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Lowell Herr

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  • Why I Prefer Index Instruments [View article]
    Larry,

    I'm a bit of a nut when it comes to benchmarking a portfolio. How else does one know how well they are doing? The tool I use is the TLH Spreadsheet, and it was developed by three fellow, I being one, but not the key designer. Inside the SS is a way to build a customized benchmark that fits the specific asset allocation plan for each investor. While not perfect, it sure beats comparing the portfolio performance to the S&P 500 or some other equity index.

    Dividend warning: Be aware of investors who calculate the yield of their investments based on original cost. A fellow, whose name I will not mention, got away with writing an entire book on this false and deceitful method of yield calculation.

    Lowell
    Feb 2 04:47 PM | Likes Like |Link to Comment
  • Reducing Portfolio Risk Using A Modified 'Ivy Portfolio' Model [View article]
    Not really. I used it successfully in the 1980s, but I need to qualify what "successfully" means. At that time I did not have the measurement tools to both accurately measure portfolio and benchmark performances.

    At that time I was writing an investment newsletter (my apologies) that was tracked by Hulbert Financial Digest. Let me quickly say that I think Hulbert's tracking system is both fair and extremely honest. When we shut down the letter, we ranked #16 out of around 87 letters he was tracking at the time. Further, we were 0.1% point from cracking the top ten letters. The model we used was very close to the one described in this article.

    Unfortunately, I was not using the model in either 2002 or 2008.

    Lowell
    Feb 2 04:36 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    Tollsforthee,

    I am not a money manager so no one will be handing over money for me to manage. (g) Rather, prefer to teach others how to avoid making major mistakes.

    Since each investor has a unique portfolio, comparisons with a benchmark such as the S&P 500 is inappropriate for most investors. Further, and this is particularly important, the performance of the S&P 500 for one investor will differ from the performance of the S&P 500 for another investor as cash flow varies as well as portfolio launch date. In no way would I be able to tell, without doing an analysis of every transaction, whether or not you are beating your benchmark.

    While most investors do not want to invest the time or effort coming up with an appropriate benchmark, it is a useful activity, but only if one has the tool in hand to do it as accurately as possible.

    Lowell
    Feb 2 03:00 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    The article referenced in one of the above comments is providing fodder for a number of blog entries. The first can be found at this location.
    http://bit.ly/xlXJE9
    The "Active vs. Passive Investing Returns" article is useful as it demands I reexamine my investing style. I doubt I will be shaken loose from my tendency to tilt toward passive or semi-passive investing.

    Lowell
    Feb 2 02:31 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    Lawrence,

    Exactly! Keep it up. (g)

    Lowell
    Feb 2 02:26 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    Varan,

    The article cited in a post above is interesting and challenging to passive and/or semi-passive style investors. I plan to take it section by section with the hope of articulating a counter position - where appropriate. Here is the link to which I refer.

    http://bit.ly/r8YeXu

    Lowell
    Feb 2 01:09 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    Retailinvestor,

    Very interesting article. Nearly every point has a counter argument if one is meticulous about record keeping including accurate measurements of appropriate benchmarks and risk or uncertainty analysis.

    Lowell
    Feb 2 12:08 PM | Likes Like |Link to Comment
  • Why I Prefer Index Instruments [View article]
    Justin,

    While I agree there are money managers who "beat the market," I have several questions. Do the managers take risks as Lynch did when he managed Magellan, yet continue to use the S&P as a benchmark? Also, remember Bill Miller? Given sufficient time, most managers fall behind the market.

    Another question is - are investors able to identify money managers in advance of their great performance?

    Unfortunately, studies as to how well small investors perform with respect to their benchmark is unknown as each portfolio is different. Of the portfolios available on my blog, I know how difficult it is to keep up with the broad U.S. Equities market.

    Lowell
    Feb 2 11:52 AM | 1 Like Like |Link to Comment
  • Sharpe Ratio: Why I Prefer The Sortino And Retirement Ratios [View instapost]
    Rob,

    I did not take it that you were critical of my benchmarks. On the contrary. I am critical of my own ITA Index as there are parts of it that are very close approximations to what it should be. Inside the TLH Spreadsheet are three accurate benchmarks. What I have for commodities, international REITs, and bonds is a good approximation, but not as accurate as I would prefer.

