With 54.5% of the portfolio in bonds, it might seem that the portfolio is nearly 15% overweight fixed income. But that's true only when junk and investment-grade bonds are grouped together. Studies have shown that junk as a group is more correlated to equities than most other types of bonds.

"In this case, we're not allocating our fixed-income assets [in investment-grade] to a more risky asset class [in junk bonds]. Instead, we took some of our holdings in equities to fund bigger positions in high-yield," said Lowenstein.

Tactical Asset Allocation Strategy

Last year, asset class valuations and scenarios for potential longer-term returns were shaken dramatically by the market's huge fall, she adds.

"Starting from mid-September of 2008 when the financial crisis really grew in scope, we made about five tactical changes through year's end. But that's very unusual," said Lowenstein. "Normally, we wouldn't see that much activity in a whole year."

According to Litman/Gregory's calculations, its index-based 60/40 model portfolio has outperformed its benchmark by a significant amount over time. Since the portfolio's inception on Jan. 1, 2002, it had returned an average annualized 3.12% through April. That compares with its benchmark's total return of 2.14%.

The firm uses a benchmark for its 60/40 model portfolio consisting of:

• The Vanguard Total Bond Market Index Fund (VBMSX), 40%

• The Vanguard 500 Index (VFINX), 40%

• The iShares Russell 2000 Index (NYSE Arca: IWM), 8%

• The Vanguard Total International Stock Index Fund (VGTSX), 12%

"We primarily employ ETFs in our index-based portfolios," said Lowenstein. "But our benchmarks use a combination of index mutual funds and ETFs."

Either way, she says Litman/Gregory stresses low-priced and well-managed vehicles of both types. "We recommend that advisers take a common-sense approach in applying factors such as account sizes, trading costs and investment strategies when choosing between ETFs and index mutual funds in individual portfolios," said Lowenstein.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

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