Portfolio construction is second in importance to The Golden Rule of Investing when it comes to building a retirement fund. Holding down expenses is also high on the list. What goes into building a portfolio? In this blog I’ll walk through the history of how the Rutherford came into existence and explain the logical steps used to create other ITA portfolios.
It makes sense to begin with the origins of the Rutherford portfolio as it has a rather long history, and if memory serves, the sources for what ETFs make up the portfolio are well understood. The current Rutherford holds ten (10) ETFs and this link takes one to the first mention of the Rutherford.
Two books were instrumental in the development of the Rutherford portfolio.
- The Ivy Portfolio by Mebane T. Faber and Eric W. Richardson
- Unconventional Success: A Fundamental Approach to Personal Investment – by David F. Swensen
In the Ivy book, Faber recommends holding the following 10 ETFs: VTI, VB, VEU, VWO, BND, TIP, VNQ, RWX, DBC, and GSG. One quickly sees the overlap between these ten recommendations and the ten ETFs found in the Rutherford.
Moving on to the Swensen recommendations, he specifies asset classes and percentages, but does not identify particular ETFs. This article lays out the Swensen recommendations. Once more we see VTI, VEA or VEU, VWO, VNQ, TLT, and TIP representing asset classes recommended by Swensen. Bonds, Gold, and Commodities are not included in the Swensen recommendations.
From these two books, and the ETFs or asset classes recommended, the Rutherford emerged. The current Rutherford portfolio uses AGG instead of TIP and GLD instead of GSG. In addition, PCY was added to provide coverage for an international bond equivalent.
Those of us who have closely followed the Rutherford know how difficult it is to outperform the VTTVX benchmark return. The bull market since March of 2009 is something to behold. We have not seen a major correction or recession to truly test the power of the Rutherford to resist a long downturn.
Asset Allocation is key to portfolio construction and this is the point of the David Swensen book. I highly recommend reading this book as Swensen lays out the logic behind his recommendations. The Rutherford is constructed using asset allocation as the basic foundation.
Another approach to portfolio construction is to use the investment quiver found in the Schrodinger or a computer managed portfolio. In addition to the Schrodinger, I’m testing several portfolios using the robo advisor investment quiver. These portfolios are: McClintock, Franklin, and Pauling. With these three portfolio I am using the ETFs Schwab employs to build the Schrodinger. Eighteen ETFs make up the Schrodinger. With the McClintock, Franklin, and Pauling, I’ve added VTI as the Target Filter ETF.
While the Schrodinger is a buy-hold-rebalance portfolio, I am using different systems within the Kipling to manage the McClintock, Franklin, and Pauling. This experiment is designed to test the validity of the momentum management model.
Yet another approach to portfolio construction is to focus on market factors rather than asset classes. With a few ITA portfolios I’ve combined ETFs from the Rutherford, factor based, asset allocation, and robo advisor securities. What does such a portfolio look like? Check out the following “Blend” portfolio.
Blend Investment Quiver
The “Blend” portfolio includes the eighteen (18) ETFs found in the Schrodinger (computer portfolio). Within these 18 ETFs one finds value, growth, domestic, gold, international, and bond asset classes. Within the “Blend” portfolio one also finds all the market factors represented. All asset classes recommended by either Faber or Swensen are included. In other words, the following portfolio covers all the bases.
Investors may find this portfolio too complicated and will run correlation coefficients in order to pair down the number of securities. That is certainly an option. Portfolio construction is one place where judgment is required. Think Dual Momentum is one is after simplicity.
Blend BHS Recommendations
In the following screenshot I am using the BHS management model. The Target Filter (left red arrow) is turned on and the Maximum Number of Assets is set to 15. Based on current data, the BHS model recommends buying seven (7) ETFs.
Blend Manual Risk Adjustments
Based on a $100,000 portfolio, below is how I would allocate the cash among the seven recommended ETFs.
For other portfolio construction models, follow the reviews for the different ITA portfolios as they become available. Several portfolios are reviewed or updated every week.