Portfolio Newsletter 4Q 2014

The 2014 numbers are in and all portfolios achieved above average returns in comparison to their peers. The “Low Min” portfolios nearly outperformed across the board due to higher performance from the Large Cap Value and Small Cap funds.

As you know from the last newsletter, we made a few changes I hope will generate even higher returns:

  • We are merging from two portfolios into one portfolio for each risk class. This will allow me to focus on research and to incorporate what was learned this year into further diversification of the portfolios.
  • Last year’s research into sector rotation led to a change in the selection process to pick funds with high weightings in the six sectors that have the highest potential for return this year.
  • In 2014, the Large Cap, Mid Cap and Small Cap portfolio weightings consisted of four funds. In 2015, they are being diversified further by expanding from four to seven funds.
  • Portfolios will be reviewed and rebalanced biannually to make sure they are still allocated to the appropriate six sectors. These changes should increase returns, increase diversification and reduce risk.

Portfolio Management & Strategy

You may be interested to know the focus of this year’s research is in technical momentum indicators. This will help to identify potential market downturns. Losses, especially in the early years of retirement, can lead to long-term financial disaster. The eventual goal of this research is to develop an active management strategy that seeks to reduce the risk to market downturns. It is the next step in the evolution of my portfolio management.

In its simplest form, a diversified portfolio seeks to reduce risk by allocating a portfolio across different investment types and sectors. Diversification works, but it doesn’t always lead to above average returns if there isn’t a fund selection process that removes underperforming funds.

Our fund selection process lead to above average returns for the last two years. In 2013, the portfolios outperformed their peers. In 2014, they were among the top in returns.

In 2015, Schwab is going to announce a series of Intelligent Portfolios™ that will offer “robot” managed portfolios. Targeted to millennials, these portfolios will offer algorithm based portfolios that include automated portfolio management, rebalancing and tax-loss harvesting. They will be limited in that investors won’t be able to make changes to the funds or to the weightings.

Shortly after rolling out the retail version, Schwab is going to make a customizable version available to its RIA partners – and we are partners under Atlas Financial Advisors. While details are scare, it is believed the RIA version will allow advisors to select from a larger pool of OneSource™ Exchange Traded Funds (ETFs) and to create custom portfolios. The benefit to using OneSource™ ETFs over their mutual funds (other than lower fees) is there are no transaction fees and no required hold period.

If you’re wondering why the OneSource™ ETFs are not being used in the portfolios initially, it is because there were a limited number of ETFs from which to choose. And while the quantity has currently increased, there is significant complexity when trading ETFs.

The new robotic platform offers a number of potential benefits. Automatic rebalancing will streamline ongoing management. It will keep the portfolios allocated properly for those taking withdrawals. It should also streamline the trading involved with making changes to the portfolios. The biggest opportunity will be making active management possible.

Over the course of the year I will share my research in the newsletter. You will see that it is possible to predict drops in the market. The ability to proactively react to information by selling high and buying low periodically throughout the year could be game changing. As soon as the RIA version is available I will begin a feasibility study to determine potential implementation. Stay tuned!