Geoff Considine

Tactical Asset Allocation, Part II

Oleg:

QPP uses three years of data to initialize the model as the baseline input--but projections have been extensively tested out of sample over decades. Black Swans may exist that defy the model---no one did well with 9/11 or 1987 crash---fair points. I have written about testing for extreme tails in a range of articles if you are interested.

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

I ran across this article:

biz.yahoo.com/wallstre...

Sad--this is the kind of thing that just should not happen.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

Mr. Buffett has just doubled the holdings of JNJ in BRK! This is consistent with the themes discussed in this article. JNJ has delivered anemic returns over the past year or so but the diversification value is huge.

Stock Portfolio to Weather a Volatility Shock

I ran across this article by Morningstar:

biz.yahoo.com/ms/07051...

This article is about investing when you don't expect the broader market to do as well as it has in the past---but it never mentions that you can build an equity portfolio that is not too coupled to the broader market--as I discuss above. A select portfolio of equities can be designed that, while impacted by the equity risk premium, does not do poorly simply because the broad U.S. economy and / or U.S. market indices do poorly.

So You Want To Invest Like Buffett? Here's An Easy Trick

Nice article. I am always interested in trying to copy the strategies of good managers. When I analyzed Berkshire Hathway's top holdings using Monte Carlo, they also came out looking really good on a forward-looking basis:

financial.seekingalpha...

I believe that this is very important for anyone thinking about trying to benchmark Berkshire Hathway's performance.

One thing to bear in mind. Buffett is a value investor and believes strongly in the value of strong consumer brands. If you are going to benchmark a portfolio like this, you should use an index that is refelective of his style. The years included in your study have been very good ones for a value-oriented style, so value indices are much better benchmarks than the S&P500. If you wanted to get a bit more sophisticated, you could create a composite benchmark that also has a higher weight to consumer products and other indices that capture the persistent style of BRK. Value indices have out-performed the broader S&P500 quite dramatically, so this would temper the results that you show that seem to suggest out-performance somewhat.

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

I just found this new article with quote from Bernstein:

finance.yahoo.com/reti...

I feel that Bernstein is getting out in left field with this kind of statement, but it all depends on what you assume about availavle rates of return, asset allocation and fees.

Low-Beta Portfolio Strategies: Devising A Low Risk Game Plan For the Current Market

Here's a great argument for the low Beta / low R^2 portfolio from Ben Bernanke:

biz.yahoo.com/ap/07011...

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

A further note. I just ran across this article which bears on the same topic, albeit with a focus on foundations:

www.wurts.com/pdf/Spen...

It's a good article and comes to very similar conclusions as my article above.

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

Further, with regard to Jim Richmond's note above:

As I looked more carefully in Mr. Guyton's Monte Carlo analysis, it appears to me that he used pure historical performance on mean and standard deviation of asset classes and perhaps portfolios as the basis for his Monte Carlo. If I am correct in my reading, this Monte Carlo analysis does not impact my statements about his work in the article above: the future will not look like history in all aspects. If my understanding is correct, Mr. Guyton's Monte Carlo analysis is essentially a re-sampling of history. There is nothing wrong with this--but if the equity risk premium is lower for the next 20 years than it has been historically, this will make Mr. Guyton's analysis too optimistic. Running Monte Carlo using historical statistics is okay, but is not my preferred approach because the world has changed in the last hundred years. My Monte Carlo analysis is forward looking--which I prefer--especially as far as the actual asset allocation is concerned. That said, forward looking models are still fraught with uncertainty. In the professional risk management applications that I work on, nobody would use forty to one hundred years of trailing history as the basis for planning--and there are some good reasons for this.

All of this aside, the points that Mr. Guyton makes and also that Jim Richmond is making above are certainly correct. If you have a flexible strategy in withdrawals, that will extend your potential retirement survival rate. Even without any analysis at all, this is pretty intuitive.

