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After a lot of reading, learning and past bad experiences in investing, i am ready to implement an ETF based asset allocation portfolio. I am starting from a reasonable chunk of cash (have been in cash for a while).

Looking to build with: XIU, XRE, XMA, XTR, VTI, VWO, VEA, XSB, XCB, XRB, BND

My challenging question to everyone is what would be your "algorithm" to buy each of these ETFs?

I am looking for your clear cut opinions -- so please no answers like "well it really depends on your goals and risk tolerence ...."

Examples (types of answers) i am looking for.....

XIU -- will wait till TSX index is below 10000
XRE -- would buy ~50% now; ~50% when xyz occurs
VTI -- would by all of it now

etc etc.
 

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After a lot of reading, learning and past bad experiences in investing, i am ready to implement an ETF based asset allocation portfolio. I am starting from a reasonable chunk of cash (have been in cash for a while).

Looking to build with: XIU, XRE, XMA, XTR, VTI, VWO, VEA, XSB, XCB, XRB, BND

My challenging question to everyone is what would be your "algorithm" to buy each of these ETFs?

I am looking for your clear cut opinions -- so please no answers like "well it really depends on your goals and risk tolerence ...."

Examples (types of answers) i am looking for.....

XIU -- will wait till TSX index is below 10000
XRE -- would buy ~50% now; ~50% when xyz occurs
VTI -- would by all of it now

etc etc.
I would buy them all now.

I have no idea what XMA, XTR, XCB and XRB are (not that it matters).
 

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If you're looking for a timing mechanism, look into Mebane Faber's paper 'A Quantitative Approach to Tactical Asset Allocation' (google it). He explores a model of investing in asset classes when they are above the 10 month MA, and moving to treasuries when below. Right now, many of these asset classes are bouncing around that moving average level. I've been raising cash.
 

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Discussion Starter #4
Slacker:

Just wanted to clarify your response. The % you are giving are NOT the overall portfolio allocations right? b/c that wasn't the question. I assume % you are referring to for ETF is the portion of that ETF's allocation to buy NOW. correct?
 

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Discussion Starter #5
andewf:

I looked at that paper previously. According to table 2 from the paper (below)... do i read that if i bought and held i would have gained 9.75% annual return and if i timed based on model, i would have improved to 10.66 (less than 1% improvement)? Even though maxDD is 83% vs 49% ?? Don't quite understand. Care to enlighten me?


Table 2 – S&P 500 total returns and timing total returns, 1900-2005
SP500 TIMING
CAGR 9.75% 10.66%
Stdev 19.91% 15.38%
Sharpe 0.29 0.43
MaxDD (83.66%) (49.98%)
MAR Ratio 0.14 0.23
UlcerIndex 20.33% 11.70%
%TimeinMkt 100.00% 69.77%
RT Trades/Year - 0.67
% + Trades - 63%
Best Year 52.88% 52.40%
Worst Year (43.86%) (26.69%)
 

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When setting up a portfolio of ETF's, my advice would be to keep it simple and use only well diversified, broad-based ETF's within your established asset allocation goals. With as few as four ETF's (XIU, XSP, XIN, and XBB for example) you can have a well diversified portfolio.

The Canadian stock market is heavily weighted in financials, energy, and materials and so, if you are holding the XIU, I don't see why you need the XFN, XEG, or XMA as well.

Further diversification could involve investing in smallcaps and emerging markets ETF's and maybe a 5% holding in precious metals (I use the RBC Global Precious Metals Fund.

You will need to rebalance periodically, as required in order to maintain your original asset allocation goals. Thus, the fewer ETF's you have in your portfolio, the easier it is to keep track of them.

International diversification is a controversial subject lately with the world's stock markets more interconnected than ever before. Thus, there is some basis for keeping a heavy weighting right here at home. I personally hold the XCV and XCS and XRE currently as my core Canadian holdings.

I also hold the PH&N Bond Fund D in lieu of the XBB ETF.

Other ETF's to consider: BMO Nasdaq 100 Index, iShares Corporate Bond ETF (XCB), iShares Real Return Bond ETF (XRB), iShares Russell 2000 ETF (XSU) among others.

Smallcaps generally provide superior long term returns but with more volatility.

Anyway, those are some random thoughts for your consideration.
 

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My choices would emphasize value, small cap, sector diversification and currency exposure. I don't think an MER of 0.50%-ish per year is too high to pay for something that tilts away from market cap weighting.

I would prefer XIC over XIU because it tracks a capped index and is more diversified. Tracking a capped index should help minimize the risk posed by cap weighted indexes of overweighting itself in overpriced stocks. Consider holding XCV or CRQfor the value bonus, and XCS or XMD for the small cap bonus.

I don't think XMA will help you any. Materials are cyclical, as are Canada's main sectors. If you want to diversify away from market weight I would go to XRE for real estate, XIT or a NASDAQ fund for tech, or individual defensive stocks (utilities, pipelines, consumer staples).

Currency shifts can give you quite a wild ride. Consider getting ETFs that are hedged to CAD, like XSP instead of VTI, CWO instead of VWO, XIN instead of VEA, and adding XSU for exposure to US small caps.
 

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i follow the old sicilian crop-planting rule myself. Sow under the full moon.

modifying for etfs this means buy A to M at the full moon and N to Z at the new moon. Triple leveraged during lunar eclipses.

btw bob aren't you the newb who showed up here a few months ago bawling that he was panicked by investment ignorance. This is the trouble with sponges. Give them a single book & they start wiping out guantanamo bay with orders.
 

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Sponge, yes, timing had better return, and lower drawdown and volatility performance over the time period examined. The advantage mainly came from not riding markets all the way to the bottom. Performance can be increased by diversifying in terms of asset classes to include real estate, foreign equities, commodities and 10 year bonds.
 
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