The Kirk Report

Bill Schultheis

A couple of months ago I had the privilege of interviewing Bill Schultheis from The New Coffee House Investor. In it we discuss a wide array of topics and questions that all investors must face and conquer successfully to reach their financial and investment goals.

Recently I provided Bill permission post the entire interview at his website for free so that all could enjoy and benefit from our conversation. Enjoy!

Passive Aggressive Portfolio

Ahead of this week's Q&A with Bill Schultheis, I thought it would be timely to at least take a quick look at how the Passive Aggressive Portfolio I've recommended in the past has performed.

Since December 31, 2008 - the portfolio is up +32.70% (the S&P is up +21.14%). Since March 9, 2009 - the portfolio is up +86.77% (the S&P is up +61.74% for the same period). To see the holdings, please visit the members' only website.

Lazy Portfolios

In a time when most feel, if not truly believe, that passive index investing has absolutely no place in this market any longer, I encourage you to visit the new tracking section for lazy portfolios at MarketWatch. Because I've covered these passive investment strategies in the past, many have asked me if there's a website that tracks their returns and they finally put one together for you to use:

At a minimum, these passive lazy portfolios will provide a benchmark for you to compare your own returns to. Also, if you've not already proven that you can time the market effectively and consistently beat these passive strategies, then you have no excuse but to implement them until you do. To get you started, MarketWatch has also put together 6 rules for you to follow.

My hope is that they'll expand this offering to include more passive strategies for readers to evaluate and track, but this is a good start.

Focused On Sector Representation

Every month I take a closer look at the sectors most and least represented within my stock screen machine. As of today, there are 168 stocks have been identified as opportunities. Below you'll see the industry groups represented along with the number of stocks that represent that sector within the SSM:

I've discovered that this information can prove quite useful.

There are tremendous ways now to track and to measure relative performance of sectors. You can simply keep track of sector-focused ETFs that have performed well over a certain period of time. You can also simply just look at the stocks that have performed well and take notes on the sectors which are represented. But, the problem with both of these methods is that they really don't help you concentrate on sectors which have improving fundamentals as well. In essence, they'll tilt your portfolio toward the sectors which have the most momentum, but also offer the most risk following a long period of outperformance.

As many of you have found within your own research, it is exceptionally difficult to screen sectors by their fundamentals and while I've tried several methods to do this (like using valuation comparisons (i.e. using p/e ratios for a sector compared with the present and overall sector representation in the major indexes like the S&P 500), my results have been mixed. Some of these methods work better is certain types of markets, but I'm looking for tools that have more consistency at least when used in combination with these other methods.

Over the past few years, one of the more helpful tools was right in front of my face even though I ignored it for quite some time. That tool was simply to monitor sector trends within my favorite stocks screens. In essence, I take notes and track sector representation within my stock screen machine as I've done above. Relative strength scans and p/e historical comparisons don't really look at sectors from a bottoms-up focus like my favorite stock screens. In addition, because my screens do not have a "specific-sector" focus, it will often go out and find the sectors with the best prospects in the future because each screen is designed to look for different, but very good qualities.

Beyond understand and seeing sector trends, how does that translate into making more money in the market?

My research is ongoing, but I've seen a strong connection between sector outperformance and increasing sector representation by my stock screen machine. In essence, if a sector is highly represented in the SSM and the representation is growing in size (i.e. more and more stocks are showing up in that sector among all of my screens), it has been a good idea to tilt your portfolio toward that sector as well. Likewise, sectors show little or less representation are groups to avoid.

As you may recall, within my retirement portfolio, I allow for a 20% actively managed position and this year I've been using sector-focused ETFS to fill in part of that 20%. Over the past two years, I've been using my SSM as a tool for me to know how to tilt my portfolio allocation along these same lines.

Let me give you one very good example that illustrates why I'm starting to rely on SSM sector representation as a tool in this way. Earlier this year I purchased shares of the Market Vectors Steel Index Fund ETF (SLX) for my retirement account because at the time my stock screen machine was filed with companies like Ak Steel Holding Corp (AKS), Companhia Vale Do Rio Doce (RIO), Mechel Steel Group OAO ADS (MTL), Posco (PKX), Companhia Siderurgica Nacional S.A. (SID), Cleveland-Cliffs Inc (CLF), Chaparral Steel Company (CHAP), and Schnitzer Steel Indust (SCHN). That turned out to be a good decision because the SLX up quite a bit above my $52 entry point. Likewise, my long-term portfolio is biased toward oil & gas equipment and services sector which has the top representation in the SSM. For example I own the PowerShares Dynamic Oil Services Portfolio ETF (PXJ) in my retirement account to benefit from this sector development and would add into weakness if I see this top sector representation continue. I'm also watching sectors which show more and less representation and have found a connection with overall performance in those sectors as well. A point I'm likely to talk about more in future posts.

Bottom line, those of you who are focused on ETFs and lazy portfolio strategies may still want to utilize the stock screen machine for your sector focused research based on several studies I've completed. In a future upgrade to my stock screen machine, I'll be incorporating sector information filters so that this kind of analysis is more easily accessible to all, but I thought it important to point out now since I know more of you have been adopting a lazy portfolio strategy and may overlook using my stock screen machine in this way.

