Sunday, December 10, 2006

PORTFOLIO ASSET ALLOCATION with a twist


ASSET ALLOCATION
This is NOT the Dogs of the Dow theory
Here is an asset allocation model I’ve prepared using a traditional 60/40 split between stocks and bonds with a twist. I’ve substituted MVV for MDY, SSO for SPY and QLD for QQQQ. These stocks move double the move of the related ETF.
This is by no means an investment recommendation but is intended to illustrate a concept in investing. Here is the hypothetical portfolio:

Bonds 40% ***40% ****30.77%
EEM 13.2%*** 13.2**** 10.15
EFA 14.4 ****14.4 *****11.08
IWO 2.4 *****2.4 *******1.85
MVV 7.2 ****14.4 *****11.08
QLD 6.6***** 13.2***** 10.15
SSO 16.2 ****32.4 *****24.92

Total 100 % *130 % ****100 %

The First column represents the dollar percent of each ETF (Exchange traded fund) plus the 40% bond portion
The second column doubles the percent of QLD, SSO and MVV which causes the total to increase to 130%. The third column restores the total to 100% by deflating the percentages of the components.

This hypothetical portfolio is somewhat like buying on the margin, but you would never get a margin call even if the double whammies caused that portion of the portfolio to drop to zero. A more conservative approach would be to keep cash in an amount equal to the values of MVV, QLD and SSO. You could also just use MDY, SPY AND QQQQ if the doubling of price volatility does not seem attractive to you.

In an asset allocation approach, you would rebalance to these percentages once or twice a year by selling winners and buying more of the losers. This would tend to cause you to buy-low and sell-high. Of course, when you rebalanced you might incur some capital gains taxes. But if BOTH the stocks and bonds went either up or down, you could still rebalance to follow this approach since the rate of increase or decrease would not be distributed equally among the components of the portfolio.

Generally, however, most advisors recommended that you do not rebalance if the percentage has made a very small variation from the desired percent. For example, anything under 5 % might be ignored when rebalancing time came. You might want to wait a while until the 5% or so change actually occurred. Likewise, you might choose not rebalance if the 5% occurred too soon after the last rebalancing
http://wwwtaxman.blogspot.com

For further tax information CLICK “IRS forms and Publ” in the LINKS portion below.


This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this correspondence was not intended or written to be used and cannot be used for the purposes of avoiding penalties.

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