Reader Q & A: Which ETF Model Portfolio Is Right For Me?

Several readers emailed recently trying to determine which one of the six ETF model portfolios might be right for them. Chuck’s message is very typical. Here’s what he had to say:

I am ready to invest in one of the six model ETF portfolios that you are suggesting. Last week I favored #1 Trend Tracking. After reading your post last Wednesday, it appears that other models took the lead, so to speak, but I still like #1.

I have accumulated some $s to invest. Should I jump in now or hold my powder until later? I guess I would describe myself as a moderate risk taker, but I have to deal with my wife, whose idea of investing is $s in a coffee can under the bed!

Yes, portfolio performance changes constantly and should not be the main criteria in making a selection. While the Trend Tracking portfolio (#1) took top billing last week, it slipped after Tuesday’s close with the markets having shown some strength via a 4-day rally.

This was followed by a sharp sell-off on Wednesday, which changed the leadership position again in that the conservative allocations came out ahead, as the benchmark S&P 500 got hammered.

In order to make a proper selection, you need to focus on something that is constant and not constantly variable, which is your risk tolerance.

While there are many ways to look at this, within the framework of trend tracking using the listed ETF model portfolios, I determine it as follows:

1. As you already did, you follow the model portfolios for a while and see how they react to various market conditions. In the past 10 days, you were able to observe the effects of a continuous 4-day rally, while last Wednesday, you had the opportunity to witness what happens during a sharp market pullback.

While a rising tide lifts all boats, it is the sell offs you need to hone in on as far as portfolio volatility is concerned. That’s when the rubber meets the road, and you can determine which portfolio you might be comfortable with when the bears take the upper hand. If that happens to be the conservative one, then that’s what you should select.

2. To further determine risk tolerance, you can limit the amount of your available assets that you wish to expose to the market:

If you are aggressive, you can invest 100% in your chosen portfolio knowing that the trailing sell stop discipline will provide you with a predetermined loss limit.

If you are moderate, expose only 50% of your assets to the market, or, if you are conservative, use 33%. These lesser amounts will reduce your potential losses, should market direction go against you.

The exact entry point can be challenging to some investors as Chuck brought up. In the current environment, where the market seems to be in shakeout mode, you can certainly wait a few days to determine if this is just the beginning of more downside action before pulling the trigger.

You can also ease into your selected portfolio via an incremental buying procedure by initially exposing yourself to only the conservative component. In the case of portfolio #1, my favorite, you could start out by only purchasing the PRPFX component, which is what I have done for some clients, with the balance to be bought at a later date.

The most important part in all this is your comfort level. If none of my offered ideas sit well with you emotionally, don’t invest at this time! Remember, there is nothing wrong with being out of the market during times of uncertainty.

Even Warren Buffett offered these words of wisdom a long time ago: “Cash is an invested position too.”