Riskalyze

Here is a free program, Riskalyze, that creates a portfolio for you which first analyzes your risk tolerance and then creates a portfolio for you. You start by selecting one of the following choices:

Source: Riskalyze

You begin by specifying a "desperation amount."  This is an amount that, if you fall below it, will have a negative impact on your lifestyle - sort of like being in Vegas and keeping in mind that you need a certain amount to make it back home.  Seriously, though, this is an important number to consciously think about as you enter the investment arena.

As you see, I put in a portfolio value of $200,000 and a "desperation value" of $150,000:

Source: Riskalyze

Note the pictures and risk scores.  The old guy has a low risk score of 28, the professional woman a risk score of 45, etc.

Next you get a series of questions comparing alternatives, comprised of taking a sure gain or preferring an uncertain situation of a much higher gain (hit the ball in the upper deck) or dropping back to your "desperation value."

Here is the first alternative:

Source: Riskalyze

As you choose among these alternatives, the bar will eventually fill up and you'll receive a risk score.  I have to admit that I have never liked answering these types of hypotheticals as a means of uncovering risk tolerance.  I would rather look at past behavior and study historical returns.  I will say, though, that Riskalyze's approach may work well for some people and, admittedly, it is based on academic research.

The next set of choices will seek to present you with a case where you start out with your portfolio dropping.  Would you, in that instance, seek to take a chance to regain your position?  It proceeds through these kinds of questions to get at a risk score.

Source: Riskalyze

As you can see, once you get a score it gives you a range of potential returns for a typical portfolio.  The process is based on modern portfolio theory.  Thus, it is saying that the average portfolio for this risk score will fall within the indicated range based on 2 standard deviations from the average.

So, quantifying in this way can be useful for some people.

At this point, Riskalyze asks if you have a prediction for the market or if you would like to use historical returns.  After you pick, it will then construct a portfolio based on your choice in the first graphic above.  What I really like is that - as seen in the first graphic above- it allows for a simple portfolio.  This is the route I would definitely choose unless you want to make managing your portfolio a full time job.

Overall, this is an interesting program and one I think most DIYers will find useful to play around with. Try and see how different it is compared to what you are doing.

Ideas for Increasing Portfolio Income

Source: Capital Pixel

The biggest challenge facing many investors today is how to increase portfolio income.  Suppose you determine you want 40% of investment assets  in the fixed income sector.  OK...so what's next?

If we go back to the good ol' day,s we could just put 40% in AGG, the exchange traded fund (ETF) that tracks the Barclay's Aggregate Index and be done with it.  Back then, AGG offered a decent yield for its duration.  Unless you are an ostrich, you know this is no longer true.  Today, the Aggregate Index is loaded with low-yielding Treasury issues (gee, I wonder how that happened!) and its yield is 1.56% with a duration of 4.36 years - not a real attractive yield/risk tradeoff.

So where can the DIY investor go to find some ideas that might improve this tradeoff?  This, of course, assumes that you are either willing to do some research or obtain a whittled down list of ideas to talk about with your advisor. 

The first place you might want to consider is Seeking Alpha.  Click "Dividends & Income" at the top, and on the right hand side of the page you come to you'll find:

Source: Seeking Alpha

As indicated, these are ETFs; so automatically you get some degree of diversification, and typically they are managed versus an index.  Still, as noted above, you need to do some research.  Go to Yahoo! Finance or Morningstar, put in the ticker symbols (shown in parentheses in the table on the left), and check out their durations, yields, expense ratios, etc.  DO NOT BE SWAYED BY THE 12-MONTH RETURNS SHOWN IN THE RIGHT HAND COLUMN!  Remember, looking in the rear view mirror causes crashes!

In fact, at this juncture, the returns are an indication of which funds will suffer the most when yields rise!

A second place to get ideas is from the list of ETFs people viewed when checking on a particular ETF. For example, if you put "JNK" in the quote box at Yahoo! Finance, you get:

Source: Yahoo

As you can see, this is an easy way to get a short list of candidates to analyze for possible yield-enhancing opportunities. At the risk of sounding like a broken record, I would emphasize that looking for higher yield is going down the pot-filled road of increasing risk where you want diversification and careful management of position size - i.e., I wouldn't invest in any yield fund or security (example - note that NLY is a security not a fund!) more than 5% of the fixed income allocation.

Disclosure:  This post is for educational purposes only.  I own some of the funds mentioned.  Individuals should do their own research or consult with a professional before making investment decisions.