It is important to remember that these models of future markets are designed to help people make better near-term decisions. Almost nobody is going to mechanically follow a model or keep the same asset allocation forever. The point is to have tools that help you make better decisions and reducing your potential increased draw from year to year below inflation is ALWAYS going to help. Perhaps the most important thing for people to learn from this type of analysis is that being more 'aggressive' can actually make your future more certain.

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

Hi Jim:

Having read Mr. guyton's Monte Carlo analysis (albeit pretty quickly), I do not know what the assumptions are that drive the Monte Carlo simulation. This is always the key--where do the assumptions come from?

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

Hi Michael:

I am including expenses--except fro brokerage fees for rebalancing, but these are low cost funds. I can tell you that the impact is substantial. Higher fees can have a truly deadly impact on your ability to fund future income. QPP clearly shows this--perhaps I should do this as an article--nice suggestion. We already know that the average mutual fund investor lags the performance of the average mutual fund by 2% and the average equity mutual fund lags the market by 2%. Lagging by 2.5% is better than many investors get. The reality is that when real return (return - inflation) for the market as a whole is around 5%, losing 2% to fees is a major impact--especially because you still have all the volatility.

Safe Portfolio Withdrawal Rates: Beyond The 4% Solution

Hi Paul:

One of the reasons that I created Quantext Portfolio Planner is to enable individual investors and advisors to run simulation analysis easily. With QPP, you can build a portfolio of your selection for 'good companies' that take full advantage of correlation effects. You can do this very fast--it takes me maybe 1minute to set up a portfolio and run the simulations. I built the portfolio above after screening for a series of low Beta / low R^2 stocks with P/E less than 20 and 2% in yield or greater--and market cap >= $10B. This is not held up as anyone's best portfolio. My personal portfolio is more aggressive in terms of the individual stocks. In other words, this article is not about this specific portfolio--its about the fact that you can and should plan for income as a function of what you invest in and your personal risk tolerance--as well as investing in companies or sectors that you believe in, if you want to get to that level. This is an holistic approach.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

Hi FIG Guru:

It is very easy to look back and say that there are ways that Buffett could have done better in the last ten years by doing something different. You simply look back and say that a manager should have invested in whatever the best performing asset classes were over that period. With perfect hindsight, I can outperform Buffett. With looking forward, I can dream of that. Now, Buffett has always been unashamedly biased towards the U.S. in terms of investing and people who have put money into emerging markets have outperformed over recent history. That said, Buffett has lived through the downside of emerging markets when overall market volatility swings up--thats the payback. Many foreign markets--developed and developing--have historical volatility that is vastly above what we have seen over recent years:

etf.seekingalpha.com/a...

You don't need to take my word for it. See the links in the articles above to Campbell Harvey (Duke U.). He has performed a range of studies on country risks.

So...who knows who will be right. There will always be a way to look back and find a strategy that would have been better. Emerging markets and many foreign economies have a higher expected future return than the U.S. but also have considerably higher risk (in general). There is no free lunch. U.S. investors are wise to invest where their is growth but also need to be congizant about the risks. BRK's conservative approach to foreign investing has some appeal.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

Also, I will acknowledge that Mr. Buffett does not discuss total diversification as a focus and does stock to 'what he knows.' What I find interesting is that the equity holdings of BRK are, in fact, so attractive when you look through the filter of portfolio analysis. I am emphatically not saying that he uses this kind of analysis. Yes, he is heavily 'concentrated' but we must be areful in thinking what that means. BRK's equity holdings are in a number of companies that have very diversified business activities, so are these actually 'concentrated.' Mr. Buffett derides unthinking 'diversification' when that means that people simply buy some of everything. The BRK portfolio shows a different kind of diversification. BRK's top 20 equity holdings result in a portfolio that is better 'diversified' from a quantitative standpoint thanmany portfolios with many more holdings that may appear (qualitatively) better diversified.

Foreign Investing and Diversification Lessons From Berkshire Hathaway

With all due respect to Mr. Guru (above), it is hard to argue with BRK's long-term performance. It is not about doing everything right, but doing more things right than wrong. It may be the case that he does not worry explicitly about diversification, but it sure looks like he does a good job to me.