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You are here: Home / Beginning Investors / Portfolio Requirements: Basic Ideas For Construction

Portfolio Requirements: Basic Ideas For Construction

April 14, 2014 By Lowell Herr

Portfolio Requirements: Basic Ideas For Construction 1

One of 600-800 chapels on Mykonos, Greece

Basic portfolio construction requires that long-term goals include diversification, a risk reduction model, and equity orientation.  Here is how I outline the thinking process when putting together a portfolio of securities.

  • Think diversification through asset allocation.  Each asset class included in the Strategic Asset Allocation (SAA) plan should hold a target percentage that makes it worthwhile, but not so large as to overwhelm the portfolio should that asset class hit a major market bump to the downside.
  • Use non-managed index instruments.  My preference is to use widely held Exchange Traded Funds (ETFs) like those listed below.
  • Long-term investors will tilt the portfolio toward equity ETFs instead of bond ETFs as long-term growth is the goal.
  • Diversify over 8 to 12 asset classes including Cash.  Allocate a minimum of 5% to each asset class with exception of Cash.
  • Include real estate as inflation protection as well as U.S. Treasury Inflation-Protected Securities (TIPs).
  • Both Developed International Equities and Emerging Markets are part of a well-diversified portfolio that has an equity orientation.
  • A broad base of U.S. and International Bonds are available to investors.  Examples are provided below.
  • When possible, use commission free ETFs.
  • Employ a risk reduction model that can be a combination of the SHY cutoff and the ITARR model.  There is a lot more written about the ITA Risk Reduction model on the original blog vs. what you find here on the new site.  Just use the Search engine on the original (http://itawealthmanagement.com) site.

What might a portfolio look like in Dashboard format?  The following Dashboard is from the Euclid after the sale of VUG.  Once Large-Cap Value (VTV) is sold and the under target asset classes are built back to target, this portfolio will look like one that holds true to all the bullet points listed above.

Dashboard

Specific Holdings:

  • U.S. Equities:  VTI, VOE, and VBR.  VOE and VBR are included based on Fama and French research.
  • Bond and Income Investments:  BIV, BND, JNK, LQD, TLT, and TIP.
  • Developed International Equities:  VEA
  • U.S. REITs:  VNQ
  • Emerging Markets:  VWO
  • International REITs:  RWX
  • International Bonds:  BWX and PCY.

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Filed Under: Beginning Investors, Critical Material Tagged With: Beginning Ideas, Portfolio Construction

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