2009 Investment Returns: Timing Model vs. Endowment Model

Both Barron’s and the WSJ penned articles on the endowments' sorry performance for 2009 (and neither mentioned my book – FAIL).

Lots of readers have emailed in asking me to comment on the endowment performance, as well as to compare it to the timing model.

Below are asset class returns for June 30th, 2008 to June 30th, 2009 (i.e. the endowment fiscal year).

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI

REITs – NAREIT

Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes.

Endowments is an approximate return for the largest endowments in 2009 (probably ranging from -25% to -40%).

60/40 is the old 60% stocks, 40% bonds allocation.

Timing Model is from my 2007 paper and 2009 book.

The buy and hold allocation would have experienced a 46% drawdown – yikes! How many investors can sit through that? (And if you read the DALBAR study you know they don’t!)

Remember, the timing model is not intended to outperform buy and hold by much over the long run, but is rather intended to manage risk effectively. It did just that with a max drawdown 1/7th the size of buy and hold…

Comments

[E.D. Hart:]

Mr. Faber,
I bought your book last week and read it.

First, excellent job on the research and the writing. I was familiar with much of what you wrote, but it was great to see the references, and the material logically presented, and all in one place. Your writing style is approachable, and not dry. (no I am not getting paid to write this, and I don't know the author)

Your book was what I wanted Swensens Book and El-Erian's most recent books to be, but werent.--practical applications to portfolio management.

IMHO your book is one of the ten best written to help the individual investor implement intelligent and tested investment strategies.

I wish I had read this book ten years ago, it would have saved me alot of money.

Second, what if you teased out gold as a separate asset class. It seems to me that the whole framework for defining asset classes is based on mean variance analysis, optimization by combining negatively correlated assets, and MPT.

Since gold frequently (but not always) trades in its own little universe (as far as correlation is concerned)--such as last year when all commodities tanked, except gold--why not include a 20% allocation to gold, and get rid of real estate altogether?

or at least run the numbers for testing and curiosity?
20% GLD
20% Bonds
20%US stocks
20% Foreign
20% commodities.

How does a portfolio constructed as this perform 1973 to 2008?

I'd be curious to see how these numbers looked when backtested.
Thanks for your work,
Eric Hart

Jul 21 12:31 PM

[WorldBeta:]

i'll try and post something to my blog in the next week on gold.

PS, thanks for the read!

Jul 21 06:49 PM