Demonstration Portfolio

The Cognitive Investing Demonstration Portfolio

January 14, 2020

 Portfolio review for the fourth quarter of 2019

For the 2019 calendar year, the Cognitive Investing demonstration portfolio advanced by 20.3%.  Over this same time period, the S&P 500 rose 31.5%, the average diversified stock fund rose 28.3% and the average taxable bond fund increased 8.6%.  International stocks rose 18.4% and the DJ total stock market index rose 30.9%.  As before, these benchmarks include the returns from dividends as well as capital appreciation.

For the last five years, the Cognitive Investing demonstration portfolio advanced at a compound annual rate of 6.9%.  Over this same time period, the S&P 500 rose 11.7%, the average diversified stock fund rose 9.1% and the average taxable bond fund increased 3.0%.  International stocks rose 2.8% and the DJ total stock market index rose 11.2%.

The Cognitive Investing demonstration portfolio has completed its 8th year, and has more than doubled over that period.  For the full 8-year period, the portfolio rose at a compound annual rate of 9.1% per year.

This 8-year period did not include any significant bear markets, so the portfolio has yet to be tested in adverse market conditions.  But 9% per year over an 8-year period is a healthy return, considering the portfolio is only about 2/3 invested in equities, with the remainder in bonds and cash.

At the end of 2019, the state of the portfolio was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
             
BLV Vanguard Long Term Bond Index ETF 381 $100.34 $38,229.54 9.54% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $127.96 $38,004.12 9.48% 10%
PFF iShares Preferred Stock ETF 949 $37.59 $35,672.91 8.90% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 440 $136.71 $60,152.40 15.01% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $115.72 $84,475.60 21.08% 20%
VEA Vanguard Europe Pacific ETF 1348 $44.06 $59,392.88 14.82% 15%
VNQ Vanguard REIT ETF 462 $92.79 $42,868.98 10.70% 10%
VWO Vanguard Emerging Markets ETF 432 $44.47 $19,211.04 4.79% 5%
Cash 1 $22,668.63 $22,668.63 5.66% 5%
             
Grand total $400,676.10 100.00% 100%

The U.S. stock market has been in a bull market since March of 2009, which is the second longest period in history without a significant decline of at least 20%.  The market is expensive according to any number of valuation parameters.  The bond market is also rather expensive, which is another way of saying that interest rates are very low.  It is unreasonable to expect that the market’s return over the next 8 years will be a duplicate of the last 8 years.  Investors should be prepared for more turbulent markets and the possibility of large declines in the next several years.

Any investor who has entered the market since the 2008-9 decline has little experience with bear markets, and is susceptible to making emotionally-based decisions to sell stocks close to the bottom of the next bear market.  Although these investors are confident at the current time, such confidence could be severely tested in the next several years. Having a methodology like the one demonstrated with this portfolio is an excellent way to prevent an emotionally-driven decision to sell stocks at the worst possible time.

 

July 15, 2019

Portfolio review for the second quarter of 2019

The Cognitive Investing demonstration portfolio rose by 2.0% during the second quarter of 2019.  The S&P 500 rose 4.3%, the average diversified stock fund rose 3.4% and the average taxable bond fund rose 2.3% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 2.5% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 4.1%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Long Term Bond Index ETF 6.06%
Ishares Investment grade Corporate Bond ETF 5.07%
Guggenheim S&P 500 Equal Weight ETF 3.69%
Vanguard Europe Pacific ETF 3.58%
Ishares preferred stock ETF 2.24%
Vanguard REIT ETF 1.19%
Vanguard Emerging Markets ETF 0.73%
Powershares FTSE RAFI small/mid cap ETF 0.41%

The state of the portfolio as of 6/30/2019 was:

ymbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 381 $96.78 $36,873.18 9.67% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $124.02 $36,833.94 9.66% 10%
PFF iShares Preferred Stock ETF 949 $36.85 $34,970.65 9.17% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 440 $127.68 $56,179.20 14.74% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $107.80 $78,694.00 20.64% 20%
VEA Vanguard Europe Pacific ETF 1348 $41.71 $56,225.08 14.75% 15%
VNQ Vanguard REIT ETF 462 $87.40 $40,378.80 10.59% 10%
VWO Vanguard Emerging Markets ETF 432 $42.53 $18,372.96 4.82% 5%
Cash 1 $22,668.63 $22,668.63 5.95% 5%
Grand total $381,196.44 100.00% 100%

At the beginning of the quarter, all portfolio constituents were within 1% of their target allocation, so no rebalancing trades were warranted.  The same situation applies to the current quarter.  Actual allocations need to be more than 1% away from their target to warrant a rebalancing trade.

The bull market is now well into its 11th year.  This is much longer than the historical average, and investors should not assume that markets rise forever.  There will be a bear market at some point in the future and it is prudent to mentally prepare for it in advance.  The timing, of course, is impossible to accurately predict, most likely occurring when few expect it.  A diligent rebalancing strategy will prevent investors from being over-weighted in the most vulnerable asset classes when the inevitable downturn occurs.

April 11, 2019

Portfolio review for the first quarter of 2019

The Cognitive Investing demonstration portfolio rose by 12.3% during the first quarter of 2019.  The S&P 500 rose 13.6%, the average diversified stock fund rose 13.3% and the average taxable bond fund rose 3.5% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 9.0% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 14.0%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard REIT ETF 16.64%
Guggenheim S&P 500 Equal Weight ETF 14.79%
Powershares FTSE RAFI small/mid cap ETF 13.69%
Vanguard Emerging Markets ETF 11.76%
Vanguard Europe Pacific ETF 11.67%
Ishares preferred stock ETF 7.79%
Ishares Investment grade Corporate Bond ETF 6.16%
Vanguard Long Term Bond Index ETF 5.51%

The state of the portfolio as of 3/31/2019 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 381 $92.14 $35,105.34 9.39% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $119.06 $35,360.82 9.46% 10%
PFF iShares Preferred Stock ETF 949 $36.55 $34,685.95 9.28% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 440 $127.69 $56,183.60 15.03% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $104.44 $76,241.20 20.39% 20%
VEA Vanguard Europe Pacific ETF 1348 $40.87 $55,092.76 14.74% 15%
VNQ Vanguard REIT ETF 462 $86.98 $40,184.76 10.75% 10%
VWO Vanguard Emerging Markets ETF 432 $42.50 $18,360.00 4.91% 5%
Cash 1 $22,668.63 $22,668.63 6.06% 5%
Grand total $373,883.06 100.00% 100%

Three rebalancing trades occurred during the quarter.  I sold 39 shares of BLV at a price of $88.39.  I bought 36 shares of PRFZ at a price of $112.52, and bought 162 shares of VEA at a price of 36.73.  All portfolio constituents are within 1% of their target allocation, so no rebalancing trades are warranted for this current quarter.

In the first quarter, the stock market essentially reversed the decline from the previous quarter, leaving the overall levels roughly equivalent to where they were six months ago.  Bond prices did better over that period, though, with the most recent quarter’s performance being much better than the magnitude of the decline in the previous quarter.  The pace of stock market increase over the first quarter (>10%) cannot continue for long, since it would make the market extremely overpriced after several more quarters of greater than 10% appreciation.  The growth in the economy does not warrant an annual appreciation rate over 50%, or even anything close to that.  So investors should be prepared for lower returns going forward than what was experienced in the most recent quarter.

 

January 16, 2019

Portfolio review for the fourth quarter of 2018

The Cognitive Investing demonstration portfolio fell by 9.1% during the fourth quarter of 2018.  The S&P 500 fell 13.5%, the average diversified stock fund declined 14.8% and the average taxable bond fund fell 0.9% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 12.9% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, fell 14.4%.  These benchmarks include the returns from dividends as well as capital appreciation.  For the whole 2018 calendar year, the Cognitive Investing demonstration portfolio declined by 6.0%.  Over this same time period, the S&P 500 declined 4.4%, the average diversified stock fund fell 7.7% and the average taxable bond fund fell 1.1%.  International stocks fell 16.8% and the DJ total stock market index fell 5.3%.  As before, these benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Long Term Bond Index ETF 1.63%
Ishares Investment grade Corporate Bond ETF -0.60%
Vanguard Emerging Markets ETF -5.28%
Ishares preferred stock ETF -5.84%
Vanguard REIT ETF -6.40%
Vanguard Europe Pacific ETF -13.01%
Guggenheim S&P 500 Equal Weight ETF -13.93%
Powershares FTSE RAFI small/mid cap ETF -19.76%

For the year, the performance for each portfolio component was as follows:

Ishares Investment grade Corporate Bond ETF -3.83%
Vanguard Long Term Bond Index ETF -4.39%
Ishares preferred stock ETF -5.12%
Vanguard REIT ETF -5.30%
Guggenheim S&P 500 Equal Weight ETF -7.70%
Powershares FTSE RAFI small/mid cap ETF -11.30%
Vanguard Europe Pacific ETF -14.53%
Vanguard Emerging Markets ETF -14.62%

The state of the portfolio as of 12/31/2018 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 420 $87.51 $36,754.20 11.04% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $112.82 $33,507.54 10.06% 10%
PFF iShares Preferred Stock ETF 949 $34.23 $32,484.27 9.76% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $113.66 $45,918.64 13.79% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $91.40 $66,722.00 20.04% 20%
VEA Vanguard Europe Pacific ETF 1186 $37.10 $44,000.60 13.21% 15%
VNQ Vanguard REIT ETF 462 $74.57 $34,451.34 10.35% 10%
VWO Vanguard Emerging Markets ETF 432 $38.10 $16,459.20 4.94% 5%
Cash 1 $22,668.63 $22,668.63 6.81% 5%
Grand total $332,966.42 100.00% 100%

One rebalancing trade occurred during the quarter.  I bought 47 shares of BLV at 86.56 to bring its allocation back to its target level of 10%.  At the end of the quarter, BLV was more than 1% above its target, so a rebalancing trade of selling 39 shares at a price of 88.39 or higher is warranted.  PRFZ is below its target, so I will attempt to buy 36 shares at 112.52 or lower.  VEA is also below its target, warranting a trade of 162 shares at 36.73 or lower.

Stock and bond markets do not always rise, as amply demonstrated most recently.  It had been quite a while since stock markets experienced any sort of decline, so the most recent decline should not have been a surprise for anyone who has knowledge of historical stock behavior.  U.S. stock prices have dramatically outpaced international stocks over the last five years or longer.  I think it is reasonable to expect that international stock should outperform U.S. stocks over the next 5 -10 years, since the disparity between valuations has grown so much.  In the short term, virtually anything can happen, so investors should remain diversified to reduce the exposure to any one sector and diligently rebalance to take advantage of market fluctuations and avoid over exposure to the most expensive market sectors.

 

October 12, 2018

Portfolio review for the third quarter of 2018

The Cognitive Investing demonstration portfolio rose by 2.0% during the third quarter of 2018.  The S&P 500 rose 7.7%, the average diversified stock fund advanced 5.2% and the average taxable bond fund rose 0.6% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 0.8% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 7.1%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the portfolio was up 3.44%.

