Analyste de Boston

All That Is Gold Does Not Shine

I agree with Richard in this regard (implied): gold is not a good "investment." It's a hedge, a safety, a cash substitute that earns nothing. The larger question is CASH: how much should you hold, in what form, and for how long.

At the end of the last major recession (1982), American investors held 18% Cash. Another of Richard's charts (11/17/09) illustrates how the 10 Year rolling allocation to Cash has fallen from 18% in the mid-1950s to just 6% this decade. If there's a lesson from that history, it's that investors were conservative in the 'good investing climate' but too aggressive in the 'poor investing decade.' Prudence & discipline sharply now return many seasoned investors to conservative sensibilities and a Cash allocation somewhere at least 10-15%.

How one manages this Cash allocation is subject to much debate, and the "Seeking Alpha" answer depends entirely on age & risk tolerance factors: probably, a combination of bullion/coin, PM ETFs, currency ETFs and/or other hard asset proxies. To learn how to save, Gold is a great teacher!

The evolution of the Cash allocation for retirees hasn't really been a major SA focus, but bigger risks for USD-holders are nearly upon us: presumed severe inflation and a collapsing Dollar. For those threats to savings, many commentators appropriately suggest Gold NOW: that defense has little or nothing to do with speculation, either.

Personally, I'd like to see more articles & discussion about gold's role in asset allocation and referencing Age & Risk Tolerance. But again, that isn't properly a "Seeking ALPHA" topic: PMs are rather a hedge against Equity Beta, especially for older, conservative, and HNW investors.

In that role, Gold shines as brilliantly as ever.

Harvard and Yale 2009 Returns

Returns? Most readers assume returns are 'what the investments generated.' WRONG.

University endowment INCLUDE donor contributions, other income & distributions in their performance (you can see why.) Contributions of what, +$1 BILLION a year sometimes?? Be very very careful when you read "endowment return" stats - don't assume these gross #s are germane to a retail investor's portfolio performance in any way, shape or form! Apples & oranges.

I ran numbers using the proxy ETFs & MFs that the author and others have suggested previously for various allocations 2006-2008. The 10/9/07-3/6/09 Great Bear Decline losses ranged -48% > -55%. For Yale (10/9/07-6/30/09), these older, unrebalanced, static allocations lost -36% > -46% (vs. the "-30%" stated recently.)

In his 12/16/08 letter, Yale President indicated -25% loss for the previous 6 months, with greater unrealized losses to appear later. I calc'd between -33% > -38% with the proxies, so they do approximate. I would also expect their pricey hedge funds managers could reduce risk & improve performance over mock-up ETF allocations from 2006!

I don't think Harvard or Yale did a good job managing risk - on the contrary, they seemed to carry the same overall risk as their asset allocation. And before we declare they "beat stocks" longer term, let's remove the billions in alumni contributions over the past 3 decades!

Diversification Isn't What It Used to Be

Interesting.
I know there's not universal agreement, but I wonder why you call 3 Years "medium term." We might quibble over a year +/-, but from a portfolio standpoint, 1-3 years is "short term," 4-8 years is "medium term and anything over 9 years (or so) is long-term. A 2020 or 2030+ portfolio is long term, a 2015 Portfolio (6 year horizon) isn't.

Most asset allocation models should reference longer term correlations - it's more instructive to look at rolling 5- or 10-year stats for general portfolio performance benchmarks. If client relationships are 7 years on average, your presentations should encompass that time-frame, at least. I'm not sure 12 month correlations will be relevant as a factoid in reports, since we expect high correlations across asset classes to occur in deflationary crises or reflationary rebounds (extraordinary moments.) Or do you generally use last year's 12 month metric to re-allocate for the next 12 month period??? IMO, that seems more distraction for the purposes of most well-diversified clients. Don't go the smoke-&-mirrors route.

"But you had great diversification last year!" is nowhere near as important as PERFORMANCE. Did you manage risk, yes or no? Sorry, your clients won't be fooled otherwise !

Top 20 Performing Dividend ETFs

Which website has the most comprehensive, accurate & timely information on dividends and interest income?

ETFConnect shows a different "Current Distribution Rate" for several just checked, and it appears to be current (8/17/09) data. Is there a better site? Thanks!

fwiw, interest income can fluctuate widely for many funds - don't anticipate these distributions will be consistent (for income/tax purposes) over time!

