Who or what is this bad, ugly beast called “Wall Street?”  Does anyone really know how Wall Street works?  When we blame it for all financial woes, who are we blaming?  Goldman Sachs?  Warren Buffett (he owns alot of Goldman)?   Is Wall Street your life insurance company, credit card companies, mutual funds, brokers, banks, and investment banks?  All or some?

The fact is, none of us are sure and it doesn’t matter because we don’t have much power over this ominous Wall Street — whatever it is.  But there is a Wall Street that we, as individuals can prevent from damaging us.

Most financial institutions want to control our money, which in turn, gives them a unique opportunity to bill us through fees that we don’t see or worse, don’t understand.  Because we’re not writing checks for these fees, we tend not to pay attention as our money flows out of our pockets and into theirs.  And that’s where the trouble starts!

Put $25,000 into a mutual fund and you’re hiring a Wall Street stock picker and paying him around $400 per year.  He and his fund now control your money.  Hire a financial adviser or a broker to manage your account – there you go again!  Wall Street now controls your money.

But here’s where Mr. Eberlin has it wrong — its investing 101.  If I buy an ETF of 1500 US companies, I own a part of all of them – IBM, Coke, Disney and Microsoft.  There’s no Wall Street.  A broker may hold my security, but they’re not charging me to invest.  I own great businesses, and my distrust of Wall Street should have no bearing on my decision to do so.

Buying low cost ETFs according to a prudent asset allocation, takes Wall Street’s hand out of your pocket.  You’re in control of your own money.

Our friend John Spence writes about this remarkable breakthrough.  When you trade Schwab ETFs or now iShares ETFs at Fidelity – you pay no commissions.  This lowers the cost of implementing an all ETF portfolio that is periodically rebalanced.  Schwab and Fidelity will also manage your ETF portfolio for you for about .6%.  While not as good as our service and way more expensive, it validates our approach and educates investors.  Go Schwab and Fidelity!

Responsible journalists like John Waggoner of USA Today are helping investors learn which ETFs to stay away from. He has a great style for helping beginner investors understand risk and financial information.  He gives a balanced view of ETFs and how to know which ones to stay away from.  We were quoted in this article, so we’re biased

Jason Zweig, is one of the most respected finance journalists in America.  In this article, he posits:  “For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself.”

In the coming years, these trends will reduce Wall Street’s fees which will in turn, weaken its grip over Americans and their money.   We hope you’re riding these trends.

In 2008 it turns out that asset allocation decisions have everything to do with a portfolio performance.

On MarketRiders, we use our own ETF portfolio builder to track some “Celebrity Portfolios” including the “Lazy Portfolios” (published by Paul B. Farrell at Marketwatch). These portfolios mimic allocations based upon Yale University’s David Swensen, Dr. William Bernstein, Ted Aronson, and Bill Schulthesis who wrote “The Coffeehouse Investor.” Community members also have posted many interesting portfolios with unique asset allocations that have held up well in the last few months.

These portfolios use ETFs without active management and we track weighted average portfolio fees. The component ETF fees range from .08% to .50% and the weighted average portfolio fees are between .12% and .21%.

Comparing and contrasting portfolios with similar asset allocations, shows a lot about how to build solid “all weather” allocations that have held up even in 2008. While some of the variance is surely explained by the allocation in non-equities (Bonds, Treasury Inflation Protected Bonds and Cash), a lot of it is explained by the level of diversification amongst the other asset classes.

There’s quite a variance between some of the portfolios – even when their equity exposures are similar. Two portfolios each with 60% equity exposure have dramatically different results.

For example, Bill Schulthesis, a ex-Salomon Smith Barney broker who wrote The Coffeehouse Investor, designed a portfolio with 40% in an intermediate bond index (BND) and 10% in each of 6 stock funds (Vanguad REIT ETF (VNQ), SPDR S&P 500 ETF (SPY), Vanguard Small-Cap ETF (VB), Vanguard Small-Cap Value ETF (VBR), Vanguard Value ETF (VTV), Vanguard FTSE All World ex-US ETF (VEU)). Dr. William Bernstein wrote the “Intelligent Asset Allocator” and “The Four Pillars of Investing” and proposed the same basic allocation. But high exposure to small cap value US stocks and REITs allowed Coffeehouse’s returns to trump Bernstein by over 2 times.

Here are the results as of last night’s close.  These portfolios and the ETFs in them are posted on MarketRiders.

The Best and the Worst Returns

To better understand where the variances lie, we drill down into each asset class to see where returns (or lack thereof) are coming from. Aronson’s portfolio, is the worst so far, down (16.65%) with 80% equity exposure. Unfortunately, Aronson had no REIT exposure and heavy exposure to Emerging Market (VWO) and Foreign Markets (European (VGK) and Pacific (VPL)) which have both been crushed this year. Aronson’s portfolio has performed very well for 5 years on the backs of these asset classes, but 2008 has been his come-uppance.

The MarketRiders “Low Risk” portfolio is doing the best so far this year – down only (1.83%) – but with 25% exposure to equity and Real Estate (RWR). A strong US allocation (iShares S&P SmallCap 600 Index  (IJR) and SPY) over Foreign Developed and Emerging Markets (VEU) helped dampen the losses.

It’s Time to Rebalance!

Today, we’re rebalancing a few of these portfolios where actual allocations now vary greater than 20% off our targets. The most out of balance portfolio is the one built by John Spense and Rick Ferri on MarketWatch. Emerging Markets, Foreign Markets, TIPs and Small Cap US stocks are all out of whack so this portfolio and others will be brought back to their targets.

Stay tuned.  At the end of the year, we’ll report back and show you how these portfolios did.