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Lowell Herr  

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  • Risk Parity: What It Is, How It Works, And Why It Matters [View article]
    Hedgewise,

    Taking historical stock and bond volatility records, if one applies very strict risk parity rules, one misses major bull markets such as we experienced since March of 2009. How do you modify the risk parity "rules" so as to not forgo strong bull market moves? Maybe I am missing something in the argument.

    Another question. Why use standard deviation for the risk measurement as money managers want to see volatility to the upside of the reference, but wish to avoid volatility to the downside? Why not use a semi-variance calculation so one does not penalize upside moves?

    Lowell
    http://itawealth.com
    Jan 24, 2015. 12:07 PM | Likes Like |Link to Comment
  • Risk Parity: What It Is, How It Works, And Why It Matters [View article]
    Hedgewise,

    I wrote a short article on this subject some time ago and I have some reservations as to whether this portfolio management model will work going forward since interest rates have a higher probability of rising than continuing to fall. Check out this article and the link to the Edward Qian article.

    http://bit.ly/1zCWcc2

    Lowell
    http://itawealth.com
    Jan 23, 2015. 09:22 AM | Likes Like |Link to Comment
  • Risk Parity: What It Is, How It Works, And Why It Matters [View article]
    Hedgewise,

    I've run some of these risk parity studies as well and I find including TLT makes quite a bit of difference in the results. I believe you include TLT in your results, but I can't be 100% sure. As one reader commented above, will this great performance be repeated? Interest rates dropped for a very long period, enhancing bonds, and will not to be repeated over the next 30 years unless we go into negative territory. I don't plan to employ risk parity over the long-term going forward.

    Lowell
    Jan 23, 2015. 09:01 AM | Likes Like |Link to Comment
  • Protect Profits By Implementing A Risk Reduction Strategy [View article]
    Interesting results. I wonder what the graph would look like if the portfolio were concentrated on the top two or three ETFs? I think you will find the results are much improved.

    Lowell
    Jan 16, 2015. 04:54 PM | Likes Like |Link to Comment
  • Protect Profits By Implementing A Risk Reduction Strategy [View article]
    The correct title of Mebane Faber and Eric Richardson's book is: "The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets."

    Lowell
    Jan 16, 2015. 09:54 AM | Likes Like |Link to Comment
  • Protect Profits By Implementing A Risk Reduction Strategy [View article]
    gman1253,

    Based on all our back-testing studies, weekly reviews are not helpful. Here are some reasons I selected the 33-day review period.
    1) It limits whipsaws. Check out Faber's "Ivy League Portfolio" book.
    2) Going this many days avoids the wash sale rule.
    3) If one is using commission free ETFs with TDAmeritrade, as I do, then one avoids the short-term commission fee.

    Back-testing continues, but so far the 33-day review period appears to serve investors better than waiting six or twelve months to review.

    Lowell
    http://itawealth.com
    Jan 16, 2015. 08:31 AM | Likes Like |Link to Comment
  • Protect Profits By Implementing A Risk Reduction Strategy [View article]
    Portfolios are reviewed every 33 days and once the decisions are made, the portfolio is placed into "neglect" mode until it comes up for review again. If something major were to happen, I would go back and take a look.

    Three of the tracked portfolios are passively managed. While they are reviewed every 33 days, it is mainly to see if the asset classes are still within target. These portfolios can go years without any attention other than recording dividends and interest. When sufficient cash is available, it is reinvested in the asset classes that are lagging their target percentage.

    Lowell
    http://itawealth.com
    Jan 16, 2015. 08:25 AM | Likes Like |Link to Comment
  • Protect Profits By Implementing A Risk Reduction Strategy [View article]
    The volatility is calculated using the most recent two months of data. 20% of the ranking is allocated to volatility where low volatility is highly valued.

    Lowell
    Jan 16, 2015. 08:20 AM | Likes Like |Link to Comment
  • Modifying The Dual Momentum Strategy [View article]
    IndyDoc1,

    There is not a lot of difference. The "Baker's Dozen" includes VOE and VBR as a way to emphasize smaller cap stocks as well as provide additional potential to move the portfolio toward value. These are anomalies based on Fama-French research.

