Introduction

To paraphrase an ironic curse: May you invest in interesting times.

This has indeed been true over the past ten years. An investment in a S&P500 index fund ten years ago has returned a total of 50% over the past ten years (including dividends), which works out to 6.2% annually. Not only that, but you suffered through a decline in value from the peak in October 2007 to the bottom in March 2009 of over 50%. Only now would your investment have fully recovered back to that peak.

For those who have a lifetime of earnings ahead of themselves, constant and disciplined periodic savings over many years may overcome the severities of the market. However for those of us much closer to retirement, capital preservation becomes an overriding concern.

Consequently, my investment goals now include:

• the need for greater diversification, beyond just a mix of stocks and bonds, into other types of assets;
• diversification within each of those asset types;
• the need to know when to overweight or underweight a particular asset, or to stay out of it entirely;
• a way to reduce the maximum loss of the portfolio;
• and maybe a way to squeeze out a couple of extra percentage points in the annual return.

That's not asking too much, is it?

Fortunately, what has become known as tactical asset allocation and the widespread use of exchange traded funds would seem to meet that need.

Over the rest of the winter, I will use this blog to discuss how I built such a portfolio. Keep in mind that this is just one investment strategy, and one approach. Learn from it if you wish.

Basically, I use exchange traded funds (ETF's), which are highly liquid, passively indexed, well diversified with respect to themselves. Limit the choices to a broad selection that covers many asset types. Select those that have performed the best amongst that small subset. Rebalance periodically. Adjust the size of the positions as to control volatility of the portfolio. I will also consider putting in a floor of some kind under each investment to control losses.

There are many choices at each step, avenues to research and experiment with, and decisions to be made. I will start by discussing the following questions in the next few posts:

• What is an ETF?
• Who are the largest providers?
• What assets are available in an ETF?
• Which assets should I invest in? Compare this to the institutions, endowments, and target date mutual funds.
• Of so many similar sounding ETF's, which ones to use?
• Risks of ETF's – there are some, believe it or not
• Biases – Hindsight and other animals
• Start with a simple equal weighted portfolio of say, 5 or 10 ETF's and see how that would have performed over the past ten years.