How Tactical Asset Allocation Will Transform Wealth Management

"more than 90% of investment returns come from asset allocation"
I think the author's referring to the widely misunderstood/ wrongly interpreted BHB study : tinyurl.com/lrsw2f

Given the apples-to-oranges comparison, I'm not sure we can say what %age returns "come from asset allocation" - as you and we WOULD think. That oversimplification is essentially meaningless - it's not helpful that "the answer" is misunderstood or convoluted by PhDs, even!

Gut instinct tells me that TACTICAL ALLOCATION can produce superior returns in the short-run (3-5 years), but over a medium term this is due entirely to the managers' discretion/freedom to REDUCE RISK. To paraphrase Warren Buffett, 'the secret to making money is not losing money.'

Managers handcuffed to rigid mandates (i.e. fully invested in risky asset-classes) will continue to lose big widely volatile markets. They carry too much risk! They're too slow to adapt! Identifying long-term skillful - as opposed to short-term "lucky" or favored managers - remains a real challenge, however.

Swedroe: 'Buy and Hold' Not Dead but Rebalancing Necessary

>On the individual level, say you only want 4% in commodities. So I’d take 25% of 4%, which is 1%, and I’d rebalance once it goes beyond a 1% move—meaning below 3% or above 5%.<

I'll nit-pick this.

a) There's probably no benefit in any ASSET allocation > 3%. And anything allocated with very small percentages (<5%) should have a much higher threshold for mandatory rebalancing. There's good reason to 'let your winners run' when the total asset allocation is so minor (presumably RISK was the reason the asset class was so restricted.) And you're likely just ADDING COSTS if such tinkering is not part of a general rebalancing, particularly in a small $ portfolio.

b) Check the "wisdom" of auto-rebalancing more significant asset percentages +/-25%. If you rebalanced your simplified 75/25 portfolio TWICE in the Great Bear Market (10/9/07-3/9/09) on Sept 30, 2008 and November 20, 2008, how would your Portfolio compare to a Target 2020 (75/25) MF?

Target 2020 avg return = -40%
Your '2x disciplined rebalanced' 75/25 portfolio= -46%
(Used returns of AGG/SPY and FBIDX/FSMKX)

Show of hands: who would be happier with an extra 11% LOSS? Recall that you'll need a +67% or +80% upside just to break-even... an extra 13.6% return on a 75/25 portfolio might take another 12-18 months, luck permitting! Just to break even!

Ouch, some "discipline" in that lesson learned.

Rhetorical question: why does no one ever shriek "Rebalance! Rebalance!" when the market is peaking? (I was conservatively Bearish in 2005-2007, fwiw.) There seems to be an inherent bias to these Permabull, buy&hold pundits cluttering the "financial advice columns." Nevermind their profound & longstanding hostility to alternative investments that afforded better downside protection.

God forbid anyone 'mainstream' would have the courage to suggest 12% commodity exposure might be a prudent allocation: they sure didn't in 2006 or 2007.

Stress Testing Your Portfolio

Thanks, Jeff!

I'm not anti-Monte Carlo per se but against over-reliance and misuse of that tool ("Monte Carlo shows...") as I've witnessed other professionals discussing it. IMO, the caveats are poorly understood and not reiterated as often as necessary. But I think that issue has been addressed in this Comment stream (and perhaps in your other posts.)

I should also correct my estimation of your Bob - with rebalancing, the 50/50 allocation probably lost another -14% between 1/1/09-3/9/09. In the the FULL Bear Mkt, Bob's portfolio has been reduced -49%, including 3 withdrawals in those 17+ months.

fwiw, my portfolio performance is just that: "investment performance" not including any fees, expenses nor withdrawals. NOT apples-to-apples with the hypothetical above! Including those 3 withdrawals, my Frugal Yankee Model would be DOWN -11% from 10/9/07-3/9/09.

Best regards, and thanks again for your excellent articles!

Stress Testing Your Portfolio

Ron-
I think your assessment is spot-on. I would only add that for investors in the game since the Bear Market began, losses would be that much greater (-4% 4Q07, plus 1 presumed withdrawal compounds to... -40%?) Grimmer than first imagined, unfortunately.

My Model is UP +61% in the Bear Market, glad I ignored Monte Carlo projections in defining my allocations. Instincts served my clients much, much better!

