshot readers can see which asset classes exceed the recommended percentage and which are below target. To limit taxes, shares are purchased but never sold unless there is an emergency. The owner of this portfolio recently needed to extract money, but is now beginning to rebuild the account.
When new cash becomes available, limit orders are set to bring asset classes below target into balance. Before the Kepler was switched to the Asset Allocation investing model it held a high percentage in VOO. That is why this asset class is well above target. Instead of selling shares of VOO, and incurring a taxable event, new infusions of cash and dividends are used to purchase shares of ETF below target.
Kepler Rebalancing Recommendations
Developed International Equities (VEA) is the asset class most below target. Instead of using all available cash to bring this single asset class into balance, I set limit orders for several asset classes below target figuring some ETFs will drop in price while others will rise. Over time the various asset classes will be brought into balance. In-balance is defined as within 1.0% of the target or recommended percentage. Ideally I prefer if each asset classes is within 0.5% of the recommended percentage. That is the goal of a balanced portfolio.
Kepler Performance Data
Since 12/31/2021 the Kepler trails the AOR benchmark. As readers can see it would have been much better to simply invest in the S&P 500 ETF, SPY. Hindsight is amazing. Readers interested in seeing how an all equity portfolio performs need look no further than the Copernicus portfolio.
Kepler Risk Ratios
The Kepler has been operating as an Asset Allocation portfolio for a little over six months. Rather than focusing on the lack luster IRR value we are interested in growth, particularly the direction of the Jensen Performance Index and Information Ratio. Both metrics are currently trending in a positive direction. It is still too early to know if this is due to a bullish market or to the Asset Allocation model. More data is needed to determine the success or failure of the Asset Allocation investing model.
Share this ITA blog site with friends and family. To see all of the blog one needs to register as a Guest and wait to be elevated to the Platinum level.
Discover more from ITA Wealth Management
Subscribe to get the latest posts sent to your email.
You must be logged in to post a comment.