A Bad Portfolio Idea

By Roger Nusbaum | October 07, 2008 | 1:10 PM | 0 Comments

Ned Riley is getting a lot of face time on the network this morning. He has been a TV personality for a while but candidly I can't remember him being right about too many things. This morning's nugget was about portfolio construction with ETFs.

He suggested a 70% exposure to equities (this part is neither bad nor good, just a generic asset allocation). He said he would put 25% in S&P 500 SPDR (NYSE: SPY), 25% in Nasqaq 100 ETF (NSDQ: QQQQ), 10% in the Healthcare SPDR (NYSE: XLV) and 10% in the Technology SPDR (NYSE: XLK).

SPY is a broad based product so some sort of large allocation is reasonable depending on the individual. QQQQ is a proxy for technology although less so than it used to be. Currently QQQQ is 64% tech versus about 80% at the start of the decade. XLK is 83% tech (the rest is telecom) and XLV is all healthcare.

Anyone following Ned's suggestion is putting 28% of the entire portfolio in tech or thought of differently, 40% of the equity portion of the portfolio (70% stocks/30% fixed income) into tech.

I get 28% from 64% of QQQQ, 16% of SPY and 83% of XLK.

It would be reasonable to ask if he is purposefully making such a big bet on tech or if he forgot what happened at the start of this decade to people who bet too much on one sector. If a big tech bet is his intention, fine, but that bears mentioning.

In print and on TV there are portfolio ideas like this puked out all the time and the vast majority of the time they have big bets embedded within. It is great to hear about portfolio ideas as ETFs are a very useful resource but be skeptical about what is presented, look for flaws not spelled out by the author (they may not share any flaws but of course all portfolios have flaws).