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Geoff Considine  

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  • Stress Testing Your Portfolio [View article]
    I am not accounting for the increase in autocorrelation / cross correlation that occurs in a major meltdown but I am hoping that the 3SD worst estimate is still a good measure. Basically, we are saying that we plan for a really bad (<1/1000) event while ignoring autocorrelation/correl... increases and this is used as a reasonable estimate of the worst case that investors must plan for, given that we know that this will under-estimate the probability of such an event. In light of 2008-2009, this look very reasonable. My estimated worst case 1-year using this simplified approach was worse than 2009-2009 for all the portfolios I have examined.

    On Jun 16 05:18 PM gasem wrote:

    > In terms of stress testing how do you view changes in a portfolios
    > diversification metric and auto-correlation metric
    > As I watch things evolve I saw diversity nose dive and auto correlation
    > explode
    Jun 16, 2009. 11:25 PM | Likes Like |Link to Comment
  • Stress Testing Your Portfolio [View article]

    Thanks for all the comments. I am running a bunch more cases right now using this stress test metric. I am looking now at the two year period ending in May 09. This fills out the picture. I will post my next article with more of these results.


    Jun 16, 2009. 11:22 PM | Likes Like |Link to Comment
  • Stress Testing Your Portfolio [View article]
    On Jun 12 01:09 PM Analyste de Boston wrote:

    >In truth, there were many, many more
    > +65yo Buy&amp;Holders with >70% allocation to eqty in 2007.

    Yes, but that is precisely the kind of over-aggressive stature that Monte Carlo tools like QPP help to warn against.
    Jun 15, 2009. 06:56 PM | 1 Like Like |Link to Comment
  • Stress Testing Your Portfolio [View article]
    Hi guys:

    I enjoyed the comment stream today, after being away for the weekend. What I find most striking is that this topic has not gotten more attention in the media. There was the really poor WSJ article on Monte Carlo, but you guys are really hashing out the important issues. I agree with the comment on market discipline--the hardest thing for people to do is to stay with a plan--if they have a plan. I am sure that there are lot's of Bob's in the world who sold their equities and purchased an annuity just before the market rallied 35% or so in early 2009. I think that Monte Carlo tools can help investors to be more cognizant of thr risks and thus choose a level of risk that they can live with. Back when QPP was projecting a doubling in volatility over recent years (in 2007), I saw very little commentary on this issue. THAT was the time to prepare. After the crash, there are many people who have been crushed and I am well aware that what Gasem says is true: there were many people aged 60+ with very high allocations to equities--and largely undiversified exposure to equities, too. Monte Carlo is not a crystal ball, but it can provide guidance that helps investors avoid taking too much risk. Also, I am totally sympathetic to the ideas that there are much better portfolios than Bob's--I agree. The specific portfolio is simply a straw man.

    Also, Analyst de Boston says that his market timing made his investors 61% in this bear market. First off, I tip my hat :) Second, Monte Carlo does not mean that you do not use tactical asset allocation methods--I have written about this. In the case shown here there is no Tactical component, but this is just one case...

    Jun 15, 2009. 10:20 AM | 1 Like Like |Link to Comment
  • E*Trade's Online Advisor Hopes to Lure DIY Investors [View article]

    Nice article. This is a timely piece and I hope to see more discussion of this kind of emerging solution. One thing I am surprised you did not mention: Where do you see in this space? Their goal has always been to provide online portfolio guidance using their tools, and they have been around for quite a while.


    Jun 9, 2009. 02:57 PM | Likes Like |Link to Comment
  • Did Portfolio Planning Tools Fail Investors in 2008? [View article]

    My next article shows how to stress test--step by step--in QPP or in any other Monte Carlo model...


    On Jun 08 10:23 AM BobLSW wrote:

    > Geoff,
    > Could you give a novice some guidance on how to QPP to stress test?
    > So far I've been just using it to generate the projected return/risk
    > for my portfolio at the end of each week. I than look at the table
    > showing the 80%/50%/20% probablilties. I use the SP # as suggested
    > 8%/15%.
    > Thanks,
    > Bob
    Jun 9, 2009. 11:02 AM | Likes Like |Link to Comment
  • Did Portfolio Planning Tools Fail Investors in 2008? [View article]

    I like your examples but I also suggest that you read Milevsky's paper. You raise a number of important issues. First, the cycle in volatility. Volatility was very low, so people took bigger risks--and this led directly to the crash. This process is well documented in Minsky's instability hypothesis. Quantext Portfolio Planner clearly docuemented this risk well before the crash--and I have written many articles on it here at SeekingAlpha.

