Ganesh Kumar

Portfolio Theory Vindicated

Normally I use past years returns to find correlations between Mutual Funds. For example a Global Bond Fund like LSGLX and Medial and Telecommunication Fund like PRMTX has low correlations with other mainstream stock funds. If I cannot use past years (I use returns from 1998) to determine correlations I am curious how is the QPP coming up with future correlation? We all by now know QPP uses Monte Carlo simulations, but they are just simulations using past data right?
The reason I ask this is I want to get to the bottom of how this works . We have all read Nasem Taleb's Black Swan and how "Value at Risk" simulations blew up on every one's face.
I also found one more contradictory statement in your article. You said
<Quote>"For the three years through 2005, the correlations between VEIEX, the Vanguard emerging market fund, and IVV was 76% (we couldn’t use EEM because it did not have three years of data at that time). The correlation between IVV and EFA was 83%. By contrast, the correlation between IVV and IDU, IXC, and IGE ranged from 46% (for IDU) to 60% (for IGE)."</Quote>
If Monte Carlo is always forward looking why do you have to look at correlation data of the past.
I also wonder If some one sets up a diversified portfolio of all asset classes you mentioned above and uses dollar cost averaging by investing in all classes periodically, whether a particular asset class underperforming for a period of time really matters. In other words I have started investing now in a small cap fund (RYVPX) using dollar cost averaging (Systematic Investment). I know small caps are going to underperform but I see this as a plus than a minus. Please comment on your thoughts on DOllar Cost Averaging and Portfolio Management.

Mean Reversion: When There Is Blood In the Streets, It's Time To Buy

I do not have problem buying when blood is in streets. That is easy. THe biggest problem I have is when market keeps going up. Assume this. It is easy to get in when Dow is below 10,000. Now after 6 months Dow has moved 1000 points and is now at 10,500. You think it has already come up 1000 points and it will revert to mean. Now it climbs another 1000 to 11,500. Now you say to yourself ha it is up 2000 so it has to revert now. It again climbs another 10000 and is now at 12,500. Now what you do? Do you wait to revert to mean and loose possibly another 1000 point rally or do you get in now only to see it reverting to mean :-). I have this issue across all asset classes. REIT's have gone up significantly, Small Cap has gone up, Commodities have gone up. What do you do in such situations?