WisdomTree Lazy Portfolio

I have yet another lazy portfolio to share with you. After receiving numerous requests from readers, Paul Farrell has put together a lazy portfolio using WisdomTree Funds based on Jeremy Siegel's research. Here's the portfolio allocation:

WisdomTree Lazy Portfolio:
- 20% in DEFA Index (DWM)
- 15% in Total Dividend Index (DTD)
- 15% in Earnings Index (EXT)
- 10% in High-Yield Equity Index (DHS)
- 10% in DEFA High-Yield Equity Index (DTH)
- 10% in International Energy Sector (DKA)
- 10% in International Consumer Non-Cyclical Index (DPN)
- 10% in Low P/E Index (EZY)
For more information: 1

As some of you already know, within my own retirement portfolio I started using the WisdomTree International SmallCap Fund (DLS) this year which is currently up +10.5% year-to-date. Although Paul didn't add this fund to the lazy portfolio (though I personally think he should have), this portfolio has a pretty decent chance of success based on some preliminary backtesting I've completed this week.

As this clearly shows, I suspect we're going to see some very appealing lazy portfolios in the coming years!

ETFs For Sector-Focused Investing

According to TickerSense, we should be paying close attention to sector performance over the first quarter. In short, the top four performing sectors tend to produce outsized returns for the next three quarters. If that holds true, then the next step probably is to consider owning some of the sector-focused ETFs that focus on the following four sectors: utilities, materials, telecom, and energy. Let's take a look at the ETFs that cover each sector:

Utilities ETFs are IDU, PUI, UTH, VPU, and XLU:

Materials ETFs are IYM, VAW, XLB, XME, and GDX:

Telecom ETFs are IYZ, IXP, TTH, VOX, PTE, and WMH:

Energy ETFs are IYE, IXC, VDE, XLE, IEZ, PXJ, OIH, XES, IEO, PXE, XOP, and PBW:

For those of you who are lazy portfolio investors, having concentrated exposure to each of the following sectors is a simple, but quite effective strategy to boost your performance. Moreover, those of you looking for investment opportunities should run some sector-focused stock screens on each sector with the primary goal of finding the very best stock you can find from each one. If you're looking for something to do today, this would be a great way to seize the day.

Q&A on Lazy Portfolios

The February Q&A is finished and ready for your review. I think you'll find it of interest and helpful to take advantage of the lazy portfolios I profiled this week. Moreover, members continue to impress both with their level of sophistication and their sincere interest in improving their performance. You guys rock!

XTF's Lazy Portfolios

XTF is another website that I highly recommend for lazy portfolio investors. If you're looking to design a portfolio that matches a style of investing or is designed to produce returns before a specific target date, you will definitely want to check this website out!

While XTF's porfolios haven't been around a long time, you will appreciate data they provide on the portfolios' hypothetical performance. Even if you don't utilize their strategies, this information can prove valuable for those who don't want to take time to do the number crunching on their own.

I also think that you'll want to keep a close eye on XTF in the years to come especially with the rise in popularity of using ETFs. There's a tremendous need for others to develop simple, but effective strategies and XTF appears to be well on their way. In fact, I don't think it will be too long before we will be able to buy a lazy portfolio ETF or well-diversified hybrid ETF which will provide the power that many of these strategies offer through just one security. Now, that truly would be revolutionary!

Index Funds Advisors

Index Funds Advisors or IFA, a fee-only financial planning house that focuses on index investing, offers a useful website for those incorporating lazy portfolio strategies.

While it is a bit of an understatement to say that the IFA are not fans of non-indexed based strategies (see their 12-step program), I think their risk capacity survey can be quite useful for portfolio planning.

Once you complete the survey (yes, take time to do the complete survey instead of the other shorter options), IFA will provide you with a model portfolio based on the answers you submit along with backtested returns. If you're trying to figure out how best to design a portfolio that fits your personality, time horizon, and risk tolerance (which is always an important step in the overall planning process), IFA's risk capacity survey can lend some useful guidance. Also, you can easily build alternative portfolios based on their suggestions using other index funds and ETFs.

Here's a sample portfolio at the top end of the risk spectrum:

All in all, lazy portfolio investors, especially those who desire to find the right portfolio match, will want to utilize this website.

Paul Merriman's Suggested Portfolios

One of my favorite websites is Paul Merriman's FundAdvice.com. No research about lazy portfolios and/or proper asset allocation can be complete without taking into account at least some of the research and articles Paul has provided through the years at his website and personal blog.

If you're really a do-it-yourself investor, Paul's research will prove extremely valuable. Not only does he cover a wide array of topics about asset management, but he also provides a plethora of suggested portfolios along with research that will help those of you who want to go beyond the basic lazy portfolio structure.

In addition, some articles at his website that you'll want to explore further in your research include the following:

• The ultimate buy and hold strategy


• The perfect portfolio


• Fine tuning your asset allocation


• Risk vs. reward: what's best for you?


• Why we teach both timing and buy-and-hold strategies


• Do you have what it takes to be a successful market timer?

If you don't fully take advantage of Paul's website, in my view you're missing one of the best resources to further both your education and ultimately your long-term performance.