Stock Rover

Source: Capital Pixel

Looking for a state-of-the-art investment management, analysis system?  Stock Rover may be exactly what you are looking for.

In just the couple of days I have played around with it, I have used it to screen for stocks, analyze portfolios, set up watch lists, etc. The software has an easily accessible abundance of info that can only be truly appreciated by giving it a test drive.  Download and create  portfolios, and then find market news or firm-specific news by rolling over portfolio holdings' stock symbols.  Compare performance to various benchmarks over 11 different time frames and arrange information how you want to see it.

There are a number of reviews on line and really good supporting videos showing capabilities of the system, so I'll just point out one feature that impressed me.

I have recently been analyzing and making presentations on how investors can use ETFs to improve the yield on the bond portion of their asset allocation and at the same time manage risk.  This can be tricky given the number of bond ETFs available in the market place; and structuring them into a portfolio for analysis and comparative analysis is challenging, to say the least.  Thus, I was pleasantly surprised to see that Stock Rover carries bond ETFs and makes it easy to create portfolios.  Here is a small partial listing of the bond ETFs they list:

Source: Stock Rover

CLICK IMAGE TO ENLARGE   Note that this is just some of the ETFs that begin with the letter "c"!  This is the middle panel of three on the page that you'll see.  It holds stocks for screening, portfolios and, as shown here, available ETFs.

The image shows performance view.  In fact, there are numerous other views.  Because CSJ  (an ETF of short maturity corporate bonds) is highlighted, a graph of its price is shown on the bottom portion of the graphic.

Clearly, it is easy to see the price history of numerous bond ETFs efficiently by selecting them.  As you play around with this, you'll find it easy to move columns in the table and get the information you want in the format you want.

To the right of this middle panel graphic is security level information on the highlighted security:

Source: Stock Rover

 CLICK IMAGE TO ENLARGE   Again, just by a click and scrolling down, you have an incredible amount of information at your finger tips.  Note the "news" tab.  Click on it, and you get general market news as well as security-specific news.

With ticker symbols, security characteristics, etc. at your finger tips, it is a piece of cake to begin putting together a portfolio to examine.  With Stock Rover, you do this on the same page using the panel on the left hand side of the page you are already on!

As you can see in this panel, you have a couple of portfolios already set up.  I set up a Benchmark portfolio comprised of 65% stocks and 35% bonds benchmarked to the BlackRock diversified portfolio they use in their asset return table.

Source: Stock Rover

CLICK IMAGE TO ENLARGE  Again, you get an idea of the available information.  Just click the green "New" button, and you're set to construct a new portfolio.  Note that I've been on the "Portfolio Performance" view and that there are numerous other views available. Also, note the arrow pointing to ETFs. Clicking there produced the ETF listing in the center panel looked at earlier.

To really get a feel for the information available, you should play with it a bit.  I'm not sure how this will eventually be priced, but Stock Rover does make life easier for those who do a lot of security and portfolio analysis.

Check it out.

Disclosure:  I am not affiliated in any way with this product.  This post is purely for educational purposes.

2012 Year-to-Date Performance - BlackRock Standard Diversified Portfolio

Whew!  What a quarter and start to the year!

As I have said many times here, one of the most useful research/data pieces I know of on market and sector performance  is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors.  It shows annual asset class returns, color-coded, ranked so that investors can easily see the best-performing and worst-performing sectors for each year over the 20-year period.  What sets it apart from similar charts is that it shows the returns of a diversified portfolio on an annual basis.  Among other important points, it clearly shows how volatility is dampened with diversification and the hedging properties of bonds.

On the volatility point, note that the diversified portfolio return was never in the top two asset categories for any given year but, by the same token, was never at the bottom of the list.  Worth studying and thinking about, I think.  On the hedging property, pay particular attention to how bonds performed in the years when stocks had negative returns.  The best example, of course, is 2008.  It is really important to understand that we are talking about bonds - not certificates of deposit or savings accounts or anything of that sort.  The key is that bond prices rise when yields drop and vice versa.  Thinking through the bond portion of one's portfolio is one of the most important parts of asset management.

Anyway, these points have been made in greater detail in previous posts - let's look at how the diversified portfolio started the year.

Source: Morningstar

CLICK TO ENLARGE  The portfolio achieved a return of 8.18% return for the quarter. This was the best quarter for stocks in 14 years! Bond prices dropped as yields rose, and the bond market eeked out a return of 0.25%.  The best performing sector was growth stocks at +14.61%.

