Wednesday, August 27, 2008

A Response to Teresa Lo

If you've been following things around here for a while, you'll recall that back in April I wrote a post which was effusive in its praise for Teresa Lo's series on building your own investment portfolio. Little did I know that Teresa would comment on that very post. I was honored.

In her comment, she asked me

Now that you've decided to reduce the number of asset classes, I was wondering how you plan to allocate the funds? Do you use a certain formula?

to which I had no response at the time. There were some other matters that had my attention, so I never really gave the question extensive thought. What I did know was that I liked the satellite portfolio that Teresa describes in the series. So much so that I planned to copy it outright. (What was that about great artists stealing?) While I would imagine that any portfolio that InvivoAnalytics constructs for a client would have slightly different components, the overall idea and simplicity of this portfolio is ideal. I know that I have too many components to my current portfolio, and while I like them all, there has to be a better way.

First, I have liquidated all the holdings in my taxable account. As I've previously stated, I use the aggressive allocation from for my 401(k). So this interpretation of the satellite portfolio will truly be the "explore" portion of my overall investment holdings, while the "core" remains in my 401(k).

So, to answer the question, I return to the original inquisitor...I have purchased a subscription to's Portfolio Strategy service!

Now, this may seem like a cop out, but I considered the following factors. First, I was planning to use the same investments anyway. Two, Teresa and Pete have put in the time and effort to come up with the algos to perform the asset allocation, rebalancing, and other processes which I would otherwise have to implement manually, and their processes are targeted at the same ETFs. Third, I'm busy. I am working on several projects outside of my investing, some of which I've talked about on this blog. There is just not enough time, and consequently not enough value I could add with the time available, to make the investment pay off. The work has already been done, so I should use it. Fourth, I didn't have to pay directly out of my pocket; I was able to pay with blog earnings. Its a minor point, but anything that reduces the friction in this kind of decision is "A Good Thing".

So Teresa, I think you already know the answer to the question by now.

That said, here's the breakdown from Monday:
  • VXF - 16.88%
  • EEM - 14.18%
  • GSG - 9.92%
  • FXF - 28.13%
  • TLT - 30.89%
Now, some things to keep in mind before anyone rushes off to implement this allocation. First, these are the allocations from's Strategic Performance Portfolio. They are designed to be implemented in a trading account, since they rebalance the allocations weekly. Thus, you'll want to reduce your friction as much as possible.

Also keep in mind that these are not core retirement portfolio holdings and allocations. has services for a core portfolio which is designed to be implemented within your primary retirement account, primarily targeted at 401(k)s. As I have mentioned before, I use the aggressive asset allocation from in my 401(k), with a few tweaks for a more defensive posture in this market (primarily, more international exposure for a greater risk/return profile, more cash, so I have some dry powder, and less real estate exposure for obvious reasons). If you're looking for a core 401(k) asset allocation from Invivo, the Strategic Performance Portfolio is NOT it.

Part 8 of Building You Investment Portfolio discusses some of the details of how the dynamic algorithm works (at a high level).

(Yes, those numbers change every week, so while you're getting a free ride for this past Monday, by next Monday the numbers will be different. You shouldn't buy in the middle of the week anyway, but wait until the next allocations come out next Monday. However, you have to be a subscriber to find out what those will be!)

So all of that said, thank you again Teresa for coming up with these model portfolios and giving me time back to generate alpha in other ways!

Until next time...

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