For the quarter, the performance for each portfolio component was as follows:

Guggenheim S&P 500 Equal Weight ETF 5.31%
Powershares FTSE RAFI small/mid cap ETF 2.51%
Ishares Investment grade Corporate Bond ETF 1.22%
Vanguard Europe Pacific ETF 0.86%
Vanguard REIT ETF 0.46%
Vanguard Long Term Bond Index ETF -0.38%
Ishares preferred stock ETF -0.69%
Vanguard Emerging Markets ETF -2.84%

 

The state of the portfolio as of 9/30/2018 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 373 $87.43 $32,611.39 8.90% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $114.93 $34,134.21 9.32% 10%
PFF iShares Preferred Stock ETF 949 $37.13 $35,236.37 9.62% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $142.26 $57,473.04 15.69% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $106.81 $77,971.30 21.28% 20%
VEA Vanguard Europe Pacific ETF 1186 $43.27 $51,318.22 14.01% 15%
VNQ Vanguard REIT ETF 462 $80.68 $37,274.16 10.17% 10%
VWO Vanguard Emerging Markets ETF 432 $41.00 $17,712.00 4.83% 5%
Cash 1 $22,668.63 $22,668.63 6.19% 5%
Grand total $366,399.32 100.00% 100%

One rebalancing trade occurred during the quarter, adding 101 shares of PFF at a price of 37.53.  At the end of the quarter, two rebalancing trades are warranted: selling 43 shares of RSP at a price of 107.88 or higher and buying 47 shares of BLV at a price of 86.56 or lower.

 

July 10, 2018

Portfolio review for the second quarter of 2018

The Cognitive Investing demonstration portfolio rose by 3.25% during the second quarter of 2018.  The S&P 500 rose 3.4%, the average diversified stock fund advanced 3.7% and the average taxable bond fund fell 0.2% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 2.2% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 3.9%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the six-month year-to-date period, the portfolio was up 1.42%.

For the quarter, the performance for each portfolio component was as follows:

Vanguard REIT ETF 10.70%
Powershares FTSE RAFI small/mid cap ETF 8.48%
Guggenheim S&P 500 Equal Weight ETF 2.83%
Ishares preferred stock ETF 2.37%
Vanguard Long Term Bond Index ETF -1.37%
Ishares Investment grade Corporate Bond ETF -1.64%
Vanguard Europe Pacific ETF -1.83%
Vanguard Emerging Markets ETF -9.59%

The state of the portfolio as of 6/30/2018 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 373 $88.64 $33,062.72 9.20% 10%
LQD iShares Investment Grade Corporate Bond ETF 297 $114.57 $34,027.29 9.47% 10%
PFF iShares Preferred Stock ETF 848 $37.91 $32,147.68 8.95% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $139.16 $56,220.64 15.65% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $101.89 $74,379.70 20.70% 20%
VEA Vanguard Europe Pacific ETF 1186 $42.90 $50,879.40 14.16% 15%
VNQ Vanguard REIT ETF 462 $81.45 $37,629.90 10.47% 10%
VWO Vanguard Emerging Markets ETF 432 $42.20 $18,230.40 5.07% 5%
Cash 1 $22,668.63 $22,668.63 6.31% 5%
Grand total $359,246.36 100.00% 100%

Two rebalancing trades occurred during the quarter.  I bought 32 shares of LQD at a price of 116.22 and 72 shares of VNQ at 74.72.  Note that VNQ rallied significantly after the purchase, once again demonstrating the wisdom of adding to the security when it is at least 1% below its target allocation.  At the end of the quarter, PFF is more than 1% below its allocation, which warrants a buy order of 101 shares at a price of 37.53 or lower.

The divergence between the sectors was larger during the most recent quarter than it has been in a while.  I am not sure whether this is significant, but if such trends persist, it will provide more opportunities for profitable rebalancing trades.

 

April 11, 2018

Portfolio review for the first quarter of 2018

The Cognitive Investing demonstration portfolio declined by 1.77% during the first quarter of 2018.  The S&P 500 declined 0.8%, the average diversified stock fund fell 0.4% and the average taxable bond fund fell 0.6% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 2.4% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, fell 0.6%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Emerging Markets ETF 2.52%
Ishares preferred stock ETF -0.39%
Powershares FTSE RAFI small/mid cap ETF -0.75%
Vanguard Europe Pacific ETF -1.00%
Guggenheim S&P 500 Equal Weight ETF -1.11%
Ishares Investment grade Corporate Bond ETF -2.89%
Vanguard Long Term Bond Index ETF -4.20%
Vanguard REIT ETF -8.20%

 

The state of the portfolio as of 3/31/2018 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 373 $90.91 $33,909.43 9.75% 10%
LQD iShares Investment Grade Corporate Bond ETF 265 $117.39 $31,108.35 8.94% 10%
PFF iShares Preferred Stock ETF 848 $37.56 $31,850.88 9.15% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $128.83 $52,047.32 14.96% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $99.48 $72,620.40 20.87% 20%
VEA Vanguard Europe Pacific ETF 1186 $44.25 $52,480.50 15.08% 15%
VNQ Vanguard REIT ETF 390 $75.47 $29,433.30 8.46% 10%
VWO Vanguard Emerging Markets ETF 432 $46.98 $20,295.36 5.83% 5%
Cash 1 $24,206.00 $24,206.00 6.96% 5%
Grand total $347,951.54 100.00% 100%

One rebalancing trade occurred during the quarter.  I bought 44 shares of BLV at 94.13 to bring its allocation back to its target level of 10%.  At the end of the quarter, LQD and VNQ were more than 1% below their targets, so rebalancing trades to buy 32 shares of LQD at a price of 116.22 or lower and to buy 72 shares of VNQ at 74.72 or lower are warranted.

Last quarter, I cautioned that the pace of stock appreciation that occurred during 2017 was unlikely to continue.  In the first quarter of 2018, markets were much more volatile and although the markets ended slightly below where they started the year, there were numerous declines of nearly 10% from high to low along the way.  It would not be surprising to me if this more recent behavior continues for the rest of the year.

 

January 12, 2018

Portfolio review for the fourth quarter of 2017

The Cognitive Investing demonstration portfolio advanced by 3.32% during the fourth quarter of 2017.  The S&P 500 climbed 6.6%, the average diversified stock fund advanced 5.1% and the average taxable bond fund rose 0.4% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 3.9% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 6.3%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2017 calendar year, the Cognitive Investing demonstration portfolio appreciated by 14.28%.  Over this same time period, the S&P 500 advanced 21.8%, the average diversified stock fund advanced 18.3% and the average taxable bond fund rose 4.2%.  International stocks rose 21.8% and the DJ total stock market index rose 21.1%.  As before, these benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Guggenheim S&P 500 Equal Weight ETF 6.23%
Vanguard Emerging Markets ETF 5.88%
Vanguard Europe Pacific ETF 4.13%
Powershares FTSE RAFI small/mid cap ETF 4.06%
Vanguard Long Term Bond Index ETF 2.63%
Vanguard REIT ETF 1.39%
Ishares Investment grade Corporate Bond ETF 1.28%
Ishares preferred stock ETF -0.21%

For the year, the performance for each portfolio component was as follows:

Vanguard Emerging Markets ETF 31.27%
Vanguard Europe Pacific ETF 25.90%
Guggenheim S&P 500 Equal Weight ETF 18.39%
Powershares FTSE RAFI small/mid cap ETF 12.19%
Vanguard Long Term Bond Index ETF 10.56%
Ishares preferred stock ETF 8.06%
Ishares Investment grade Corporate Bond ETF 7.82%
Vanguard REIT ETF 5.42%

The state of the portfolio as of 12/31/2017 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $95.08 $31,281.32 8.83% 10%
LQD iShares Investment Grade Corporate Bond ETF 265 $121.56 $32,213.40 9.09% 10%
PFF iShares Preferred Stock ETF 848 $38.07 $32,283.36 9.11% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $129.89 $52,475.56 14.81% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $101.03 $73,751.90 20.82% 20%
VEA Vanguard Europe Pacific ETF 1186 $44.86 $53,203.96 15.02% 15%
VNQ Vanguard REIT ETF 390 $82.98 $32,362.20 9.14% 10%
VWO Vanguard Emerging Markets ETF 432 $45.91 $19,833.12 5.60% 5%
Cash 1 $26,815.30 $26,815.30 7.57% 5%
Grand total $354,220.12 100.00% 100%

One rebalancing trade occurred during the quarter.  I sold 82 shares of VEA at 43.83 to bring its allocation back to its target level of 15%.  At the end of the quarter, BLV was more than 1% below its target, so a rebalancing trade of 44 shares at a price of 94.13 or lower is warranted.

The appreciation of the U. S. and international stock markets have continued to increase at a mathematically unsustainable pace.  I can guarantee that stock markets will not continue to go up at double digit percentage rates indefinitely.  In fact, investors should be extra diligent about rebalancing out of asset classes that have recently outperformed so that they are not over-exposed to the most vulnerable sectors when the next downturn occurs.  Of course, the timing for the next downturn is unknowable.  It could be imminent or still be years away.  In either case, one needs to not be complacent by assuming that today’s investor-friendly markets will remain so.

 

October 16, 2017

Portfolio review for the third quarter of 2017

The Cognitive Investing demonstration portfolio advanced by 3.37% during the third quarter of 2017.  The S&P 500 climbed 4.5%, the average diversified stock fund advanced 4.2% and the average taxable bond fund rose 1.1% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 4.8% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 4.6%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the demonstration portfolio is up 10.6%.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Emerging Markets ETF 7.96%
Powershares FTSE RAFI small/mid cap ETF 6.20%
Vanguard Europe Pacific ETF 5.47%
Guggenheim S&P 500 Equal Weight ETF 3.53%
Vanguard Long Term Bond Index ETF 1.91%
Ishares Investment grade Corporate Bond ETF 1.67%
Vanguard REIT ETF 0.86%
Ishares preferred stock ETF 0.50%

 

The state of the portfolio as of 9/30/2017 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $93.77 $30,850.33 9.00% 10%
LQD iShares Investment Grade Corporate Bond ETF 265 $121.23 $32,125.95 9.37% 10%
PFF iShares Preferred Stock ETF 848 $38.81 $32,910.88 9.60% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $125.35 $50,641.40 14.77% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $95.54 $69,744.20 20.34% 20%
VEA Vanguard Europe Pacific ETF 1268 $43.40 $55,031.20 16.05% 15%
VNQ Vanguard REIT ETF 390 $83.09 $32,405.10 9.45% 10%
VWO Vanguard Emerging Markets ETF 432 $43.56 $18,817.92 5.49% 5%
Cash 1 $20,312.37 $20,312.37 5.92% 5%
Grand total $342,839.35 100.00% 100%

 

One rebalancing trade occurred during the quarter.  I bought 103 shares of PFF at 38.78.  At the end of the third quarter, the Vanguard Europe Pacific ETF was more than 1% above its targeted allocation, so that sector requires a rebalancing trade of 82 shares at a price of 43.83 or higher.  All the other groups are within 1% of their targets, although the BLV allocation is exactly 1% below its target.

The stock market has now gone more than 8.5 years since it experienced a significant decline, which is quite long when examined from a long term historical perspective.  Its recent pace of increase is also not sustainable in the long run.  Therefore, it is reasonable and prudent to expect some sort of decline in the near-term future.  The timing for such events is always uncertain, as is their size and duration.  But one should become increasingly cautious as markets outperform at an unsustainable pace of appreciation.