    Second, Monte Carlo models are attempting to capture a series of unknown future factors in terms of cumulative risks. We do not need to know specifically what these are. I disagree that the recent market crash is beyond the realm of statistics to capture (bad cement vs. 100 year flood). We cannot predict what will happen in terms of the extreme events but we can stress test our plans to see if they will hold up in extreme events--thats the point of my article.

    On Jun 08 11:05 AM gasem wrote:

    > The issue of the past melt down IS UNRELATED to a probabilistic thing.
    > The melt down was due to systemic risk. In effect the market was
    > rigged. AAA bonds were NOT AAA loans were being made to people who
    > HAD NO ABILITY TO EVER PAY THEM BACK. Government policy was such
    > that there was a bias to do financially unsound things. Everyone
    > knew this was going on EVERYONE. Because there was a huge amount
    > of money to be made the bet was "I'll play the game make my huge
    > amount of money AND I'll be smart enough to get out before it crashes."
    > Virtually no one was smart enough, so the market unwound all at once.
    > In my opinion the thing in the monte carlo engine that should have
    > given this away was was the ever declining S&amp;P volatility during
    > the period following the burst of the tech bubble. We went through
    > recession and we went through 2 wars yet the volatility declined.
    > THAT decline was due to the systemic bias that was added by the government
    > which gave us the sandbox where the Tech bubble was turned into the
    > real estate bubble, and that is now being turned into the currency/credit/govern...
    > bailout bubble Another systemic risk, and another reason to NOT invest
    > in America
    > To blame monte carlo for government violation of the rule of randomization
    > is to absolutely NOT understand what a monte carlo engine does. The
    > example of engineering a bridge for the 100 year flood is the perfect
    > example. You can engineer for that probablility, but if you systematically
    > undermine the quality of your concrete (as in adding systemic risk)
    > your bridge is built on a fraud that is not the fault of the model.
    Jun 9, 2009. 11:01 AM | Likes Like |Link to Comment
  • Did Portfolio Planning Tools Fail Investors in 2008? [View article]

    Great comments all. I would like to see more discussion of the roles and duties of advisors here on SA if that would interest people. This is a major issue and I think that advisors and individual investors would benefit from more dialog. I think that really good advisors help their clients to understand the responsibilities on both sides of desk. I am quite convinced that good advisors add considerable value for many investors. That may or may not include making tactical decisions--depends on the advisor and the client. This debate is very similar to what has gone on in the institutional world for several years.

    Some investors want to hand over their money and have no involvement whatsoever. Some investors are proactive. Many of the users of my Monte Carlo platform are individuals and quite a few have introduced their advisors to our tools rather than the other way around.

    The models and the use of models is one part of the discussion, but this is a bigger topic obviously.


    Jun 8, 2009. 10:15 AM | Likes Like |Link to Comment
  • Did Portfolio Planning Tools Fail Investors in 2008? [View article]

    Milevsky's proposed SORDEX statistic is a great solution. The more I work with it, the more impressed I am.


    On Jun 03 10:17 PM Alan Young wrote:

    > The average investor, being told that their portfolio had a 95 or
    > 98% chance of sustaining its value throughout their remaining lifespan,
    > would be satisfied. There are no 100% guarantees.
    > But the problem is not the modeling. The problem is that a once-in-a-century
    > event is thought of as a remote improbability, because "that hasn't
    > happened for many years and everything is different now." Actually,
    > an investor with a remaining life expectancy of 30-35 years has about
    > a 1/3 chance of encountering a 100-year improbability. That is a
    > substantial enough risk that some specialized control device should
    > be added to the plan. If only we could know what that would be.
    Jun 4, 2009. 08:01 PM | Likes Like |Link to Comment
  • Did Portfolio Planning Tools Fail Investors in 2008? [View article]
    Thanks for your comments. I very much reccomend the article by Milevsky linked above. His point is that MC models provided strong warnings prior to 2008 if people stress tested the results--as he shows. When I do the same tests as Milevsky, I get even more extreme warning signals using data available through 2007.

    The subtle point I am trying to make is that the real issue is using these tools correctly. Anyone using my MC platform can easily demonstrate this for themselves.