Overall, a really good quarter for retirees who are drawing down their nest egg.  In fact, it opens up possibilities.  A performance above what was expected can be used to use a portion of the exceptional gain to lock in income by buying an immediate-pay single premium annuity.  Or a slight increase can be taken in the draw down rate.  The point is that it opens up some possibilities for those retirees who are flexible.

For the accumulators, i.e. those building their nest eggs, the news isn't so good.  I know - it feels good to see the portfolio go up; but the important thing is not where it is today but where it is when it comes time to draw it down.  Stocks are more expensive today than they were at the beginning of the quarter but, on the brighter side, bond yields are a bit higher.

Disclosure:  The data shown in the table and discussed was obtained from reliable sources but cannot be guaranteed as to accuracy.  I and some of my clients own securities mentioned in the post.  The information is solely for educational purposes. I ndividuals should do their own research or consult with a professional advisor before making investment decisions.

Paul Merriman Videos on Portfolio Construction

Biz of Life presents 9 videos as the first part of a series that details the process of portfolio construction by renowned investment manager Paul Merriman.  The explanations are very well done.  Merriman shows how, over the longer term, based on academic evidence, adding asset classes increases expected compound annual return from 9.5% to 12%.  He clearly demonstrates the role of risk in the portfolio construction process.

This is one of the best explanations I have seen on this complex subject and is the starting point for understanding the investment process.  I highly recommend these videos for newbies as well as a review for more knowledgeable investors.  Those who make a living explaining these concepts will surely appreciate Merriman's clear presentations.

Were You In the Right Sector in 2010?

A good way to think about this question is to look at "The Callan Periodic Table of Investment Returns."  The table ranks, on an annual basis, returns of nine sectors of the market. For 2010, it shows Growth stocks as having the best return at 29.09% and bonds, as represented by Barclay's Aggregate Index at the bottom, with a return of 6.54%.

A huge take away from the Table is that predicting the best performing sectors is, to put it mildly, very difficult. Consider the last 3 years. In 2008, Emerging International stocks were at the bottom--down 53%; in 2009, they were at the top with a 79% return; and in 2010, fourth from the top at 19.20%. The best approach for most investors is to diversify among the sectors on the basis of a well thought-out plan.

As we know, many don't follow this path. In 2010, in fact, individual investors poured money into bonds at a record rate.

CLICK TO ENLARGE

DIY Newbie - Portfolio Analytics - Part 5

The DIY investor typically has at his or her fingertips powerful technology. This technology is easy to use, is indispensable in setting up and tracking a portfolio, and saves a lot of time in monitoring the portfolio. The way to learn it is to get your hands dirty and play around with it. Spending a bit of time now will pay huge time-saving dividends in the future.

Those of a certain vintage will recall days of keeping much of the data by hand. Today the novice has available much more than the institutional investor of even 15 years ago. The trick is to learn to use it.

I tend to use Schwab, so I'll illustrate it here; but similar tools are available at most major brokerage firms. But again, I find that people tend to approach brokerage inline sites like the old VHS systems where we learned how to play a tape and that was about it. We were ignorant of its other functions.

It is easy to get on Schwab, consolidate your accounts, and select a model portfolio. The model portfolio, in turn, will specify targets for various classes of assets. For example, it will specify a target for small cap stocks. Then one of the important tools is the asset allocation pie chart and table which shows you how far off target you are for each asset class both in dollar terms and percentage terms. In other words, it shows you where you have to take action and by how much to get closer to target. It simplifies the whole process of rebalancing.

Suppose you want to go one step further and drill down to see a listing of assets by account and sector? Click "Schwab Portfolio Checkup," "View Holdings," and "Asset Class Details." You get this table for each asset class.

CLICK TO ENLARGE Notice the information provided. Here we have "Large Cap Funds." You get the "gross expense ratio," the "asset class," "% of portfolio" etc. Also the account numbers, which have been erased here, are provided.
Notice the "multi-class" funds. These are allocated to appropriate sectors on the basis of Morningstar breakdowns.

Learning to use this technology simplifies portfolio management and is worth the time investment.

Protection Against the Bond Bubble

Small investors are piling into bonds despite highly vocal, widespread warnings of a bond bubble. It's time to leave, the water's coming over the dike, and the buses to the Superdome are filling up. If you don't leave now ,you'll soon be on your roof.