 

July 12, 2017

Portfolio review for the second quarter of 2017

The Cognitive Investing demonstration portfolio advanced by 3.21% during the second quarter of 2017.  The S&P 500 climbed 3.1%, the average diversified stock fund advanced 2.7% and the average taxable bond fund rose 1.2% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 5.0% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 3.0%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the six-month year-to-date period, the demonstration portfolio is up 7.24%.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Europe Pacific ETF 6.37%
Vanguard Long Term Bond Index ETF 4.10%
Vanguard Emerging Markets ETF 3.43%
Ishares Investment grade Corporate Bond ETF 2.74%
Ishares preferred stock ETF 2.65%
Guggenheim S&P 500 Equal Weight ETF 2.40%
Vanguard REIT ETF 2.08%
Powershares FTSE RAFI small/mid cap ETF 1.95%

The state of the portfolio as of 6/30/2017 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $92.86 $30,550.94 9.21% 10%
LQD iShares Investment Grade Corporate Bond ETF 265 $120.18 $31,847.70 9.60% 10%
PFF iShares Preferred Stock ETF 745 $39.17 $29,181.65 8.80% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $118.33 $47,805.32 14.41% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $92.68 $67,656.40 20.40% 20%
VEA Vanguard Europe Pacific ETF 1268 $41.32 $52,393.76 15.80% 15%
VNQ Vanguard REIT ETF 390 $83.23 $32,459.70 9.79% 10%
VWO Vanguard Emerging Markets ETF 432 $40.83 $17,638.56 5.32% 5%
Cash 1 $22,142.74 $22,142.74 6.68% 5%
Grand total $331,676.77 100.00% 100%

 

Only one of the two rebalancing trades occurred during the quarter.  I bought 44 shares of VNQ at 81.76.  PFF never declined more than 1% below its closing price of the previous quarter so that order never got executed.  PFF is still 1% below its target allocation, so I will try again to bring this up to its target by putting in an order to buy 103 shares at 38.78.  All the other sectors are within 1% of their targeted allocation.

The U.S. stock market is entering its ninth year of a bull market, which is quite long by historical standards.  It will not be surprising if a sizable decline was in the offing, but guessing the timing and severity of such a decline is a fool’s game.  Basing one’s portfolio decision on such forecasts has been demonstrated to be a losing strategy.  Periodically rebalancing away from sectors that have outperformed the best into ones that have relatively underperformed is a more sound strategy and one that we will continue to implement.

 

April 20, 2017

Portfolio review for the first quarter of 2017

The Cognitive Investing demonstration portfolio advanced by 3.90% during the first quarter of 2017.  The S&P 500 climbed 6.1%, the average diversified stock fund advanced 4.8% and the average taxable bond fund rose1.4% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 6.5% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 5.8%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

 

Vanguard Emerging Markets ETF 11.21%
Vanguard Europe Pacific ETF 7.96%
Guggenheim S&P 500 Equal Weight ETF 5.23%
Ishares preferred stock ETF 5.03%
Vanguard Long Term Bond Index ETF 1.65%
Ishares Investment grade Corporate Bond ETF 1.25%
Powershares FTSE RAFI small/mid cap ETF 0.99%
Vanguard REIT ETF 0.79%

 

The state of the portfolio as of 3/31/2017 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $90.04 $29,623.16 9.20% 10%
LQD iShares Investment Grade Corporate Bond ETF 265 $117.91 $31,246.15 9.70% 10%
PFF iShares Preferred Stock ETF 745 $38.70 $28,831.50 8.95% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 404 $116.42 $47,033.68 14.61% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $90.82 $66,298.60 20.59% 20%
VEA Vanguard Europe Pacific ETF 1268 $39.30 $49,832.40 15.48% 15%
VNQ Vanguard REIT ETF 346 $82.59 $28,576.14 8.88% 10%
VWO Vanguard Emerging Markets ETF 432 $39.72 $17,159.04 5.33% 5%
Cash 1 $23,369.29 $23,369.29 7.26% 5%
Grand total $321,969.96 100.00% 100%

Two rebalancing trades were undertaken during the quarter.  I sold 56 shares of PRFZ and bought 28 shares of LQD.  At the end of the current quarter, two components  are below their target allocation by more 1%.  Therefore, I will place conditional orders to buy 88 shares of PFF at $38.31 or lower and buy 44 shares of VNQ at $81.76 or lower.

Once again stocks in the U.S. had a positive return for the quarter.  The only quarter during the last four years that stocks have declined was during the 3rd quarter of 2015.  Such a streak is somewhat unusual.  One should certainly expect that this trend cannot go on indefinitely.  Choppier markets could be in store for the next several years, which would return to a pattern more in line with the long term historical behavior.

 

January 12, 2017

Portfolio review for the fourth quarter of 2016

The Cognitive Investing demonstration portfolio declined by 0.03% during the fourth quarter of 2016.  The S&P 500 climbed 3.8%, the average diversified stock fund advanced 4.1% and the average taxable bond fund declined 0.8% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) fell by 1.0% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 4.1%.  These benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2016 calendar year, the Cognitive Investing demonstration portfolio appreciated by 9.98%.  Over this same time period, the S&P 500 advanced 12.0%, the average diversified stock fund advanced 10.8% and the average taxable bond fund rose 5.5%.  International stocks fell 1.9% and the DJ total stock market index rose 12.6%.  As before, these benchmarks include the returns from dividends as well as capital appreciation.

For the full five years since inception, the Cognitive Investing demonstration portfolio is up 54.93%.  The annualized rate of return for the past five years is 9.15%.  The annualized returns for the five-year period are 14.7% for the S&P 500, 12.0% for the average stock fund, 2.8% for the average bond fund, 3.6% for the EAFE, and 14.6% for the Dow Jones total stock market index.

For the quarter, the performance for each portfolio component was as follows:

Powershares FTSE RAFI small/mid cap ETF 10.13%
Guggenheim S&P 500 Equal Weight ETF 3.83%
Vanguard Europe Pacific ETF -1.52%
Vanguard REIT ETF -2.90%
Ishares Investment grade Corporate Bond ETF -3.98%
Ishares preferred stock ETF -3.99%
Vanguard Emerging Markets ETF -4.46%
Vanguard Long Term Bond Index ETF -8.26%

 

For the entire 2016 year, the performance for each portfolio component was as follows:

Powershares FTSE RAFI small/mid cap ETF 26.36%
Vanguard Emerging Markets ETF 20.47%
Guggenheim S&P 500 Equal Weight ETF 14.40%
Vanguard REIT ETF 8.35%
Vanguard Long Term Bond Index ETF 6.95%
Ishares Investment grade Corporate Bond ETF 5.72%
Vanguard Europe Pacific ETF 3.19%
Ishares preferred stock ETF 1.36%

The state of the portfolio as of 12/31/2016 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $89.13 $29,323.77 9.46% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $117.18 $27,771.66 8.96% 10%
PFF iShares Preferred Stock ETF 745 $37.21 $27,721.45 8.95% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 460 $115.29 $53,033.40 17.11% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $86.64 $63,247.20 20.41% 20%
VEA Vanguard Europe Pacific ETF 1268 $36.54 $46,332.72 14.95% 15%
VNQ Vanguard REIT ETF 346 $82.53 $28,555.38 9.22% 10%
VWO Vanguard Emerging Markets ETF 432 $35.78 $15,456.96 4.99% 5%
Cash 1 $18,424.13 $18,424.13 5.95% 5%
Grand total $309,866.67 100.00% 100%

 

No rebalancing trades were done during the quarter.  Three components have strayed more than 1% from their targeted allocation, so orders for the following securities are entered: sell 56 shares of PRFZ at 116.44 or higher, buy 28 shares of LQD at 116.01 or lower, and buy 89 shares of PFF at 36.84 or lower.

 

October 11, 2016

Portfolio review for the third quarter of 2016

The Cognitive Investing demonstration portfolio advanced by 3.7% during the third quarter of 2016.  The S&P 500 climbed 3.9%, the average diversified stock fund advanced 4.8% and the average taxable bond fund rose 1.8% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 5.8% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 4.4%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the demonstration portfolio is up 10.01%.

For the quarter, the performance for each portfolio component was as follows:

Powershares FTSE RAFI small/mid cap ETF 8.58%
Vanguard Emerging Markets ETF 8.09%
Vanguard Europe Pacific ETF 7.15%
Guggenheim S&P 500 Equal Weight ETF 4.41%
Vanguard Long Term Bond Index ETF 1.80%
Ishares Investment Grade Corporate Bond ETF 1.33%
Ishares preferred stock ETF 0.28%
Vanguard REIT ETF -1.50%

 

The state of the portfolio as of 9/30/2016 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $98.60 $32,439.40 10.47% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $123.18 $29,193.66 9.42% 10%
PFF iShares Preferred Stock ETF 745 $39.50 $29,427.50 9.49% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 460 $105.39 $48,479.40 15.64% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $83.59 $61,020.70 19.69% 20%
VEA Vanguard Europe Pacific ETF 1268 $37.41 $47,435.88 15.30% 15%
VNQ Vanguard REIT ETF 346 $86.74 $30,012.04 9.68% 10%
VWO Vanguard Emerging Markets ETF 432 $37.63 $16,256.16 5.24% 5%
Cash 1 $15,691.55 $15,691.55 5.06% 5%
Grand total $309,956.29 100.00% 100%

 

At the end of last quarter, VEA was below its allocation, so I added to that position early in the third quarter.  By buying the security at 1% lower than its closing price for the quarter, it boosted the quarterly performance for that holding by more than 1%.  VEA appreciated 5.8% during the quarter, but the portfolio saw a 7.15% increase due to the timely purchase.  This demonstrates how rebalancing can add to performance and lead to good market timing decisions without having to correctly guess the market’s future direction.

At the end of the quarter, all portfolio constituents were within 1% of their targeted allocation, so there will be no rebalancing trades this quarter.

 

July 12, 2016

Portfolio review for the second quarter of 2016

The Cognitive Investing demonstration portfolio advanced by 3.31% during the second quarter of 2016.  The S&P 500 climbed 2.5%, the average diversified stock fund advanced 1.8% and the average taxable bond fund rose 2.4% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) fell by 2.6% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 2.6%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the six-month year-to-date period, the demonstration portfolio is up 6.07%.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Long Term Bond Index ETF 6.36%
Vanguard REIT ETF 6.10%
Ishares preferred stock ETF 4.67%
Ishares Investment grade Corporate Bond ETF 4.02%
Powershares FTSE RAFI small/mid cap ETF 3.77%
Vanguard Emerging Markets ETF 2.58%
Guggenheim S&P 500 Equal Weight ETF 2.56%
Vanguard Europe Pacific ETF -0.11%

The state of the portfolio as of 6/30/2016 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $97.76 $32,163.04 10.76% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $122.39 $29,006.43 9.71% 10%
PFF iShares Preferred Stock ETF 745 $39.89 $29,718.05 9.94% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 460 $97.29 $44,753.40 14.98% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $80.35 $58,655.50 19.63% 20%
VEA Vanguard Europe Pacific ETF 1138 $35.36 $40,239.68 13.47% 15%
VNQ Vanguard REIT ETF 346 $88.67 $30,679.82 10.27% 10%
VWO Vanguard Emerging Markets ETF 432 $35.23 $15,219.36 5.09% 5%
Cash 1 $18,403.20 $18,403.20 6.16% 5%
Grand total $298,838.48 100.00% 100%

 

All three of the rebalancing trades scheduled for the second quarter were exercised.  Thus position sizes increased for PFF and PRFZ and decreased for VNQ compared to the prior quarter.  At the end of the most recent quarter, one security, VEA, is below its target allocation by more than 1%, so that triggers a buy order for 130 shares at a price of $35.01 or lower.  This potential purchase price is 1% below its closing price for the quarter, which is the formula used to make rebalancing trades.  The number of shares is calculated to bring VEA’s allocation up to the targeted 15%.