    Investors and advisors have a somewhat uneasy relationship to MC models. They are far from perfect, but they are the best tools available. Milevsky's article is must-read stuff for anyone who worries about long-term sustainability of income.
    Jun 4, 2009. 08:00 PM | 1 Like Like |Link to Comment
  • Dividend Aristocrats Will Continue to Outperform [View article]
    Typo alert:

    Article says:
    "For the two years through March of 2007, DVY had average annual returns of -35.8% per year..."

    It should read:
    "For the two years since March of 2007, DVY had average annual returns of -35.8% per year"
    May 6, 2009. 10:56 AM | Likes Like |Link to Comment
  • Dividend Aristocrats Will Continue to Outperform [View article]

    Ahh--but you have neglected a crucial factor. Let's say that a model predicted two years ago that bonds would out-perform stocks over the future years. Then the market crashed. And your point would be that any bond portfolio would have out-performed in a market crash, so big deal. But, the model--when it predicted this--did not know that the market would crash. The model was implying something important. Same here. Anyone can say that a low Beta portfolio has and should out-perform in a down market, but we did not know there would be a down market when I wrote the original article. Make sense?

    On May 04 07:26 PM dkco wrote:

    > Geoff
    > A quick skim of some of the characteristics of your simulation, beta
    > of about 0.60 and equal weighted positions of the dividend aristocrats
    > would indeed predict outperformance of the cap-weighted S&amp;P 500
    > over the period when it fell 25%. Equal wighted stocks significantly
    > outperformed cap-weighted during the time, and a portfolio with a
    > beta of 0.6 should roughly fall 60% of the amount of the market (and
    > rise only 60%). 60% of -25% is -15%. So, the combination of the portfolio
    > beta and equal weightedness is the primary explanation for the dividend
    > portfolio's performance, not what stocks they are, or, even that
    > they pay dividends. A comparable analysis would hold for any basket
    > of stocks, dividend paying or not, with a portfolio beta of 0.60.
    > I know, most low beta stocks pay dividends, but not all, and not
    > all div-payers are financials.
    May 5, 2009. 01:03 PM | 1 Like Like |Link to Comment
  • Dividend Aristocrats Will Continue to Outperform [View article]
    Yes, but there is little evidence that investors as a whole are rational. Witness bubbles and other speculative extremes. There are a range of data points that suggest that investors are not rational. One of my favorites is that low Beta strategies tend to return more than they should (Fama and French 2004 showed this). In a perfect market CAPM would be correct--and you would be correct--but Fama and French 2004 shows that this is clearly not the case, even over long periods.

    On May 03 08:54 PM Flav wrote:

    > Geoff:
    > If agents are rational and forward looking, and past information
    > of returns and risk are at their disposal; knowing that a montecarlo
    > simulation which uses this information shows that a basket of stocks
    > will outperform the S&amp;P, shouldn't create an arbitrage opportunity
    > that will soon erase the return diferential, so that the future expected
    > return of this basket is the same of that of the S&amp;P?
    May 5, 2009. 12:59 PM | 1 Like Like |Link to Comment
  • Dividend Aristocrats Will Continue to Outperform [View article]

    Trust me--I am well aware that -18% is not a happy outcome. For the people who are net short or who have otherwise sustained no losses in the last couple of years, I am duly impressed. For the institutional investors and retail investors who maintain net long positions, relative out-performance matters a great deal. The Dividend Aristocrats have turned a REALLY bad year into far less substantially bad year. You seem to be suggesting that the only good strategy is one that never has losses. If you believe that this is possible, I wish you luck.

    If price appreciation is anemic, I will be very grateful for the dividends for my net long positions.

    With regard to comments from donzelion and Whidbey:

    The theory etc. behind why companies pay dividends and why investors care is long and interesting. Dividends are a signal to investors. Some companies have tried to exploit this with leveraged dividend strategies or simply payouts that were simply too high to be sustained. Dividends that are raised or maintained over long periods can signal managements approach to growth, etc. Yes, companies can and do cut their dividends and they may do so in the future. Do you think that the out-performance of the Aristocrats in 2008 was just coincidence? Time will tell.


    Apr 27, 2009. 06:26 PM | 5 Likes Like |Link to Comment
  • Emerging Market ETFs Come Unhinged [View article]
    Nice article. The wierd thing about the 'decoupling' theory is that the statistics never supported it. I have been writing about this for years before 2008 here on SeekingAlpha. EEM and other emerging markets funds have always had high Beta relative to the S&P500 and a high correlation to the S&P500. See, for example, this article from May 2006:
    Apr 16, 2009. 07:37 PM | 1 Like Like |Link to Comment