CPM Investing LLC - Research Publications
This article defines key terms of our investment approach.
Focused 15 Investing is published each week, and each publication contains several different model portfolios. As a subscriber, you select the model portfolio that fits your appetite for return and variability. Guidance on making that selection will be covered in another article.
Once you have made a selection, you will follow that particular model portfolio over a long period of time. Each week's publication has the target weights for the ETFs in the model portfolio. These target allocations might change each week, so you need to check each weekly publication for the current allocations. Often, however, we don't trade every week.
ETF - Exchange Traded Fund
It is helpful to think of an ETF as an exchange-traded index fund; it is basically an index fund you can trade on a stock exchange at any time during the trading day. This means that you sell your index fund at any time of day when the market is open, and you can use the proceeds of that sale to buy another ETF – all in the same day. When you trade an ETF, you know the price you buy and sell at immediately. For index funds that are traded as mutual funds, each transaction is done after the market closes based on the closing price for the day. Because of this delay, you don’t know exactly the price you have obtained until the market close. We could use the Focused 15 investment approach using mutual funds, but ETFs are simply more convenient because of the ability to trade during the day.
An index fund is a diversified portfolio of securities designed to track a well-known published index. For example, there are index funds designed to track the 30 stocks in Dow Jones Industrial Average. There are index funds designed to track all 500 stocks in the S&P500. Thus, an index fund is just a portfolio of a specified number of securities defined by that index and held at weights that are generally the same as the weights in the index.
An exchange-traded index fund uses a single ticker symbol for the index fund. Thus, an exchange-traded fund (ETF) can simply be thought of as an easy-to-trade index fund. Because it is traded just with one ticker, we are able to trade an entire basket of securities of hundreds or thousands of stocks in just fifteen minutes—something that would have taken all day to do twenty or thirty years ago. ETFs are gaining in popularity, and you will often see stories about them or hear about them on the business news and even in popular press in relation to retirement accounts.
A model portfolio is simply a list of ETFs published by Focused 15 Investing showing weekly target weights for those ETFs.
The image above shows Focused 15’s Zircon Model Portfolio. You can see that this portfolio currently has 60% of its entire weight in the ETF ‘DIA,’ which tracks the Dow Jones Industrial Average. It also has 20% of its weight in the ETF ‘IEF,’ which tracks the 7-10 Year US Treasury Bond Index and 20% in the ETF ‘SHY,’ which tracks the 1-3 Year US Treasury Bond Index.
Your retirement account could be comprised of just those 3 ETFs, and you’d have a broad allocations of assets to stocks, bonds and cash with the target weights indicated. When the most recent Focused 15 weekly publication calls for an increase in stocks, you will simply buy more shares of ETF ‘DIA’ to bring your account into alignment with the new target weights.
In the weekly publications, the model portfolios are shown in the above format. There are many numbers on the publication, and these are described in more detail in a separate article. You will be trading your investment account to bring it into alignment with the target weights of your selected model portfolio.
The numbers circled in the image: 28%, 63%, and 9%. If this is your selected model portfolio, and if your retirement account holds these ETFs—DDM, SHY and UST, at these weights—you are doing good job of tracking that model portfolio.
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