 

 

April 5, 2016

Portfolio review for the first quarter of 2016

The Cognitive Investing demonstration portfolio advanced by 2.67% during the first quarter of 2016.  The S&P 500 climbed 1.3%, the average diversified stock fund declined 0.4% and the average taxable bond fund advanced 1.7% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) fell by 3.7% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 0.9%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Emerging Markets ETF 8.21%
Vanguard Long Term Bond Index ETF 7.50%
Vanguard REIT ETF 6.26%
Ishares Investment grade Corporate Bond ETF 4.43%
Guggenheim S&P 500 Equal Weight ETF 2.99%
Ishares preferred stock ETF 0.90%
Powershares FTSE RAFI small/mid cap ETF 0.59%
Vanguard Europe Pacific ETF -1.86%

 

The state of the portfolio as of 3/31/2016 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $92.74 $30,511.46 10.55% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $118.48 $28,079.76 9.71% 10%
PFF iShares Preferred Stock ETF 666 $38.83 $25,860.78 8.94% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 424 $94.35 $40,004.40 13.83% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $78.53 $57,326.90 19.82% 20%
VEA Vanguard Europe Pacific ETF 1138 $35.88 $40,831.44 14.12% 15%
VNQ Vanguard REIT ETF 386 $83.80 $32,346.80 11.18% 10%
VWO Vanguard Emerging Markets ETF 432 $34.56 $14,929.92 5.16% 5%
Cash 1 $19,381.75 $19,381.75 6.70% 5%
Grand total $289,273.21 100.00% 100%

 

During the quarter, one rebalancing trade was undertaken, buying 97 shares of VWO at a price of 31.84.  As frequently happens when a sector falls below its targeted range, its subsequent behavior reverts to the mean by increasing more than most other sectors.  The emerging market sector followed this script, increasing by more than 5.5% during the quarter.  Because the portfolio purchased more shares at an opportune time, the total increase in the value during the quarter for that sector was more than 8%.

At the end of the quarter, three securities have strayed more than 1% from their targeted allocations.  Therefore buy orders are issued for 79 shares of PFF at 38.44 or lower, 36 shares of PRFZ at 93.41 or lower, and a sell order is issued for 40 shares of VNQ at 84.64 or higher.

 

January 13, 2016

Portfolio review for the fourth quarter of 2015

The Cognitive Investing demonstration portfolio advanced by 2.85% during the fourth quarter of 2015. The S&P 500 climbed 7.0%, the average diversified stock fund advanced 4.0% and the average taxable bond fund declined 0.8% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 4.4% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, rose 6.3%. All of these benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2015 calendar year, the Cognitive Investing demonstration portfolio declined by 1.87%. Over this same time period, the S&P 500 advanced 1.4%, the average diversified stock fund declined 2.1% and the average taxable bond fund declined 1.7%. International stocks fell 3.3% and the DJ total stock market index rose 0.4%. As before, all of these benchmarks include the returns from dividends as well as capital appreciation.

For the full four years since inception, the Cognitive Investing demonstration portfolio is up 40.87%. The annualized rate of return for the past four years is 8.9%.

 

For the quarter, the performance for each portfolio component was as follows:

Vanguard REIT ETF 7.00%
Guggenheim S&P 500 Equal Weight ETF 4.65%
Vanguard Europe Pacific ETF 4.09%
Ishares preferred stock ETF 3.20%
Powershares FTSE RAFI small/mid cap ETF 3.02%
Vanguard Emerging Markets ETF 0.69%
Ishares Investment grade Corporate Bond ETF -0.32%
Vanguard Long Term Bond Index ETF -1.02%

 

For the entire 2015 year, the performance for each portfolio component was as follows:

Ishares preferred stock ETF 4.18%
Vanguard REIT ETF 3.38%
Vanguard Europe Pacific ETF -0.03%
Ishares Investment grade Corporate Bond ETF -1.68%
Guggenheim S&P 500 Equal Weight ETF -2.63%
Vanguard Long Term Bond Index ETF -3.59%
Powershares FTSE RAFI small/mid cap ETF -5.50%
Vanguard Emerging Markets ETF -15.60%

 

The state of the portfolio as of 12/31/2015 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $86.81 $28,560.49 10.14% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $114.01 $27,020.37 9.59% 10%
PFF iShares Preferred Stock ETF 666 $38.85 $25,874.10 9.18% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 424 $93.89 $39,809.36 14.13% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $76.64 $55,947.20 19.86% 20%
VEA Vanguard Europe Pacific ETF 1138 $36.72 $41,787.36 14.83% 15%
VNQ Vanguard REIT ETF 386 $79.73 $30,775.78 10.92% 10%
VWO Vanguard Emerging Markets ETF 335 $32.71 $10,957.85 3.89% 5%
Cash 1 $21,012.89 $21,012.89 7.46% 5%
Grand total $281,745.40 100.00% 100%

 

No rebalancing trades were done during the quarter. The Vanguard emerging markets allocation is more than 1% below its target, so a rebalancing trade for that security is warranted. To bring this allocation up to its target, I need to virtually buy 97 shares at $32.38 or lower. When one considers the performance of emerging markets over the last year, it is no surprise that this component is well below its target allocation. The discipline of conducting rebalancing trades forces one to buy at lower prices and sell at higher prices.

The portfolio performed similarly to a mix of the average stock and bond funds during the year. This was the first down year for the portfolio in its four-year history. One should not expect a portfolio that is more than 50% exposed to the stock market to appreciate every single year. So experiencing one small down year after three more sizable up years is a reasonable expectation and nothing to be alarmed about.

 

October 6, 2015

Portfolio review for the third quarter of 2015

The Cognitive Investing demonstration portfolio declined by 4.87% during the second quarter of 2015. The S&P 500 declined 6.4%, the average diversified stock fund declined 8.2% and the average taxable bond fund declined 1.9% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 10.7% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, declined 7.3%. All of these benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the demonstration portfolio is down 4.59%.

The quarterly performance of each constituent component, including dividends, was:

Vanguard REIT ETF 3.50%
Vanguard Long Term Bond Index ETF 3.12%
Ishares Investment grade Corporate Bond ETF 0.76%
Ishares preferred stock ETF -0.53%
Guggenheim S&P 500 Equal Weight ETF -7.42%
Vanguard Europe Pacific ETF -8.82%
Powershares FTSE RAFI small/mid cap ETF -11.37%
Vanguard Emerging Markets ETF -18.11%

 

The state of the portfolio as of 9/30/2015 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 329 $89.05 $29,297.45 10.70% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $115.75 $27,432.75 10.01% 10%
PFF iShares Preferred Stock ETF 666 $38.42 $25,587.72 9.34% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 424 $91.62 $38,846.88 14.18% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $73.56 $53,698.80 19.60% 20%
VEA Vanguard Europe Pacific ETF 1138 $35.64 $40,558.32 14.81% 15%
VNQ Vanguard REIT ETF 386 $75.54 $29,158.44 10.64% 10%
VWO Vanguard Emerging Markets ETF 335 $33.09 $11,085.15 4.05% 5%
Cash 1 $18,259.94 $18,259.94 6.67% 5%
Grand total $273,925.45 100.00% 100%

 

In the most recent quarter, two rebalancing trades were undertaken, buying more shares of VNQ and BLV. Coincidentally, these were the best performing securities during the quarter, which positively illustrates the concept of regression to the mean. They had been the weaker performers, relative to the rest of the portfolio. One could argue that they were “due” for a period of outperformance, but such logic is likely to mislead, since there is no rule that says that lagging performers will eventually outperform. As long as one does not get carried away though, it is not a bad assumption to count on changes in market leadership.

All the constituent components of the portfolio are within 1% of their targets, so no rebalancing trades are warranted this quarter.

 

July 8, 2015

Portfolio review for the second quarter of 2015

The Cognitive Investing demonstration portfolio declined by 2.55% during the second quarter of 2015. The S&P 500 advanced 0.3%, the average diversified stock fund advanced 0.03% and the average taxable bond fund declined 0.7% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 0.4% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, advanced 0.1%. All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Powershares FTSE RAFI small/mid cap ETF 0.04%
Vanguard Emerging Markets ETF 0.02%
Vanguard Europe Pacific ETF -0.45%
Ishares preferred stock ETF -0.55%
Guggenheim S&P 500 Equal Weight ETF -1.15%
Ishares Investment grade Corporate Bond ETF -3.96%
Vanguard Long Term Bond Index ETF -7.60%
Vanguard REIT ETF -11.41%

 

The state of the portfolio as of 6/30/2015 was:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 284 $87.61 $24,881.24 8.64% 10%
LQD iShares Investment Grade Corporate Bond ETF 237 $115.72 $27,425.64 9.52% 10%
PFF iShares Preferred Stock ETF 666 $39.17 $26,087.22 9.06% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 424 $103.76 $43,994.24 15.28% 15%
RSP Guggenheim S&P 500 Equal Weight ETF 730 $79.80 $58,254.00 20.23% 20%
VEA Vanguard Europe Pacific ETF 1138 $39.65 $45,121.70 15.67% 15%
VNQ Vanguard REIT ETF 345 $74.69 $25,768.05 8.95% 10%
VWO Vanguard Emerging Markets ETF 335 $40.88 $13,694.80 4.76% 5%
Cash 1 $22,734.49 $22,734.49 7.89% 5%
Grand total $287,961.38 100.00% 100%

 

The demonstration portfolio declined modestly during the quarter, essentially erasing the gains of the first quarter. For the six month, year-to-date period, the portfolio is up 0.29%, which is probably about how much the portfolio fluctuates on a daily basis. Put another way, you could have slept through the first half of 2015 and not missed a thing. At the end of the first quarter, none of the portfolio’s constituent allocations were far enough from their targets to warrant a rebalancing trade. However, at the end of this most recent quarter, two ETFs are below their allocations by more than 1%, so two rebalancing trades are to be entered. One is to buy 45 shares of BLV at a price of $86.73 or lower and the other is to buy 41 shares of VNQ for a price of $73.94 or lower. Refer to earlier posts for the methodology of how these prices are calculated if you want the gory details.

 

April 10, 2015

Portfolio review for the first quarter of 2015

The Cognitive Investing demonstration portfolio advanced by 2.92% during the first quarter of 2015. The S&P 500 advanced 1.0%, the average diversified stock fund advanced 2.5% and the average taxable bond fund advanced 1.2% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 4.2% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, advanced 1.8%. All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Vanguard Europe Pacific ETF 6.79%
Vanguard REIT ETF 4.72%
Powershares FTSE RAFI small/mid cap ETF 3.43%
Vanguard Long Term Bond Index ETF 2.36%
Vanguard Emerging Markets ETF 2.30%
Ishares preferred stock ETF 2.15%
Ishares Investment grade Corporate Bond ETF 2.13%
Guggenheim S&P 500 Equal Weight ETF 1.66%

The state of the portfolio as of 3/31/2015 was:

Description # of shares Current price Market value Actual Allocation Target Allocation
Vanguard Long Term Bond Index ETF 284 $95.91 $27,238.44 9.22% 10%
iShares Investment Grade Corporate Bond ETF 237 $121.38 $28,767.06 9.73% 10%
iShares Preferred Stock ETF 666 $39.93 $26,593.38 9.00% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $103.99 $44,091.76 14.92% 15%
Guggenheim S&P 500 Equal Weight ETF 730 $81.05 $59,166.50 20.02% 20%
Vanguard Europe Pacific ETF 1138 $39.83 $45,326.54 15.34% 15%
Vanguard REIT ETF 345 $84.31 $29,086.95 9.84% 10%
Vanguard Emerging Markets ETF 335 $40.87 $13,691.45 4.63% 5%
Cash 1 $21,540.48 $21,540.48 7.29% 5%
Grand total     $295,502.57 100.00% 100%

During the quarter, I virtually bought 159 shares of the Vanguard Europe Pacific ETF, which had fallen more than 1% below its targeted allocation. That security ended up being the best performer for the quarter, so this rebalancing trade paid off extremely quickly. At the end of this quarter, no securities were more than 1% from their targets, although the iShares Preferred Stock ETF is right on the border.

