In his latest book Daniel Sortin describes the "Smartest Portfolio You Will Ever Own", giving, in his own style, the flaws with most portfolio and asset allocation techniques, the key criteria based on Fama and French's research for a smart portfolio, his preference for low-cost investing through passively managed index funds - and backtests his recommendations through a roaring bull and subsequent vicious bear markets to validate his recommendations.

Is Daniel Sortin right? Should you go ahead and modify your portfolio based on his recommendations?

The key point that Dan highlights is something that has stood the test of time, and we have made the same point on this site - the absolute best form of stock investing through bull & bear markets is with small caps & value stocks. Our own recommendation has been mutual funds that invest in small-cap value stocks to capture the best of the market's gains.

The Smartest Portfolio adds a dose of risk measurement to this mix. Measuring risk is an inexact science, but price volatility gives a sense to the investor of the amount of variability they can expect in their portfolio. However as Warren Buffet, coming from a fundamental analysis point of view would argue, the price of the stock does not change the fundamental business thesis for the company in question. He would in fact welcome a drop in price for a company, so that he could buy more shares, if his fundamental thesis still held. From a broad portfolio perspective though, volatility in price does give the perception of increased risk, and it is an attempt of the 'Smartest Portfolio' to decrease this volatility.

Also, Dan does not combine small-caps with value stocks in a single fund - instead his recommendation covers small caps and value (large and small) as distinct flavors. His various portfolio recommendations then add bond funds in different measures to suitably adjust for total risk. With any of his portfolios, he recommends a measure of time that is at least 5 years or more, typically 10 to 20 years - since the gains he indicates will materialize in that time frame.

In our perspective, retirement accounts and college 529 plans and such are ideal vehicles for this type of portfolio - where options are typically limited, and frequent trading is uncalled for. For those interested in trading in their own accounts, we continue to recommend highly rated investment newsletters with great track records.

Happy investing!