    I like your article. While I use a quant tool, I realize its limitations. I think of them as probability tools rather than "absolute tools" of accuracy.

    I sure don't have the answers to the market. It is a beast that keeps investors nimble.

    Lowell
    Feb 1 07:24 PM | Likes Like |Link to Comment
  • Sharpe Ratio: Why I Prefer The Sortino And Retirement Ratios [View instapost]
    Rob,

    I use VTSMX as the benchmark until I have sufficient data to move over to a customized benchmark. I call this customized benchmark the ITA Index. One can develop a benchmark that is appropriate to the portfolio.

    Without getting "into the deep weeds" of benchmarking, the ITA Index is not a perfect index, but it is better than anything I've found available on the commercial market. One program I used, until it was discontinued for the small investor, Captool, calculated the benchmark incorrectly. They never admitted it, but it was wrong.

    I likely have something written about it on my blog.

    Lowell
    Feb 1 07:04 PM | Likes Like |Link to Comment
  • Sharpe Ratio: Why I Prefer The Sortino And Retirement Ratios [View instapost]
    Rob,

    Thanks for the positive feedback.

    As for the Retirement Ratio, it is a slight modification of the Sortino Ratio. Whereas the Sortino Ratio uses what he now calls Desired Target Return (that term carries a copyright), I simply define DTR further.

    Let T be that return value or goal for the portfolio to beat. In the Retirement Ratio, T is the greater of these two calculations. 1) The IRR of the benchmark or 2) The sum of inflation plus the withdrawal rate. I try to hold retirement withdrawal rates down to 2% or no higher than 4%.

    I attempt to explain this in greater detail on my blog.

    Lowell
    http://bit.ly/rfwO89
    Feb 1 02:59 PM | Likes Like |Link to Comment
  • Reducing Portfolio Risk Using A Modified 'Ivy Portfolio' Model [View article]
    Nick,

    I am not using any puts or calls. I have used inverse ETFs, but not with consistent success. With the five test portfolios, I am sticking to using the price of the ETF and where it is positioned with respect to its 195-Day EMA.

    I may test one modification with a portfolio or two, but I have to write about that change.

    Lowell
    Feb 1 11:46 AM | Likes Like |Link to Comment
  • Reducing Portfolio Risk Using A Modified 'Ivy Portfolio' Model [View article]
    Contheon,

    I strongly agree that dividends need to be included. In the Faber & Richardson book, "The Ivy Portfolio," they make the following point in their calculations.

    "All data series are total return series including dividends, updated monthly." They also mention they use StockCharts as SC includes dividends in their graphs. I use StockCharts rather than generating the data in an Excel SS.

    Your point is will taken.

    Lowell
    Feb 1 07:25 AM | Likes Like |Link to Comment
  • Reducing Portfolio Risk Using A Modified 'Ivy Portfolio' Model [View article]
    Varan,

    I am testing this method with a few smaller portfolios. I don't see size as critical since I am using commission free ETFs through TDAmeritrade.

    Lowell
    Jan 31 03:27 PM | Likes Like |Link to Comment
  • Reducing Portfolio Risk Using A Modified 'Ivy Portfolio' Model [View article]
    Zach,

    The "Dogs of the Dow" was shown many years ago on the Motley Fools to work with "in sample" data, but not "out of sample" data. I'm experimenting with five portfolios going forward to test this method. As mentioned in the article, I used something very similar, with success, in the 1980s. At that time I did not have a reliable benchmarking tool. That is now available in the TLH Spreadsheet.

    So, yes, the results will be benchmarked. Each ETF in the portfolio is handled independently. You will be able to see how that works on my blog.

    The rebalancing is explained in my blog discussions. The next portfolio is up for examination on February 6th.

    Lowell
    Jan 31 08:35 AM | Likes Like |Link to Comment
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