There was very little divergence between the various market sectors this quarter. The difference between the best and worst performers was only about 5%. Based on past experience, I would not expect this level of homogeneity to continue for very long.

 

January 9, 2015

Portfolio review for the fourth quarter of 2014

The Cognitive Investing demonstration portfolio advanced by 3.91% during the fourth quarter of 2014. The S&P 500 climbed 4.9%, the average diversified stock fund advanced 4.6% and the average taxable bond fund declined 0.2% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) fell by 3.9% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, rose 5.2%. All of these benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2014 calendar year, the Cognitive Investing demonstration portfolio advanced by 8.97%. Over this same time period, the S&P 500 advanced 13.7%, the average diversified stock fund advanced 7.6% and the average taxable bond fund advanced 2.8%. International stocks fell 7.3% and the DJ total stock market index rose 12.5%. As before, all of these benchmarks include the returns from dividends as well as capital appreciation.

For the full three years since inception, the Cognitive Investing demonstration portfolio is up 43.56%. The annualized rate of return for the past three years is 12.8%.

For the quarter, the performance for each portfolio component was as follows:

Vanguard REIT ETF 14.27%
Powershares FTSE RAFI small/mid cap ETF 7.71%
Vanguard Long Term Bond Index ETF 6.18%
Guggenheim S&P 500 Equal Weight ETF 5.75%
Ishares preferred stock ETF 2.69%
Ishares Investment grade Corporate Bond ETF 2.26%
Vanguard Emerging Markets ETF -3.63%
Vanguard Europe Pacific ETF -4.10%

For the entire 2014 year, the performance for each portfolio component was as follows:

Vanguard REIT ETF 29.99%
Vanguard Long Term Bond Index ETF 19.94%
Ishares preferred stock ETF 13.85%
Guggenheim S&P 500 Equal Weight ETF 13.66%
Ishares Investment grade Corporate Bond ETF 8.28%
Powershares FTSE RAFI small/mid cap ETF 4.26%
Vanguard Emerging Markets ETF 0.57%
Vanguard Europe Pacific ETF -5.77%

The state of the portfolio as of 12/31/2014 was:

Description # of shares Current price Market value Actual Allocation Target Allocation
Vanguard Long Term Bond Index ETF 284 $94.27 $26,772.68 9.32% 10%
iShares Investment Grade Corporate Bond ETF 237 $119.41 $28,300.17 9.86% 10%
iShares Preferred Stock ETF 666 $39.44 $26,267.04 9.15% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $100.74 $42,713.76 14.88% 15%
Guggenheim S&P 500 Equal Weight ETF 730 $80.05 $58,436.50 20.35% 20%
Vanguard Europe Pacific ETF 979 $37.88 $37,084.52 12.92% 15%
Vanguard REIT ETF 345 $81.00 $27,945.00 9.73% 10%
Vanguard Emerging Markets ETF 335 $40.02 $13,406.70 4.67% 5%
Cash 1 $26,202.69 $26,202.69 9.13% 5%
Grand total     $287,129.06 100.00% 100%

During the fourth quarter, one rebalancing trade was undertaken: selling 45 shares of the Guggenheim S&P 500 Equal Weight ETF for a price of $76.55. The other potential rebalancing trade to buy more shares of VNQ did not get triggered because VNQ never traded below 1% lower than the closing price of the previous quarter.

In 2014, the portfolio outperformed both the average stock fund and bond fund. This was certainly not due to its international components, which performed rather poorly. Instead, the outperformance was largely due to the superior performance of the REIT sector, which performed especially well in the past year. This is a good demonstration of how diversification helps to increase returns without adding extra risk.

At the end of the quarter, one sector was well below its targeted allocation: the international developed markets sector. I am placing a virtual order to purchase an additional 159 shares of VEA at a price of $37.50 or lower to bring this holding back into its targeted range.

Another attractive characteristic of investing in a manner similar to that demonstrated by the Cognitive Investing portfolio is that sales of securities, which are relatively rare, generate long term capital gains which are taxed at a lower rate than short term capital gains. In the three year-period of the demonstration portfolio, it has never generated a short-term capital gain.

 

October 9, 2014

Portfolio review for the third quarter of 2014

The Cognitive Investing demonstration portfolio declined by 2.41% during the third quarter of 2014. The S&P 500 advanced 1.1%, the average diversified stock fund declined 1.9% and the average taxable bond fund declined 0.8% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 6.4% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, declined 0.1%. All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Vanguard Long Term Bond Index ETF 1.04%
iShares Preferred Stock ETF -0.06%
iShares Investment Grade Corporate Bond ETF -0.38%
Guggenheim S&P 500 Equal Weight ETF -0.85%
Vanguard Emerging Markets ETF -2.26%
Vanguard REIT ETF -3.10%
Vanguard Europe Pacific ETF -6.17%
Powershares FTSE RAFI small/mid cap ETF -6.51%

For the nine-month year-to-date period, the portfolio is up 4.87%.

The state of the portfolio as of 9/30/2014 was:

Security Description # of shares Current price Market value Actual Allocation Target Allocation
Vanguard Long Term Bond Index ETF 284 $89.93 $25,540.12 9.24% 10%
iShares Investment Grade Corporate Bond ETF 237 $117.88 $27,937.56 10.11% 10%
iShares Preferred Stock ETF 666 $39.32 $26,187.12 9.48% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $94.03 $39,868.72 14.43% 15%
Guggenheim S&P 500 Equal Weight ETF 775 $75.79 $58,737.25 21.26% 20%
Vanguard Europe Pacific ETF 979 $39.75 $38,915.25 14.08% 15%
Vanguard REIT ETF 345 $71.85 $24,788.25 8.97% 10%
Vanguard Emerging Markets ETF 335 $41.71 $13,972.85 5.06% 5%
Cash 1 $20,379.23 $20,379.23 7.38% 5%
Grand total     $276,326.35 100.00% 100%

During the quarter, I purchased 34 shares of the iShares Investment Grade Corporate Bond ETF at a price of $118.07. This was the only security that was more than 1% away from its target allocation at the end of the prior quarter.

For the upcoming quarter, two securities are in need of a rebalancing trade. I need to buy 40 shares of VNQ at a price of 71.13 or lower and sell 45 shares of RSP at a price of 76.55 or higher.

This most recent quarter was the first time in five quarters that the portfolio declined. Expecting a positive quarter for each quarter is not realistic, so it not much of a surprise that the streak of advances was broken. The pace of increase over the prior four quarters was not sustainable over the long term. The only question was when a decline would occur and how severe it would be. Whether such a decline would occur was never in doubt.

 

July 8, 2014

Portfolio review for the second quarter of 2014

The Cognitive Investing demonstration portfolio advanced by 4.25% during the second quarter of 2014. The S&P 500 advanced 5.2%, the average diversified stock fund advanced 3.4% and the average taxable bond fund advanced 1.9% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 2.9% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, advanced 4.9%. All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Vanguard Emerging Markets ETF 9.55%
Vanguard REIT ETF 6.96%
Guggenheim S&P 500 Equal Weight ETF 5.48%
Vanguard Long Term Bond Index ETF 5.13%
Vanguard Europe Pacific ETF 4.44%
iShares Preferred Stock ETF 4.24%
iShares Investment Grade Corporate Bond ETF 3.16%
Powershares FTSE RAFI small/mid cap ETF 1.97%

For the six month year-to-date period, the portfolio is up 7.46%.

The state of the portfolio as of 6/30/2014 was:

Security Description # of shares Current price Market value Actual Allocation Target Allocation
Vanguard Long Term Bond Index ETF 284 $89.89 $25,528.76 9.02% 10%
iShares Investment Grade Corporate Bond ETF 203 $119.26 $24,209.78 8.55% 10%
iShares Preferred Stock ETF 666 $39.91 $26,580.06 9.39% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $100.85 $42,760.40 15.10% 15%
Guggenheim S&P 500 Equal Weight ETF 775 $76.71 $59,450.25 21.00% 20%
Vanguard Europe Pacific ETF 979 $42.59 $41,695.61 14.73% 15%
Vanguard REIT ETF 345 $74.84 $25,819.80 9.12% 10%
Vanguard Emerging Markets ETF 335 $43.13 $14,448.55 5.10% 5%
Cash 1 $22,664.01 $22,664.01 8.66% 5%
Grand total     $283,157.22 100.00% 100%

During the quarter, I purchased 73 shares of the Vanguard Emerging Markets ETF at a price of $40.17. This was the only one of three constituents I was trying to purchase that traded at prices 1% below the closing price of the previous quarter. The other two candidates for purchase, VNQ and LQD, never traded at levels low enough to trigger their buy orders.

LQD is now the only security that is below its targeted allocation by more than 1%, so it becomes a candidate for purchase at a price 1% below this quarter’s closing price. Thus, I entered an order to purchase 34 shares at $118.07. This will be the third attempt in as many quarters to rebalance this security.

Both the stock market and bond market have rallied so far this year. Volatility is well below its long-term average. After watching markets for many decades, I would venture a guess that these trends will change at some point, most likely when few are expecting it. But anyone who thinks they can profit from accurately predicting the timing and magnitude of such a change is likely to be proven wrong. As John Maynard Keynes once said, “Markets can remain irrational longer than you can remain solvent.”

In the meantime, the way to protect your investment profits is to continually monitor your portfolio by measuring and comparing its allocation to its target. Rebalancing to the target will ensure that you will be selling the higher priced market sectors and buying the lower priced sectors. It’s the closest thing on Wall Street that resembles a free lunch.

 

April 7, 2014

Portfolio review for the first quarter of 2014

The Cognitive Investing demonstration portfolio advanced by 3.08% during the first quarter of 2014. The S&P 500 advanced 1.8%, the average diversified stock fund advanced 1.3% and the average taxable bond fund advanced 1.7% during the quarter. International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 0.005% (measured in US dollars). The Dow Jones total stock market index, which measures all U.S. stocks, advanced 2.0%. All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Vanguard REIT ETF 10.09%
Ishares preferred stock ETF 6.57%
Vanguard Long Term Bond Index ETF 6.56%
Guggenheim S&P 500 Equal Weight ETF 2.84%
Ishares Investment grade Corporate Bond ETF 2.72%
Powershares FTSE RAFI small/mid cap ETF 1.56%
Vanguard Europe Pacific ETF 0.05%
Vanguard Emerging Markets ETF -1.11%

The state of the portfolio as of 3/31/2014 was:

Security Description # of shares Current price Market value Actual Allocation Target Allocation
Vanguard Long Term Bond Index ETF 284 $86.40 $24,537.60 9.03% 10%
iShares Investment Grade Corporate Bond ETF 203 $116.60 $23,669.80 8.71% 10%
iShares Preferred Stock ETF 666 $38.83 $25,860.78 9.52% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $99.23 $42,073.52 15.49% 15%
Guggenheim S&P 500 Equal Weight ETF 775 $72.99 $56,567.25 20.83% 20%
Vanguard Europe Pacific ETF 979 $41.27 $40,403.33 14.87% 15%
Vanguard REIT ETF 345 $70.62 $24,363.90 8.97% 10%
Vanguard Emerging Markets ETF 262 $40.58 $10,631.96 3.91% 5%
Cash 1 $23,510.96 $23,510.96 8.66% 5%
Grand total     $271,619.10 100.00% 100%

 

At the end of the prior quarter (December 31, 2013), three of the portfolio’s constituents were more than 1% away from their targeted allocation. I placed virtually buy orders for those securities at 1% below the quarter’s closing price, which is the rule I use to manage this portfolio. None of the orders were triggered as bonds and real estate investments rallied from the beginning of the year onwards and never dipped below the levels at the end of last year. This is the first time in two years of managing this portfolio that rebalancing orders were not fulfilled during the subsequent quarter. The consequences are relatively minor, though, since the portfolio still owns a fair amount of all the securities that rallied. In retrospect, placing the orders at a slightly high price would have turned out better, but with the benefit of hindsight, every financial decision would be a no-brainer.

