- Asset allocation is at the heart of any portfolio, how you weight your asset allocation is over half of your risk and returns over time.
- ETFs are the best vehicles for building an asset allocation, there are multiple types with subtle difference to be aware of.
- The Plug & Play ETFs are our preferred ETFs for building an asset allocation, having been screened for multiple characteristics.
- Everyone’s portfolio should own the Invesco QQQ ETF or a close substitute.
- Use the Global Trends ETF if you are a growth investor, Retirement Trends ETF if you are close to or nearing retirement, or just more conservative.
The “Plug & Play Portfolio ETFs” represent investment ideas from our “Very Short Lists” that are near buy zones as of the first week of the new quarter and offer the best upside for intermediate term (6 months to several years) risk adjusted profits.
These are NOT model portfolios to be jumped into right now! There is no such thing. Rather, this is a guide for monitoring your intermediate and long-term asset allocation.
The “Plug & Play ETFs” can be monitored in a few minutes weekly, with more attention during periods of higher volatility.
Asset Allocation Cash Levels
To make things easy to look at and build towards, you first need to determine who “invested” you will be in the short-term. Because we do not all have the same financial circumstances or risk tolerances you must first decide if you want to be fully invested right now.
So, the first question for you to answer as you build your portfolio is this:
How much of your investable assets do you want invested right now?
Each Plug & Play piece will have a set of cash levels for you to consider holding in the short-term (weeks to several months). For lack of more creative words, I call these levels:
- Defensive – for those who are willing to miss short-term gains due to concerns about market risks.
- Cautiously Optimistic – for those who want to make most short-term gains, but want to keep some dry powder for “black swans.”
- Pedal To The Metal – for those who want to almost all-in, almost all the time, and can tolerate high volatility.
Sample cash ranges:
|Investor Category||Defensive*||Cautiously Optimistic||Pedal To The Metal|
|Current Cash % (Tactical)||50-40||30-20||15-10|
|Long-term Cash % (Strategic)||12-4||4-2||2-1|
* It is very rare that even Defensive investors would ever be more than half in cash. Typically 40-50% cash is the most any investor should ever hold. Occasionally, a few times in life when there are great unknowns, an investor might go 75% cash. However, this should be based on the possibility that your standard of living could be threatened by an event, not that you are trying to predict things or are just fearful. In those situations, we must be humble and control our emotions.
We must remember that stocks tend to go up the longer we hold them. Thus, we should always try to find a way to gravitate to our long-term strategic cash levels, regardless of our fearfulness of the unknowns.
Investing Strategy Thoughts
If you are using ETFs as your entire portfolio, then Global Trends ETF or Retirement Trends ETF is for you.
If you are using an ETF portfolio as your core portfolio, but also using stocks, then the ETFs give you diversification and reduce single stock risk. I generally recommend 50/50 ETFs/stocks, but 75/25 and 25/75 are fine depending on your goals and risk tolerance.
Invesco QQQ Is A Core ETF For Everyone
The Invesco QQQ ETF (QQQ) has proven over time to be the best large cap ETF out there that is somewhat diversified. The fund focuses on the technology, communications and consumer sectors with exposure to the healthcare, industrial and financial sectors.
QQQ has beaten the broad S&P 500 (SPY) (VOO) over almost every rolling 3 year or longer time frame since its inception in 1999. The only exceptions were 2 rolling three year periods from 2000-2002 and 2001-2003 during the dot.com crash.
Whether you are a growth or dividend growth investor, QQQ is a great core holding to build around.
Global Trends ETF
Global Trends ETF is designed for those who are focused on long-term growth of wealth. These ETFs will focus heavily on secular trends, but also cyclical trends that allow for intermediate term gains.
We will have several sector or industry specific ETFs in the list each quarter that are in an upward trend or near an inflection point. A selection of Semiconductor and Clean Energy ETFs are generally on the list.
We will also invest in other sector ETFs, as well as, national or regional ETFs.
Retirement Trends ETF
Retirement Trends ETF is designed for those who want both dividend income and growth over the long-term. These ETFs will focus on secular trends, but also find dividend income where possible.
Because there are very few dividend ETFs that actually have strong risk adjusted returns compared to the S&P 500, owning some Closed End Funds and REITs for income is generally a good way to increase portfolio income.
As of 2021, we have started adding favorite CEFs to the bottom of the ETFavorites VSL.
Strategic Investing vs Tactical Trading
Strategic investing is the long-term asset allocation that you will gravitate towards. The Plug & Play ETFs quarterly update is concerned with intermediate and long-term strategic “position trades” lasting 6 months or longer.
Tactical trading is the shorter term (under 6 months) trades that you can make to take advantage of market conditions. Sometimes these shorter term trades last longer, but for the most part, tactical trades last a matter of months.
Each weekend I release ETF Trends which will give you updates on what can be entered week and what should be trimmed or sold. Look for that over the weekend.
Scale In, Scale Out
Make sure to mind the buy zones and scale in at 2 or 3 support lines as marked by our broad (yellow box) buy zone and narrow (orange box) buy zone.
Areas where Fibonacci lines bunch up are called ares of confluence. These are generally strong support or resistance areas.
Technical indicators, particular weekly RSI and the volume profile also offer very strong indicators of market trends and strength. Make sure to read our Technical Trading Basics: Using Overbought And Oversold Signals To Buy And Sell.
When buying or selling, you want to do so incrementally, i.e. scale in, scale out. This is important to manage risk, as well as, ride winners for greater profits.
By scaling in you reduce your need to be perfect. It is a form of dollar cost averaging, but instead of using the calendar, you are using price levels. In general, buy at 2 or 3 levels within the broad and narrow buy zones, i.e. at 2 or 3 of the yellow or orange lines.
Scale out to reduce your need to be perfect. Scaling out helps to manage risk, but also leaves some money participating in a winner that is gaining. There is merit to the phrase “let your winners ride.” There is also merit to “taking profits.” Scaling out allows you to do both.
Disclosure: I am/we are long QQQ.