Geoff Considine

Assessment of Sector Outlooks

RY:

Thanks for the note and kind words. I have a Ph.D. from the Dept. of Atrophysical, Planetary, and Atmospheric Sciences at University of Colorado. I did an atmospheric focus and studied statistical modeling...worked out well.

Scott F:

I am aware of the issues with TIPS but better that as the 'baseline' than nominal bonds. PIMCO has previously made a compelling case for TIPS as the baseline for financial planning. I agree that there needs to be more discussion of this issue. I will not be surprised if someone invents a "better" inflation index that is more tied to the costs that most people face: food + energy + housing. I have been expecting to see this for a while.

Checking In on the All-ETF Portfolio

SmartETF:

It would be far more helpful if you published one or more articles about what you think is the best approach, how it works, back tests, etc. Simply claiming that your model is better and that you have out-performed by some measure over some period of time is not compelling. Also, publishing a portfolio and then revisiting it later and seeing how it has performed--as I did here--is a useful data point. QPP is consistent with the opinions of some of the very best minds in institutional research (Roger Ibbotson, David Swensen, etc.). This does not make it right, of course, but it is meaningful in my opinion. There may be better models in the world, but there are none that I know of that are as well documented both in stress testing and in practice.

Geoff

Checking In on the All-ETF Portfolio

To Andrew Muchmore:

I am not sure what you are asking here...

Geoff

Checking In on the All-ETF Portfolio

Smart ETF:

No model is perfect and there are many ideas for better models. A forum like SA is a great way to show what a model says and then to go back and revisit it later to see how it did.

I do favor simpler models when they work and QPP has held up very well for what it is designed for--and this article is a case in point. The ultimate test of statistical models is that they work operationally.

If you have an operational model that is of value, I am sure that many people here would be interested in what it says. But how do we establish value? In a broad forum, it is by publishing positions / suggested allocations that can be benchmarked later.

There are so many complexities in how even a model like QPP deals with stationarity and correlation that this is probably not the forum. QPP does not assume stationary statistics or linear correlation, for example. I often show correlation matrices but QPP is not a so called Delta Normal Mean Variance model. I am not sure where you got that idea.

Geoff

Checking In on the All-ETF Portfolio

Indexor: I just checked and it is up--must have been a glitch at the server farm earlier.

Checking In on the All-ETF Portfolio

Smart ETF: You always post this stuff to my articles and I have previously proposed to you that you show us a portfolio of ETF's that looks good on the basis of your models--which would be fascinating since Mandelbrot himself says that his approach to modeling is not yet practical for actual use. Let's see one of these better designed portfolios.

Checking In on the All-ETF Portfolio

Skjellifetti:

Yes, but..you have taken a brief statement from a longer point. In the short term, portfolio theory models will under-estimate the probability of "black swan" events. If you expand the time horizon--even including these events--the models do well. If you are a short-term trader who needs to model the amplitude and duration of daily-monthly fluctuations in extreme one-off events, this is not an ideal model.

With regard to systemic risk in Malaysia, why are you so confident that this risk is not priced into the implied volatility? you MAY be right, but what is the evidence? This actually relates quite closely to the work that I did on credit ratings and implied volatility (also on SA).

Geoff

Checking In on the All-ETF Portfolio

To Skjellifetti:

I address this specific Taleb-type argument in an article written in Feb:

seekingalpha.com/artic...

People who point out these individual events and say that portfolio theory can't "predict" such events are really missing the point. There are events like 9/11 that are impossible to model in the short term, but increased perception of risk in markets (via volatility and implied volatility) is a very useful signal with considerable information content. Anyway, for the detailed discussion of Taleb and model considerations, black swans, etc., see that article.

Checking In on the All-ETF Portfolio

To Tigisit:

You can perform backtesting in QPP--and I have published a range of articles on backtesting here at SA and on my website. I am increasingly looking at writing articles where I go back and see how the forward-looking analysis has performed in real life--and this is one such article. I like SA in part because it gives readers a real time stamp tocheck if I really said something when I said it! I find it notable that so many people are now writing about the fallacy of the "decoupling" argument after the fall--but where were these analyses before?

Asset Allocation and the All ETF Portfolio

It has been a year since I published this--so I wanted to check in. By my calculations, this portfolio is in the black for the 12-month period through June 08, and it has exhibited much lower volatility than the S&P500--as it was designed to. One year is too little time to judge a portfolio, but a down market is a great stress test...

Outlook for Select Sector ETFs

Jonathan:

As I say in the article--three years of trailing data is what I use. As far as getting rid of an under-performing sector, that will require study beyond QPP. The Financial sector is a great example. I have been very light on financials since well before the meltdown. I own some BAC, though, and it has gotten pounded. I am neither selling nor buying more. I invest for the long term and that is really what QPP is designed to help with. Over periods of less than a year, momentum tends to dominate--as I have discussed in some articles.

Personally, I do my homework up front and then I tend to get in for the long haul. I do not try to time my major investments in terms of selling out when they are down. When I am adding money, I will use data such as these to help provide ideas for sectors to look at.

The difference between under-valued and distressed is also apparent if you look at projected risk levels...

Geoff

Fixing Target Date Strategies: 'Target Date Folios'

FYI: Geoff is quoted on target date funds in U.S. News and World Report:

www.usnews.com/article...

Asset Allocation and the All ETF Portfolio

To JAS:

QPP has been very well tested out-of-sample, as you will see from my articles stretching back two years and more. I believe that much of what passes as asset allocation misses some of the key benefits of diversification. The obvious question is why. I think that the reason is that the people designing the portfolios that emphasize US indexes, market cap weighted, etc. either don't use quantitative tools or don't think that the potential purchasers or their products are sophisticated enough to care.

There is also the problem of closet indexing. A lot of mutual funds are closet indexers and these tend not to perform all that well. If you want to get close to an index, you will not include low Beta / lor R^2 asset classes because these increase tracking error vs. an index like the S&P500. Closet indexing is, essentially, the enemy of really effective diversification.

Outlook for Select Sector ETFs

Ben:

Good question. I would say that this could be one data point among several. Buying individual stocks means that you have a specific view of a firm and want to own it. I would never do so just on the basis of QPP. I would also want to consider default risk via the tails--see my articles on this. Underpriced can also mean 'distress.'

Geoff

Outlook for Select Sector ETFs

Just for an interesting update for this article, check out how the top two rated ETF's have performed relative to the bottom two since this article was written:

finance.yahoo.com/q/bc...

TIP and DJP are up and EEM and EFA are down. Anecdotal evidence? Definitely. But notable nonetheless.