We will repeat the process again this quarter and place virtual buy orders for the three positions that are more than 1% from their targeted allocation. Thus I will be attempting to purchase at least 1% of the iShares Investment Grade Corporate Bond ETF, the Vanguard REIT ETF, and the Vanguard Emerging Markets ETF. All of these orders will be placed at 1% below the quarter’s end closing prices.

January 7, 2014

Portfolio review for the fourth quarter of 2013

The Cognitive Investing demonstration portfolio advanced by 4.29% during the fourth quarter of 2013.  The S&P 500 climbed 10.5%, the average diversified stock fund advanced 8.8% and the average taxable bond fund advanced 0.8% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 5.4% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 10.1%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2013 calendar year, the Cognitive Investing demonstration portfolio advanced by 14.39%.  Over this same time period, the S&P 500 advanced 32.4%, the average diversified stock fund advanced 32.3% and the average taxable bond fund advanced 0.1%.  International stocks rose 19.4% and the DJ total stock market index rose 33.5%.  As before, all of these benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Guggenheim S&P 500 Equal Weight ETF 9.21%
Powershares FTSE RAFI small/mid cap ETF 8.67%
Vanguard Europe Pacific ETF 5.84%
Vanguard Emerging Markets ETF 3.06%
Ishares Investment grade Corporate Bond ETF 1.44%
Vanguard Long Term Bond Index ETF -0.10%
Vanguard REIT ETF -0.86%
Ishares preferred stock ETF -1.90%

For the entire 2013 year, the performance for each portfolio component was as follows:

Powershares FTSE RAFI small/mid cap ETF 39.03%
Rydex equal weight S&P 500 ETF 33.56%
Vanguard Europe Pacific ETF 21.38%
Vanguard REIT ETF 2.36%
iShares preferred stock ETF -2.68%
iShares Investment grade Corporate Bond ETF -2.81%
Vanguard Emerging Markets ETF -5.09%
Vanguard Long Term Bond Index ETF -8.79%

The state of the portfolio as of 12/31/2013 was:

Security Description # of shares Current price Market value Actual Allocation Target Allocation
           
Vanguard Long Term Bond Index ETF 284 $81.65 $23,188.60 8.80% 10%
iShares Investment Grade Corporate Bond ETF 203 $114.19 $23,180.57 8.80% 10%
iShares Preferred Stock ETF 666 $36.83 $24,528.78 9.31% 10%
Powershares FTSE RAFI Small-Mid ETF 424 $97.73 $41,437.52 15.73% 15%
Guggenheim S&P 500 Equal Weight ETF 775 $71.25 $55,218.75 20.96% 20%
Vanguard Europe Pacific ETF 979 $41.68 $40,804.72 15.49% 15%
Vanguard REIT ETF 345 $64.56 $22,273.20 8.45% 10%
Vanguard Emerging Markets ETF 262 $41.14 $10,778.68 4.09% 5%
Cash 1 $22,087.99 $22,087.99 8.38% 5%
           
Grand total     $263,498.81 100.00% 100%

In the fourth quarter of 2013, three rebalancing trades were undertaken: sales of the Powershares and Guggenheim ETFs and a purchase of the iShares preferred stock ETF.  Three more rebalancing trades are warranted during the upcoming quarter, since the Vanguard Long Term Bond ETF, the iShares Investment Grade Corporate Bond ETF and the Vanguard REIT ETF are all below their targeted allocations.  In each case, I have entered a virtual purchase order to buy more shares at 1% less than the quarter’s closing price.  I will spare the details of the math calculations for the share amounts.  The process is the same as in previous quarters, so if you really want the gory details, scroll down and examine prior rebalancing discussions.

Comparing the performance of the portfolio for each of the last two years is instructive.  In 2012, the portfolio advanced 15.17%, which is a less than 1% difference from this past year’s performance.  But the route to such performance was dramatically different for the two years.  The yearly performance for each of the portfolio’s constituents is 2012 was:

Vanguard Emerging Markets ETF 19.12%
Vanguard Europe Pacific ETF 18.36%
Powershares FTSE RAFI small/mid cap ETF 17.99%
Vanguard REIT ETF 17.53%
Ishares preferred stock ETF 17.12%
Rydex equal weight S&P 500 ETF 17.09%
Ishares Investment grade Corporate Bond ETF 10.13%
Vanguard Long Term Bond Index ETF 8.63%

There was very little divergence between the various categories.  In 2013, however, there was a much larger divergence between categories, with stocks dramatically outperforming other asset classes, and U.S. stocks significantly outperforming international stocks.

In 2012, diversification and asset allocation did not matter that much.  Bonds and stocks both increased and the magnitudes of their appreciation were similar.  That situation changed in 2013, and a portfolio’s return was highly dependent on its allocation.  Portfolios with a high allocation to stocks performed well and those with a high allocation to bonds (or just about any other asset class) did not perform very well.

In any event, returns of 15% per year are above average and should not be taken to be the norm for future performance.  Bonds certainly cannot average that kind of return over the period of a typical investor’s horizon. Stocks have averaged more like 10% per year when averaged out over measurement periods of many decades.  A much more reasonable expectation for the annual return of a diversified portfolio like the Cognitive Investing demonstration portfolio is approximately something like 7 to 8%, rather than the 14 and 15% returns of the last two years.

October 7, 2013

Portfolio review for the third quarter of 2013

The Cognitive Investing demonstration portfolio advanced by 4.02% during the third quarter of 2013.  The S&P 500 advanced 5.2%, the average diversified stock fund advanced 7.3% and the average taxable bond fund advanced 0.8% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 10.9% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 6.2%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the portfolio is up 9.69%.

The quarterly performance of each constituent component of the demonstration portfolio, including dividends, was:

Vanguard Europe Pacific ETF

11.64%

Powershares FTSE RAFI Small/mid cap ETF

10.73%

Guggenheim S&P 500 Equal Weight ETF

6.77%

Vanguard Emerging Markets ETF

4.34%

iShares Investment Grade Corporate Bond ETF

0.71%

Vanguard Long Term Bond Index ETF

-1.37%

iShares Preferred Stock ETF

-2.05%

Vanguard REIT ETF

-2.86%

The state of the portfolio as of 9/30/2013 was:

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

 

 

 

 

 

 

Vanguard Long Term Bond Index ETF

284

$83.02

$23,577.68

9.33%

10%

iShares Investment Grade Corporate Bond ETF

203

$113.52

$23,044.56

9.12%

10%

iShares Preferred Stock ETF

561

$38.00

$21,318.00

8.44%

10%

Powershares FTSE RAFI Small-Mid ETF

469

$89.54

$41,994.26

16.62%

15%

Guggenheim S&P 500 Equal Weight ETF

816

$65.20

$53,203.20

21.06%

20%

Vanguard Europe Pacific ETF

979

$39.58

$38,748.82

15.34%

15%

Vanguard REIT ETF

345

$66.14

$22,818.30

9.03%

10%

Vanguard Emerging Markets ETF

262

$40.13

$10,514.06

4.16%

5%

Cash

1

$17,447.81

$17,447.81

6.91%

5%

 

 

 

 

 

 

Grand total

 

 

$252,666.69

100.00%

100%

During the prior quarter, I made one virtual rebalancing trade: to buy 42 shares of the Vanguard Long Term Bond Index Fund at a price of 83.36.

Stocks once again outperformed bonds during the quarter, and as a result, several portfolio constituents are now more than 1% away from their targeted allocation.  Three small rebalancing trades are thus warranted to bring the portfolio back into balance.  The iShares Preferred Stock ETF is at a 8.44% weighting vs. its target of 10%, thus I need to purchase enough to add 1.56% to its allocation.  This will require 105 shares at a price of $37.62, which is 1% below the quarter end closing price.  Similarly I will need to sell 1.62% of the Powershares FTSE RAFI Small-Mid ETF and 1.06% of the Guggenheim S&P 500 Equal Weight ETF.  After a bit of math, this translates to 45 shares of PRFZ at $90.44 and 41 shares of RSP at a price of $65.85.

All the other portfolio components are within 1% of their targets, so rebalancing of those positions is not necessary.

July 8, 2013

Portfolio review for the second quarter of 2013

The Cognitive Investing demonstration portfolio declined by 0.46% during the second quarter of 2013.  The S&P 500 advanced 2.9%, the average diversified stock fund advanced 2.3% and the average taxable bond fund declined 2.2% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) declined by 2.1% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, advanced 2.7%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the six-month year-to-date period, the portfolio is up 5.04%.

The quarterly performance of each constituent component, including dividends, was:

Powershares FTSE RAFI Small/mid cap ETF

4.34%

Guggenheim S&P 500 Equal Weight ETF

3.00%

Vanguard Europe Pacific ETF

-0.78%

Vanguard REIT ETF

-1.67%

iShares Preferred Stock ETF

-1.80%

iShares Investment Grade Corporate Bond ETF

-4.90%

Vanguard Long Term Bond Index ETF

-5.99%

Vanguard Emerging Markets ETF

-8.40%

 

 

The state of the portfolio as of 6/30/2013 was:

Symbol

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

 

 

 

 

 

 

 

BLV

Vanguard Long Term Bond Index ETF

242

$85.16

$20,608.72

8.52%

10%

LQD

Ishares Investment Grade Corporate Bond ETF

203

$113.65

$23,070.95

9.54%

10%

PFF

Ishares Preferred Stock ETF

561

$39.28

$22,036.08

9.11%

10%

PRFZ

Powershares FTSE RAFI Small-Mid ETF

469

$81.02

$37,998.38

15.71%

15%

RSP

Guggenheim S&P 500 Equal Weight ETF

816

$61.27

$49,996.32

20.66%

20%

VEA

Vanguard Europe Pacific ETF

979

$35.60

$34,852.40

14.40%

15%

VNQ

Vanguard REIT ETF

345

$68.72

$23,708.40

9.80%

10%

VWO

Vanguard Emerging Markets ETF

262

$38.79

$10,162.98

4.20%

5%

Cash

1

$19,519.14

$19,515.24

8.07%

5%

 

 

 

 

 

 

 

 

Grand total

 

 

$241,953.64

100.00%

100%

 At the end of the prior quarter, the portfolio had three components that were more than 1% away from their targeted allocation.  During the second quarter I made three small trades that rebalanced the portfolio by bringing these components to their targeted allocations.  I virtually purchased 27 shares of LQD at $118.33, sold 48 shares of the RSP at $60.24, and sold 31 shares of the PRFZ at $78.63.  The calculation of the amounts of these rebalancing trades were described fully in last quarter’s report (scroll down to view).