Stress Testing Your Portfolio

Ron, if your "Bob" is a generic/typical retail investor paying an advisor nothing, he's invested in mutual funds ("plan" = 401k) and lost -27% in a conservative allocation, you can chart those MF tickers listed above in Googlecharts, from 12/31/07-3/31/09. Those 2015 allocations lost between -31% to -35% in that period, so your "Bob" did somewhat better and has less to regain : +37% to breakeven.

fwiw, if Jeff's "Bob" was put in a 50/50 allocation and only lost about -24% for the entire Bear Period (I'm extrapolating here) that client is probably much, much better off than most investors of his age/wealth/class.

But I don't believe that 50/50 allocation has been 'optimal' for the rally that many predicted, and IF this is a new Bull Market that allocation won't be satisfactory for long. In asset allocation for the upper-end of the Mass Affluent mkt, the "set it, forget it" days are over. Advisors will need to be much more proactive in managing both risk & return, and prove their value going forward.

My own experience with Monte Carlo simulations was a disappointment (thank god I didn't follow it!) but the program wasnt QPP. I have an issue with the black box features of all quant models, the presumptions & premises behind the output, and until my own performance lags significantly I won't be too interested.

fwiw, I also co-worked with Milevsky on a project for a major insurance company. Although I have the highest respect for his work, go back and see what kinds of allocations he was advocating in 2003-07. (He seemed far more risk-tolerant then; I wasn't.)

Stress Testing Your Portfolio

No anger here, just a reality check.

Most 2015 Lifecycle funds (marketed as a "set-it-forget-it" option) lost about -43% (10/9/07-3/9/09).
FFVFX -43.8%
VTXVX -41.6%
TRRGX -48.6%
TCNIX -43.1%

In aggregate, that's also the institutional allocation for products sold to Baby Boomer retirees (born 1946-1950.) For private investors with the relevant time-horizon and risk-tolerance, target date/lifestyle products are a simple benchmark - if you pay a financial advisor to get the same or lower return, you really should shop around for better counsel.

Keep the focus: a competent advisor needs to deliver risk-returns significantly better than retail offerings. S/he can't just provide a clever hypothetical model to dupe the sheeple. What else is the Client paying for, if not superior advice & performance?

There are times to take your clients' money out of (or into) the market, to deliberately & intentionally reduce (or add) risk. Those religiously following quant models got very badly burned - and honestly, its hard to see lots of converts flocking back tomorrow.

Stress Testing Your Portfolio

A few thoughts:
1) "Events like 2008" started in October 07 and might not be over (March 09), but focusing on the WORST possible outcome is what everyone should look at during Market peaks (March 00, Oct 07.) They and their advisors rarey do!

2) "[At age 65] Bob’s portfolio was only moderately exposed to this over-valuation because of his 50% allocation to bonds" doesn't reflect most investors' reality AT ALL. In truth, there were many, many more +65yo Buy&Holders with >70% allocation to eqty in 2007. Playing catch-up from the last "event" (2000-02.) If people were more prudent, if only people were saving more, if only people were better diversified... too many ifs.

3) "Age 65" is arbitrary (the Boomer wave starts in 2011) and the 50/50 allocation wasn't realistic either. Bob has $1m in retirement savings, and "we have assumed that Bob will continue to draw his $50K in current dollars" ... Can we ask, how reasonable are those numbers? If you're running survival seminars for Mass Affluents (yes, that's what they WERE called), then reduce the savings by 50% and raise the draw by 50%.

4) Not to pour on your parade, but I'm afraid taxes & inflation will render these presumptions abit unrealistic, too.

This article is written with the best intentions, I know, but why do I have the sense that "retirement planning" for MOST people is now a bad joke? Bob has to be much wealthier (probably older) and likewise have a greater draw and appetite for risk, to be a Client. Or you need to ratchet down, and think "poverty counseling" - there's less money there! Either way, "Bob" needs to be closer to reality with numbers that showed his TRUE age, wealth, experience.

God help us all if hyperinflation hits in 2012-16 or the currency fails sometime in the next decade or so. Stowing away 10-15% in gold bullion certainly isn't as "nutty" as it sounded in 2005 - just look at how much things have changed! So we go back to basics, the frugality of our forefathers - can we Monte Carlo that?

This is the curse of interesting times. Almost all the quant models failed, didn't they? False premises? Mom & Pop investors who believed the 'Buy & Hold' lie lost HALF their invested assets, to say nothing of their property devaluation or remortgaging to buy flashy junk. Now they'll have to re-pay the Pied Piper, somehow. Or do we make-believe it'll all go back to the way it was? Why?

Shouldn't we start with a more accurate description of real investors' experiences?