Sunday, August 10, 2008

Still beating the S&P 500 with a simple portfolio

Back in early 2006, The Confused Capitalist suggested a low maintenance model portfolio that I felt would outperform the S&P500 over the next five years or so. The portfolio was based on certain themes, some of which are ones which have generally proven to outperform over longer periods of time, such as buying value positions and small companies.

Additionally, I felt that commodities and emerging markets would continue to benefit from the world situation, and that the US dollar would continue to be under pressure - thereby adding to investments denominated in something other than US$. I suggested positions in a total of six ETFs, at values of 7.5% to 25% of the portfolio, with most around the 20% range.

When we reviewed this portfolio on June 17 2007, we found it had outpaced SPY by 5.4% over the 14 months since inception. It's now been 14 months or so since that review, and the market has changed notably over that time frame; let's check in with our model portfolio to see how it has performed.

Since then, SPY has dropped by 15.5% and is now priced at $129.37. Let's see how our own simple ETF-based portfolio, which looks like this, performed:
  • 20% weighting to a broad-based international ETF - EFV - $78.92 - ishares product tracks the MSCI EAFE Value Index, which tracks European, Australian, and Far Eastern markets. This ETF closed at $58.96 on Friday August 8, 2008, for a 25.3% loss.

  • 18.6% weighting to small company - IWN - $85.11- ishares product tracks the Russell 2000 Value Index (US small cap). This ETF closed at $68.84 on August 8 2008, for a 19.1% loss.

  • 25.7% weighting to emerging markets - EEM - $44.14 (adjusted for a 3 for 1 split) - a broadly-based (for emerging markets) ishares product tracks the MSCI Emerging Markets Index. This ETF closed at $41.16 on August 8 2008, for a 6.7% loss.

  • 19.4% weighting to the value portion of the S&P 500 - IVE - $83.78 - an ishares product tracking the value portion of the S&P500. This ETF closed at $65.90 on August 8 2008, for a 21.3% loss.

  • Commodity-oriented countries: The Canadian ETF (EWC; 7.6% weighting) - $30.58- and a Brazilian ETF (EWZ; 9.1% weighting) - $62.66. The EWC closed at $29.35, for a 4.0% loss, and EWZ closed at $74.61, for a 19.1% gain.
Overall, this portfolio lost 13.1% of its value compared to our last review in June 2007.

Last year, both this portfolio and the SPY were up, although this portfolio beat the SPY by 5.4%.

So this year, both SPY and this portfolio are down, although this portfolio did beat the SPY by 2.4% which is still pretty significant outperformance.

The relative gains and losses on the portfolio aren't sufficient enough to warrant a re-balancing yet, so here are the relative portfolio balances going forward:

  • EFV -19.5%
  • IWN - 18.5%
  • EEM - 26.0%
  • IVE - 19.1%
  • EWC - 7.8%
  • EWZ - 9.1%


The Confused Capitalist

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