At the end of the most recent quarter, the Vanguard Long Term Bond Index Fund is more than 1% away from its targeted allocation, so this condition triggers another rebalancing trade.  Its allocation is 8.52% compared to its 10% target, so I need to purchase 1.48% of the total portfolio’s value to bring this back in line.  As is my practice, I will enter this order at 1% below the quarter’s closing price.  Cranking through the math results in an order to buy 42 shares at $84.31.

Rebalancing a portfolio generally adds a small bit to the overall return, although the effects can take a while to manifest.  All of the rebalancing trades I made at the beginning of the second quarter are at levels worse than current levels.  This is relatively typical. But one quarter is far too short a time period to judge the wisdom of rebalancing.  The time to make such judgments is over a period of years.  And one must take into account all of the rebalancing trades over the period, not just a few.  In the longer term, markets regress to their mean and rebalancing takes advantage of this, but the process takes years, not months.

April 7, 2013

Portfolio review for the first quarter of 2013

The Cognitive Investing demonstration portfolio advanced by 5.54% during the first quarter of 2013.  The S&P 500 advanced 10.6%, the average diversified stock fund advanced 10.2% and the average taxable bond fund advanced 0.8% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 4.4% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, advanced 11.1%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Guggenheim S&P 500 Equal Weight ETF

12.23%

Powershares FTSE RAFI Small/mid cap ETF

11.98%

Vanguard REIT ETF

8.00%

Vanguard Europe Pacific ETF

3.86%

iShares Preferred Stock ETF

3.01%

iShares Investment Grade Corporate Bond ETF

-0.29%

Vanguard Long Term Bond Index ETF

-1.73%

Vanguard Emerging Markets ETF

-3.53%

(Note: the Guggenheim S&P500 Equal Weight ETF underwent a name change.  In previous reports I referred to it as the Rydex Equal Weight S&P500 ETF.  The fund is still the same, just with a different name, reflecting its corporate parent.)

The state of the portfolio as of 3/31/2013 was:

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

Vanguard Long Term Bond Index ETF

242

$91.65

$22,179.30

9.12%

10%

Ishares Investment Grade Corporate Bond ETF

176

$119.90

$21,102.40

8.68%

10%

iShares Preferred Stock ETF

561

$40.52

$22,731.72

9.35%

10%

Powershares FTSE RAFI Small-Mid ETF

500

$77.85

$38,925.00

16.01%

15%

Guggenheim S&P 500 Equal Weight ETF

864

$59.64

$51,528.96

21.20%

20%

Vanguard Europe Pacific ETF

979

$36.43

$35,664.97

14.67%

15%

Vanguard REIT ETF

345

$70.53

$24,332.85

10.01%

10%

Vanguard Emerging Markets ETF

262

$42.90

$11,239.80

4.62%

5%

Cash

1

$15,387.40

$15,387.40

6.33%

5%

Grand total

 

 

$243,092.40

100.00%

100%

Unlike the situation at the end of the prior three quarters, several of the portfolio’s constituents are more than 1% away from their targeted allocations.  The allocation for the iShares Investment Grade Corporate Bond ETF is more than 1% below its target (8.68% vs. 10%).  The allocations for the Powershares FTSE RAFI Small-mid ETF and the Guggenheim S&P 500 Equal Weight are more than 1% above their targets (16.01% vs. 15% and 21.2% vs. 20%).

Therefore we have three candidates for rebalancing trades.  I entered a limit buy order for 27 shares of LQD at a price 1% below the quarter’s closing price.  By entering a buy order below the current price, I ensure that I will not overpay for the security and I will take advantage of normal market fluctuations.  If the security rallies from this point, then the asset allocation divergence will most likely self-correct without any need for a trade.   I calculated the appropriate amount to purchase by taking the percentage difference between the target and actual allocation (1.32%) multiplied by the total portfolio value ($243,092.40).  This is $3209.  I will need to add this amount to bring the allocation up to its target. When I divide this by the share price of $118.33, I get 27 shares (rounded to the nearest share).  So my buy order is to buy 27 shares of LQD at a price of $118.33 or better.  ($118.33 is 1% below the quarter end’s price of $119.9, taking into account the dividend payment on April 7.)

Similarly for the Powershares FTSE RAFI Small-mid ETF, I entered an order to sell 1.01% of the position at a price 1% higher than the quarterly closing price of $77.85.  Without repeating the math exercise, this translates to a sell order of 31 shares at $78.63.  For the Guggenheim S&P 500 Equal Weight ETF, I entered an order to sell 48 shares at $60.24.

This rebalancing process is one of the main themes of Cognitive Investing.  Rebalancing is one of the most important ways to ensure that your portfolio is properly diversified as market prices fluctuate.  Rebalancing adds a small amount of performance to the portfolio each year, on average.  But more importantly, the discipline required to conduct rebalancing trades requires that an investor organize her portfolio so that she can periodically measure the portfolio’s allocation and compare it to a target.  It also forces the investor to figure out an appropriate allocation for his or her particular situation.  These two steps of defining an allocation and periodically rebalancing it to a target can bring many benefits to investors who have historically relied on more random processes.

January 9, 2013

Portfolio review for the fourth quarter of 2012

The Cognitive Investing demonstration portfolio advanced by 3.14% during the fourth quarter of 2012.  The S&P 500 declined 0.4%, the average diversified stock fund advanced 0.8% and the average taxable bond fund advanced 1.1% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 6.2% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 0.2%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the entire 2012 calendar year, the Cognitive Investing demonstration portfolio advanced by 15.17%.  Over this same time period, the S&P 500 advanced 16.0%, the average diversified stock fund advanced 13.9% and the average taxable bond fund advanced 7.5%.  International stocks rose 13.6% and the DJ total stock market index rose 16.4%.  As before, all of these benchmarks include the returns from dividends as well as capital appreciation.

For the quarter, the performance for each portfolio component was as follows:

Vanguard Europe Pacific ETF

8.20%

Vanguard Emerging Markets ETF

7.81%

Powershares FTSE RAFI small/mid cap ETF

3.63%

Rydex equal weight S&P 500 ETF

2.72%

Vanguard REIT ETF

2.50%

Ishares preferred stock ETF

1.46%

Ishares Investment grade Corporate Bond ETF

0.62%

Vanguard Long Term Bond Index ETF

0.18%

For the entire 2012 year, the performance for each portfolio component was as follows:

Vanguard Emerging Markets ETF

19.12%

Vanguard Europe Pacific ETF

18.36%

Powershares FTSE RAFI small/mid cap ETF

17.99%

Vanguard REIT ETF

17.53%

Ishares preferred stock ETF

17.12%

Rydex equal weight S&P 500 ETF

17.09%

Ishares Investment grade Corporate Bond ETF

10.13%

Vanguard Long Term Bond Index ETF

8.63%

The state of the portfolio as of 12/31/2012 was:

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

Vanguard Long Term Bond Index ETF

242

$93.87

$22,716.54

9.86%

10%

Ishares Investment Grade Corporate Bond ETF

176

$120.99

$21,294.24

9.24%

10%

Ishares Preferred Stock ETF

561

$39.62

$22,226.82

9.65%

10%

Powershares FTSE RAFI Small-Mid ETF

500

$69.54

$34,770.00

15.09%

15%

Rydex Equal Weight S&P 500 ETF

864

$53.32

$46,068.48

20.00%

20%

Vanguard Europe Pacific ETF

979

$35.23

$34,490.17

14.97%

15%

Vanguard REIT ETF

345

$65.80

$22,701.00

9.86%

10%

Vanguard Emerging Markets ETF

262

$44.53

$11,666.86

5.07%

5%

Cash

1

$14,407.81

$14,407.81

6.25%

5%

Grand total

 

 

$230,341.92

100.00%

100%

There were no trades during the previous quarter because all of the constituents of the portfolio were within 1% of their targeted allocation.  The same situation applies to the upcoming quarter, thus no rebalancing trades are warranted for this quarter.  In fact, there was only one small rebalancing trade during the first year of this portfolio’s existence.   In tranquil markets, little rebalancing is required because there is little divergence between various market sectors.  In spite of what you may have read in the financial press, 2012 was a relatively quiet, non-volatile year, at least when compared to typical market behavior over the last 20 or 30 years.

A return of more than 15% for the year is quite positive, but one should not extrapolate this level of performance into the distant future.  It is unlikely that the fixed income portion of the portfolio will continue to produce double-digit rates of appreciation, since only a portion of this return is from interest.  The remaining portion, which reflects changes in the price of the principal, has practical limits to how high it can go.  In the very long run, any gains in capital appreciation will be balanced by losses, since in just about all cases, bonds are redeemed at the same price they are issued.  Although the principal of any bond trading above par value will decline at some point in the future, the negative effects of any such declines will be diluted by the interest portion of the return, which is always positive.

Global stock markets had an above-average year, which followed a below-average year the prior year.  When measured over longer (multi-year) time periods, the stock market’s performance is roughly in line with historical performance.  For more details about this, see “How is the stock market performing?”

Although a single year is not enough time to thoroughly and adequately judge the quality of an investment process, it provides some information that can tell you whether you are on the right track. The 15% performance of the demonstration portfolio over the past year provides a benchmark for comparison to your personal portfolio.  If your portfolio’s performance diverged quite significantly from this level, it would be educational to examine the differences in asset allocation, security selection, and market timing between this portfolio and yours.  Looking at the contributions of each component to the portfolio can shed light on sources of outperformance and underperformance.  Perhaps such an examination will lead you to adjust your process to more closely resemble that of the demonstration portfolio.

October 3, 2012

Portfolio review for the third quarter of 2012

The Cognitive Investing demonstration portfolio advanced by 4.18% during the third quarter of 2012.  The S&P 500 advanced 6.4%, the average diversified stock fund advanced 5.3% and the average taxable bond fund advanced 2.5% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) rose by 6.1% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, rose 6.2%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the nine-month year-to-date period, the portfolio is up 11.67%.

The quarterly performance of each constituent component of the demonstration portfolio, including dividends, was:

Vanguard Europe Pacific ETF

6.33%

Vanguard Emerging Markets ETF

5.80%

Rydex equal weight S&P 500 ETF

5.79%

Powershares FTSE RAFI small/mid cap ETF

5.45%

Ishares Investment grade Corporate Bond ETF

4.21%

Ishares preferred stock ETF

3.19%

Vanguard Long Term Bond Index ETF

2.48%

Vanguard REIT ETF

0.10%

The state of the portfolio as of 9/30/2012 was:

Symbol

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

BLV

Vanguard Long Term Bond Index ETF

242

$96.35

$23,316.70

10.44%

10%

LQD

Ishares Investment Grade Corporate Bond ETF

176

$121.38

$21,362.88

9.57%

10%

PFF

Ishares Preferred Stock ETF

561

$39.65

$22,243.65

9.96%

10%

PRFZ

Powershares FTSE RAFI Small-Mid ETF

500

$67.72

$33,860.00

15.16%

15%

RSP

Rydex Equal Weight S&P 500 ETF

864

$52.18

$45,083.52

20.19%

20%

VEA

Vanguard Europe Pacific ETF

979

$32.88

$32,189.52

14.41%

15%

VNQ

Vanguard REIT ETF

345

$64.97

$22,414.65

10.04%

10%

VWO

Vanguard Emerging Markets ETF

262

$41.72

$10,930.64

4.89%

5%

Cash

1

$11,932.43

$11,932.43

5.34%

5%

Grand total

 

 

$223,333.99

100.00%

100%

There were no trades during the previous quarter because all of the constituents of the portfolio were within 1% of their targeted allocation.  The same situation applies to the upcoming quarter, thus no rebalancing trades are warranted for this quarter.  This situation is typical when markets exhibit low performance divergences between various sectors.  The difference in performance between the best and worst performing sectors was a bit more than 6%, which is very low, especially compared to the previous two quarters, when this divergence measure was more than 15%.