I agree with this, except for the timing, and timing is everything when it comes to money. It could be a while before the bubble bursts. The deflation scare could intensify. QE2 could temporarily push longer-term rates even lower.

What's an investor to do? I recommend looking at CSJ, a shorter-term bond market exchange traded fund, or, if you're looking at your 401k, considering a short-term corporate bond fund. CSJ is well diversified, participates in the short-term, corporate bond market and, best of all, has a shorter duration than the overall market. This means these bonds won't decline as much in price. I t is presently yielding slightly more than 3%.

Make no mistake-this bubble will burst within the next 5-7 years, and it will be ugly., For one thing, the younger generation of investors wil,l for the first time, see what inflation is really about.

Disclosure: My clients and I hold CSJ.

DIY Newbie - Portfolio Analytics - Part 4

Yesterday we had a look at the portfolio holdings and the percentage in each sector of the selected model versus the targeted percentage. This is a live portfolio. Today we want to see what trades need to be done to bring the portfolio back into line with the model.
Again, here is a listing of assets, all low cost, low turnover, exchange traded funds (ETFs):

CLICK TO ENLARGE The bond ETF is CSJ. The account is basically riding out the "bond bubble" by using a short-term (1 to 3 year maturity) corporate bond ETF. Although it gives up a bit in yield and price appreciation if rates drop, it provides protection in the event that rates move higher--which is the greater fear now. The "Big Cap" holding is SPY which tracks the S&P 500. Both CSJ and SPY have transactions costs; the others are commission free.

CLICK TO ENLARGE Next, let's revisit the table showing sector allocations relative to model targets, this time in dollar terms. We see that we need to sell approximately $500 from "Large Cap Equity" and increase "Fixed Income." In the first table above, we see that SPY is at $114.13/share, so we can sell 5 shares; and because CSJ is at $105.05/share, we would buy 5 shares. This would take "Large Cap" to approximate target weighting and overweight "Fixed Income." There are other minor moves that could be made, for example, to reduce cash and increase international slightly.

Notice that reducing stocks fits with the contrarian philosophy because stocks had a spectacular month! Also notice that there is some room, within this disciplined approach, for decision-making, if that's what you want. A 5% leeway, up and down, versus the target percent gives decent wiggle room.

This 4-part series has only touched the surface of the free analytics that are typically available to account holders. The only way to see and understand what is available to you is to get online and explore. You may want to do this with someone who is knowledgeable about investments to get a fuller understanding of the various tools. This is one technology where it pays to learn the full capability.

DIY Newbie - Portfolio Analytics-Part 3

At this point, as described in yesterday's post, we've got our model and we want to track our portfolio allocation. Let's look at an actual portfolio. Get into Schwab and click "Portfolio Analytics." This gets you to :

(CLICK TO ENLARGE) This is actually a 401k for a young person. She works for a small firm. Because it has less than 100 employees,, it can offer what is called a self-directed simple IRA. For the simple IRA the company is required to make a contribution. Thus, the portfolio manager knows when money is coming in and approximately how much. In this particular box, accounts can be combined--obviously important in getting an holistic view of assets.

Click "Edit" and then "View/Edit Portfolio." This brings you to a list of the holdings in the portfolio: (this is useful for later)

( CLICK TO ENLARGE) As you can see, the holdings are low cost, low turnover exchange traded funds. The portfolio is well diversified and participating in many markets. ,If individual securities are your style you would probably have many more holdings listed here .


Now we are set up to analyze the portfolio. Click "analyze portfolio" and "View Table in %":
(CLICK TO ENLARGE)

The right-hand column indicates changes that need to be made to bring portfolio into conformance. "Large Cap Equity" needs to be reduced and "Fixed Income" needs to be increased. "Cash Investments" can also be brought down to zero.
,
Next we'll look at specific trades that will accomplish the rebalancing.

If you can't wait, figure them out yourself using the securities held in the portfolio.

It hopefully, goes without saying that all of this takes considerably longer to explain and go over the first time than it actually takes. This is a 15-minutes-a-week operation once the portfolio is set up and you've been through it a couple of times.

DIY Investor Newbie - Constructing the Portfolio

This is another step towards managing our own investments. We go back to the asset allocation post and use that allocation to talk about implementing it with an actual portfolio. Recall that the allocation was arrived at after making specific assumptions. As always this is intended solely for educational purposes.