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.

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

Ranger Ric:

First "hedge like" asset classes require considerable care. I have not written about these but they are certainly worth examining. I prefer to get as much as I can get from basic asset allocation, etc. Public private equity funds are a different animal that private equity of course...I have some doubts about the viability of a public private equity stock: a lot of the argument for private equity is that a private firm can be run more efficiently than a public one--so what happens when they go public? BX and FIG do not exactly inspire confidence...

As to why Swensen does not look at utilities as an asset class: I don't know. I think that utilities look like the kind of thing he would like. This is an interesting question. Obviously I see utilities as a rather special "class."

The idea that the right portfolio changes over time is correct. In fact, the old idea among institutional investors of a permanent "policy portfolio" is quite outdated. Inst. investors increasingly revisit asset allocations and shift their portfolios as the world changes.

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

Pizon:

Good question on taxes. In taxable accounts (obviously) it is generally better to hold individual securities and to rebalance only when the risk-return balance of the portfolio shifts outside of your desired range or when the diversification benefits shrink because of some over-concentration. This is the best approach. Many investors and advisors feel uncomfortable comparing the risk/return benefits of ETF's / index funds to a basket of individual securities because they lack the tools to really capture equivalence and risks of default in individual stocks--but that can be handled.

The average retail investor will capture the vast majority of the benefits of this kind of strategy with index funds, however, and he/she is typically not willing or unable to manage the individual securities to capture these benefits.

Geoff

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

Standard deviation is relative to the expected return--so you are looking at 10.1% per year plus/minus 11.8%. That said, the plus/minus 1 standard deviation is not the extreme case. In general, only 2/3 of outcomes will fall within the average +/- 1 standard deviation. 95% of outcomes will fall withing 2 standard deviations.

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

Yes-there are supposed to be figures. I have asked SA to re-post this article. It is available in complete form here:

www.quantext.com/David...

From The Horse’s Mouth: Yale's Endowment Officer Makes Financial Sense

Hi TraderPig:

It is always good to be skeptical. QPP/QRP have been extensively tested out-of-sample in varying market conditions and the portfolio projections of risk and return for both stocks and funds turn out well.

I tend to run the model using three years of data, but the model the combines these data with long-term capital markets data on risk/return relationships--so its not as though the model only knows about the last three years.

For an example of this kind of testing, see this article:

seekingalpha.com/artic...

Regards,

Geoff

Dividend Stocks for Retirement Portfolios

Nice screening analysis. I examined this set of stocks as candidates for a portfolio in this discussion group:

finance.groups.yahoo.c...

Thought you might find it interesting.

Regards,

Geoff

Getting the Most Return For Your Risk, Part 2

To Pete:

With regards to the 1:1 ratio, its a ballpark rule of thumb--the market neutral does somewhat better but its pretty close.

Your question with regard to rebalancing is a good one: do we rebalance to maintain the 1:1? This was also proposed by another user and makes for a really interesting and plausible rebalancing criterion.

In general, rebalancing makes sense when your portfolio risk/return characteristics are not optimal for you--and this is a personal determination--see my article on rebalancing. Maintaining 1:1 is reasonable...I need to do more analysis on this. Its on my list :)

Getting the Most Return For Your Risk, Part 2

It has been pointed out that the link to the Ibbotson article does not seem to be working today--here is another link:

corporate.morningstar....

Getting the Most Return For Your Risk, Part 2

User 61872:

What you are missing is forward-looking vs. trailing performance. The S&P500 has beaten this 1:1 ratio over the past 3-5 years, too---but thats just trailing performance. This cannot continue in the long-term and the point is that the forward-looking models from credible sources (and yes, I include my own model) suggest that in the long-haul you cannot expect better than 1:1 for a really diversified portfolio.

Getting the Most Return For Your Risk, Part 2

To HLEASON:

This article is somewhat abstract but it deals with a centrally important topic in portfolio construction. The references linked in the article may help your understanding. This is not about which stock to buy now, but rather about what appears to be a convergence in forward-looking estimates of potential portfolio performance--almost regardless of the individual components.

Getting the Most Return For Your Risk, Part 2

Carol:

Remember, however, that the thing you want is the 1:1 ratio on a forward-looking basis--not backwards.

Thanks for your comments,

GC

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.