    Lowell
    http://itawealth.com
    Jan 13, 2015. 12:17 PM | Likes Like |Link to Comment
  • Dividend-Oriented Portfolio Using Low Correlated ETFs [View article]
    GetRealHere,

    I suspect you don't completely understand the "Cluster Analysis" method as that process ferrets out ETFs that have low correlations. Therefore, the ETFs do not move together. Yes, we did have the Great Recession event of 2008 and early 2009 when nearly everything tanked. But that draw-down is mitigated by using SHY as a cutoff security.

    High risk? Not if you understand how SHY is used a risk reducer.

    The portfolio does not hold 20 different ETFs at anyone time. Again, I suggest you reread the article.

    Why did you mention ILYD and MDIV when those securities are not listed as a possible investments?

    Why would anyone purchase PCEF? Check the record or compare it with the U.S. Equities (VTI) as shown in this link.

    http://yhoo.it/1CBgaVi

    FSEMX is a much better choice, but still lags VTI.

    Keep in mind this is not a static portfolio as every effort is made to protect profits. I'm always looking for ways to improve, but your suggestions are not convincing.

    Lowell
    Dec 24, 2014. 08:47 AM | Likes Like |Link to Comment
  • The Importance Of Diversification [View article]
    Mike,

    Here is a graph that underscores your point.

    http://yhoo.it/1wBJnuC

    Opps. Looks like the comparison with VTI was stripped from the graph. Put it in and you will see how well the consumer sector performed vs. the total stock market.

    Lowell
    Dec 15, 2014. 05:17 PM | Likes Like |Link to Comment
  • The Importance Of Diversification [View article]
    Dividend Earner,

    I use asset classes to diversify. If you go to this link you will see a diagram or table showing the various asset classes.

    http://bit.ly/1wzODyM

    In the rebalancing table, I now use VEA for Developed International Markets instead of VEU.

    Lowell
    Dec 15, 2014. 09:14 AM | Likes Like |Link to Comment
  • Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]
    2sd,

    Suggest an off-the-shelf program and I'll see if it does what I do manually. I'm not aware of any testing software that applies a semi-variance calculation (inverse Sortino ratio) based on where the ETF is positioned with respect to SHY, the ETF used as a cutoff or "circuit breaker" security.

    Lowell
    http://itawealth.com
    Dec 6, 2014. 12:27 PM | Likes Like |Link to Comment
  • Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk [View article]
    2sd,

    I recognize that momentum, as an investing model, is an anomaly that has the possibility of failing or diminishing in the future. However, it has proved sufficiently beneficial for such a long time, there is a reasonable probability it will continue into the future. As for running millions of variations, it is not going to happen as it is extremely time consuming to run each test. I'm not a big fan of back-testing as there are too many variations from how actual portfolio management works. For example, in the "real world" one ends up with more dollars invested in cash vs. back-testing models.

    The momentum model I am using is designed to prevent major draw-downs even if it means giving up some returns. The true test will come when the next bear market arrives.

    Sixteen portfolios are reviewed on my blog. One uses options and three are passively managed where there is almost zero trading. Those are the extremes. The remaining 10 are managed using varying degrees of the momentum model. I am following performance trends for 14 of the 16 (Two of the portfolios are tracked by another investor.) portfolios so it will be easy to see how the passively managed portfolios perform with respect to the semi-actively managed portfolios.

    I wish your suggestion were possible.

    Lowell
    http://itawealth.com
    Dec 6, 2014. 08:30 AM | Likes Like |Link to Comment
  • Equity Investing Or Index Investing [View article]
    Chowder,

    "I choose income. It doesn't make me right or wrong, it's my goal, and it was selected to fit my needs."

    This is an important point. Consider the person who is retired and fortunate enough to have a pension, social security, and perhaps non-portfolio income that is sufficient to provide an acceptable lifestyle. That investor is then free to focus on return or return and income, rather than just income. It makes a difference as to the situation one finds themselves.

    Lowell
    Dec 4, 2014. 02:53 PM | 1 Like Like |Link to Comment
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