July 9, 2012

Portfolio review for the second quarter of 2012

The Cognitive Investing demonstration portfolio declined by 1.59% during the second quarter of 2012.  The S&P 500 declined 2.8%, the average diversified stock fund declined 4.6% and the average taxable bond fund advanced 1.3% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) fell by 8.4% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, fell 3.1%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

For the six-month year-to-date period, the portfolio is up 7.19%.

The quarterly performance of each constituent component of the demonstration portfolio, including dividends, was:

Vanguard Long Term Bond Index ETF

8.97%

Vanguard REIT ETF

3.61%

Ishares Investment Grade Corporate Bond ETF

2.72%

Ishares Preferred Stock ETF

1.43%

Rydex Equal Weight S&P 500 ETF

-4.14%

Powershares FTSE RAFI Small-Mid ETF

-4.86%

Vanguard Europe Pacific ETF

-7.23%

Vanguard Emerging Markets ETF

-8.14%

The state of the portfolio as of 6/30/2012 was:

Symbol

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

BLV

Vanguard Long Term Bond Index ETF

242

$94.95

$22,977.90

10.72%

10%

LQD

Ishares Investment Grade Corporate Bond ETF

176

$117.59

$20,695.84

9.65%

10%

PFF

Ishares Preferred Stock ETF

561

$39.03

$21,895.83

10.21%

10%

PRFZ

Powershares FTSE RAFI Small-Mid ETF

500

$64.51

$32,255.00

15.05%

15%

RSP

Rydex Equal Weight S&P 500 ETF

864

$49.52

$42,785.28

19.96%

20%

VEA

Vanguard Europe Pacific ETF

979

$31.57

$30,907.03

14.42%

15%

VNQ

Vanguard REIT ETF

345

$65.43

$22,573.35

10.53%

10%

VWO

Vanguard Emerging Markets ETF

262

$39.93

$10,461.66

4.88%

5%

Cash

1

$9,821.68

$9,821.68

4.58%

5%

Grand total

 

 

$214,373.57

100.00%

100%

During the quarter I purchased 25 shares of BLV at $88.02.  The calculation of the amount of this rebalancing trade was described fully in last quarter’s report (scroll down to view).  This trade occurred at the very beginning of the quarter and the price of BLV rallied strongly afterwards.   I had no foresight of the ensuing rally—the purchase was merely necessary to bring the portfolio constituent that was farthest from its targeted range back to its targeted allocation.

At the end of June, all of the portfolio’s component holdings are within 1% of their targets.  Thus no rebalancing trades are necessary this quarter to bring the portfolio back into alignment.

If you compare this quarter’s winners and losers with last quarter’s you will find that the best holding of the first quarter was the worst holding of the second quarter (VWO).  Likewise, the worst performer of the first quarter (BLV) was the best performer during the second quarter.  This behavior provides a great example of how a diversified portfolio smoothes out the inevitable fluctuations of various market sectors.

April 5, 2012

Portfolio review for the first quarter of 2012

The Cognitive Investing demonstration portfolio advanced by 8.92% during the first quarter of 2012.  The S&P 500 advanced 12.6%, the average diversified stock fund advanced 12.3% and the average taxable bond fund advanced 2.2% during the quarter.  International stocks as measured by the EAFE (Europe, Australasia, Far East) advanced by 10.0% (measured in US dollars).  The Dow Jones total stock market index, which measures all U.S. stocks, advanced 12.9%.  All of these benchmarks include the returns from dividends as well as capital appreciation.

The quarterly performance of each constituent component, including dividends, was:

Vanguard Emerging Markets ETF

13.80%

Powershares FTSE RAFI Small-Mid ETF

13.56%

Rydex Equal Weight S&P 500 ETF

12.47%

Vanguard Europe Pacific ETF

11.06%

Vanguard REIT ETF

10.65%

Ishares Preferred Stock ETF

10.45%

Ishares Investment Grade Corporate Bond ETF

2.36%

Vanguard Long Term Bond Index ETF

-2.71%

The state of the portfolio as of 3/31/2012 was:

Symbol

Security Description

# of shares

Current price

Market value

Actual Allocation

Target Allocation

BLV

Vanguard Long Term Bond Index ETF

217

$88.91

$19,293.47

8.86%

10%

LQD

Ishares Investment Grade Corporate Bond ETF

176

$115.63

$20,350.88

9.34%

10%

PFF

Ishares Preferred Stock ETF

561

$39.04

$21,901.44

10.05%

10%

PRFZ

Powershares FTSE RAFI Small-Mid ETF

500

$68.07

$34,035.00

15.62%

15%

RSP

Rydex Equal Weight S&P 500 ETF

864

$51.87

$44,815.68

20.57%

20%

VEA

Vanguard Europe Pacific ETF

979

$34.03

$33,315.37

15.29%

15%

VNQ

Vanguard REIT ETF

345

$63.65

$21,959.25

10.08%

10%

VWO

Vanguard Emerging Markets ETF

262

$43.47

$11,389.14

5.23%

5%

Cash

1

$10,771.86

$10,771.86

4.95%

5%

 

Grand total

$217,832.09

100.00%

100%

The allocation for the Vanguard Long Term Bond Index is more than 1% below its target (8.96% vs. 10%).  Therefore it is a candidate for a rebalancing trade.  I entered a limit buy order for 25 shares of BLV at a price 1% below the quarter’s closing price.  By entering a buy order at below the current price, I ensure that I will not overpay for the security and I will take advantage of normal market fluctuations.  If the security rallies from this point, then the asset allocation divergence will most likely self-correct without any need for a trade.   I calculated the appropriate amount to purchase by taking the percentage difference in allocation (1.04%) multiplied by the total portfolio value ($215,358.58).  This is $2240.  I will need to add this amount to bring the allocation up to its target. When I divide this by the share price of $88.91, I get 25 shares (rounded to the nearest share).  So my buy order is to buy 25 shares of BLV at a price of $88.02 or better.  ($88.02 is 1% below the quarter end’s price of $88.91.)

This rebalancing process is one of the main themes of Cognitive Investing.  Rebalancing is one of the most important ways to ensure that your portfolio is properly diversified as market prices fluctuate.  Rebalancing adds a small amount of performance to the portfolio each year, on average.  But more importantly, the discipline required to conduct rebalancing trades requires that an investor organize his portfolio so that he can periodically measure the portfolio’s allocation and compare it to a target.  It also forces the investor to figure out an appropriate allocation for his or her particular situation.  These two steps of defining an allocation and periodically comparing it to a target can bring many benefits to investors who have historically relied on more random processes.

January 5, 2012

Cognitive Investing may sound enticing in theory, but how does it hold up in practice?

This portfolio is constructed to demonstrate how a typical cognitive investing portfolio performs in real market conditions.  I started this portfolio at the very beginning of 2012. This will make comparisons with industry benchmarks very straightforward.  All of the trading decisions will be published as they occur.  Thus, there is no opportunity to “turn the clock back” or claim “previously-made, but not divulged until the time is right” decisions with the benefit of hindsight. The goal is total transparency.

This portfolio is a template portfolio you can use as a starting place to design your own portfolio.  It will also show how the cognitive investing portfolio management process works in practice and how an investor should respond as market prices fluctuate.  It aims to demonstrate how rebalancing a portfolio enhances its return and enforces a “buy low, sell high” discipline.

There is nothing particularly special about the securities I have chosen for the portfolio.  The specific asset allocation is also not chosen because of any forecast about the short-term market direction, but is chosen to balance the influence of various market sectors.   I have chosen broad-based ETFs from a number of suppliers in an attempt to not play favorites.  The key lessons from this exercise are how the portfolio is managed over time, and how it performs in a variety of market environments.  I will compare its performance to standard industry benchmarks and test for rebalancing trading opportunities on a quarterly basis.  If markets are extraordinarily volatile, I may test for rebalancing opportunities more frequently.

To customize this portfolio for your own needs, you will need to decide an appropriate asset allocation for your own personal situation.  This can vary widely by individual, based on portfolio size, goals, employment situation, age, cash flows, risk exposures, tax situation, and the amount of time and attention you want to spend on portfolio management.  Once this allocation is determined, appropriate securities should be chosen in the various categories.  The allocation should remain relatively fixed for long periods of time.  The rationale for a fixed asset allocation is explained in this blog post: https://cognitiveinvesting.com/2011/04/27/the-importance-of-a-fixed-asset-allocation/#more-189  More information about choosing appropriate securities can be found in chapters 30 through 34 of Cognitive Investing.

The portfolio will incur costs as if it is a “real” portfolio.  Every transaction will incur an $8.95 commission fee.  All dividends will be paid in cash and reinvested at an appropriate time.  I will report every buying and selling transaction as it occurs and provide explanatory commentary.

This is not a “get rich quick” portfolio.  In fact, its performance should be downright boring for long stretches of time.  I anticipate that it will be at least several years before the relative merits of this portfolio process emerge.  But since the typical time horizon of most investors should be measured in decades, and not days, months, or years, the fact that this process yields results over an appropriate time frame should only reinforce the long-term perspective required for investment success.

January 3, 2012:

Symbol Security Description # of shares Current price Market value Actual Allocation Target Allocation
BLV Vanguard Long Term Bond Index ETF 217 $92.01 $19,966.17 9.99% 10%
LQD Ishares Investment Grade Corporate Bond ETF 176 $113.76 $20,021.76 10.01% 10%
PFF Ishares Preferred Stock ETF 561 $35.62 $19,982.82 9.99% 10%
PRFZ Powershares FTSE RAFI Small-Mid ETF 500 $60.00 $30,000.00 15.01% 15%
RSP Rydex Equal Weight S&P 500 ETF 864 $46.28 $39,985.92 20.00% 20%
VEA Vanguard Europe Pacific ETF 979 $30.63 $29,986.77 15.00% 15%
VNQ Vanguard REIT ETF 345 $58.00 $20,010.00 10.01% 10%
VWO Vanguard Emerging Markets ETF 262 $38.21 $10,011.02 5.01% 5%
Cash 1 $9,963.94 $9,963.94 4.98% 5%
Grand total $199,928.40 100.00% 100%

Portfolio characterstics:

The portfolio is comprised of ETFs from eight different categories, which cover many of the major classes of investments appropriate for individual investors.  Large-cap U.S. stocks are represented by RSP.  Small and mid-cap U.S. stocks are represented by PRFZ.  VEA holds developed market international stocks and VWO holds emerging market international stocks.  Real estate is represented by VNQ.  In the fixed income area, BLV holds a roughly even mix of long-term government and corporate bonds.  LQD holds only corporate bonds and has a shorter average maturity than BLV.  PFF invests in preferred stocks.  A small portion of the portfolio is in cash.

I am using $200,000 as a starting portfolio size.  The initial value is slightly less than this due to the eight commissions paid on each security.  I used 2011 closing prices to make the initial asset allocation calculations.  The portfolio yields approximately 2.9% per year.  The number is approximate because dividends for all the ETFs are not fixed, but vary with each payment period.  With one exception, no single stock or bond comprises more than 1% of the entire portfolio.  (I will give an autographed copy of my book, Cognitive Investing, to the first person who correctly identifies which underlying security comprises more than 1% of this portfolio.  Send your entry to richwillis@cognitiveinvesting.com.)

Disclosure: My family members and I own all of the securities in the portfolio, but not in the quantities or proportions listed.

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