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Lowell Herr  

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  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    LHZ,

    The ETFs used in the above article mirror the GEM model, but obviously are different. I chose to use commission free ETFs (through TD Ameritrade) as those are ETFs I use with portfolios I track. The three basic asset classes Antonacci uses in his book are covered in the two examples provided in my article.

    Using my ranking model, an investor would now be invested in EFA. I used EFA instead of VEA as it has a longer historical record. Currently, I am invested in VEA as it is the highest ranking ETF of the three.

    I'm still confused why Antonacci used ACWI and then called for an international ex-US ETF. I thought he would use ACWX as that is the ex-US international ETF.

    The intent of my article is not to challenge the GEM model. Rather, I wanted to point out inherent uncertainties that surround all back-testing models. These uncertainties also apply to back-tests I use to justify investing models I use so I am not immune to the problems.

    Lowell
    http://itawealth.com
    Apr 12, 2015. 11:14 AM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Hsfrey,

    There was one starting date (June 30, 2006), not 33. Thirty-three (33) days is the review interval, but this sometimes falls on a non-business day. The fellow who ran these back-tests (programmed in R) has a routine that finds the nearest trading day to the calculated check date. When I am running portfolio reviews in real time, if the review date falls on Saturday, Sunday, or a holiday, I shift the review date to the first trading day following the "off" day.

    The following quote comes from the programmer. "At each calculated check point a random number of trading days are added by selecting a number between 0 and 14 trading days from a flat random number generator. Each 8 year run began on June 30, 2006, so no random days were added to the starting date."

    I hope this helps to answer your questions.

    Lowell
    http://itawealth.com
    Apr 11, 2015. 08:53 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Govind Das,

    I'm aware of many, not all, of the back-testing results. However, I am using different arrays of securities in different portfolios that were launched at different times. In addition, one of my benchmarks is actually customized for each portfolio. In other words, the variables are sufficiently different that it requires me to prove to my own satisfaction whether or not the momentum anomaly holds going forward.

    Lowell
    Apr 11, 2015. 04:28 PM | Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Govind Das,

    I should have made a clearer distinction between the basic uncertainties inherent in back-testing vs. momentum model results. I'm not faulting the momentum model as I think it has merit.

    As for the 8-year study vs. a 40-year study, I did not have 40 years of historical data for any of the ETFs used in the two examples. It is unclear to me how Antonacci was able to come up with results beginning in 1974 (Table 8.4 on page 102) where he uses ACWI and AGG as two ETFs. ACWI, according to Yahoo-Finance, began serving up data on March 28, 2008 and AGG data begins on September 29, 2003. What proxies were used for aggregate bonds and ex-U.S. Equities to produce 1974 - 2013 results.

    On page 101, ACWI is the ETF used to represent ex-U.S. Equities. Did Antonacci really mean to use ACWI, not ACWX? There is confusion at the very least as one ETF includes U.S. stocks while the other is ex-US stocks.

    Another problem I have with the data tables throughout the book has to do with pushing the data to four significant figures. It is absurd to think the return percentages are accurate to the hundredth place. It is this type of reporting one frequently finds in investment books that do not pass the smell test. Even if it were actual data, reducing accuracy to one decimal is plenty.

    I hope these additional comments shed additional light on why I light up my "doubt meter" when examining any type of back-testing or future projections. I'm sure I too have been guilty of taking computer generated numbers and presenting them as "truth."

    Respectively,

    Lowell
    http://itawealth.com
    Apr 11, 2015. 02:37 PM | Likes Like |Link to Comment
  • SYLD: An ETF You Can Buy And Hold Forever [View article]
    I ran a comparison between SYLD and VTI and see they are highly correlated. SYLD costs 59 basis points while VTI is only 5 basis points. Over a long period that difference will add up to real dollars.

    My preference is to stick with the lower cost ETF, VTI.

    Lowell
    http://itawealth.com
    Apr 11, 2015. 12:46 PM | 8 Likes Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Richard,

    The two portfolio models shown in this article were reviewed every 33 days so the draw-downs or portfolio reversals are based on the time of review. What happens between the review periods is neglected.

    The primary reason for the 33 day review interval is to shift the portfolio update throughout the month. Of the 14 portfolios I am tracking, all are reviewed on a 33 day interval. After a review the portfolio goes into "neglect" mode for another 33 days.

    Lowell
    http://itawealth.com
    Apr 11, 2015. 10:53 AM | 1 Like Like |Link to Comment
  • Back-Testing Results Are Filled With Uncertainty - Turn On Your 'Doubt Meter' [View article]
    Eric,

    Yes, I think there is validity to the momentum approach (momentum anomaly) used to generate the above results. Nevertheless, I want to test the model using out-of-sample data and that is what I am attempting with several portfolios.

    I'm also comparing momentum models vs. passively managed portfolios to see if there are major differences that come about with extra work.

    Lowell
    http://itawealth.com
    Apr 10, 2015. 08:20 PM | 1 Like Like |Link to Comment
  • Combining Dividend Aristocrats And ETFs For A Retirement Portfolio [View article]
    Bob,

    I'll give it some thought. Adding individual stocks to the mix presumes one is a good stock picker. That is a particular skill few investors possess. There is also an additional cost due to commissions. Nearly every ETF I use is commission free.

    Lowell
    http://itawealth.com
    Mar 25, 2015. 08:53 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    Never Going Back,

    If you are referring to Gold, Commodities, and Emerging Markets ETFs, I have data to show these three ETFs have not ended up with the best long-term results. Granted, this is historical data, not what might happen in the future. With passively managed portfolios, I am invested in all three asset classes.

    Having said that, the ETF ranking table (third screenshot above) is designed to put the investor back into those ETFs, if and when they show themselves to merit a position in the portfolio. These portfolios are semi-actively managed.

    There are at least three investing models one might consider. 1) Set the portfolio on a course based on a Strategic Asset Allocation model. This is what I use with passively managed portfolios. 2) Reversion-to-the-mean model is where one selects lagging securities with the view they will make a comeback. 3) The momentum model is where one stays invested in the top ranked securities as rising stocks continue to rise and declining stocks continue to decline. At least for a time. I'm testing strategies 1 and 3 with a number of portfolios.

    Lowell
    http://itawealth.com
    Mar 24, 2015. 07:15 AM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    Hardog,

    One more hint. Should you purchase the Hoadley add-in software, be sure to close all other Excel spreadsheets when running the program. Otherwise the calculations will likely time out the program. This is something I learned by experience, but frequently forget until the program chokes.

    Lowell
    Mar 23, 2015. 03:23 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    BlueOkie,

    I'm not understanding what you mean by this sentence. "If you change the x or y to be equal increments it will better reflect the relationship between return and volatility." The increments are equal (2% increments) for both the X- and Y-axis. What am I missing?

    Lowell
    http://itawealth.com
    Mar 22, 2015. 07:33 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    Moosb,

    I should mention that the Hoadley add-in requires a significant amount of computer power unless one wishes to wait a long time. Even with a fast computer, it takes about five minutes to make one run if 20 - 25 ETFs are involved.

    Lowell
    Mar 22, 2015. 05:42 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    BlueOkie,

    The Return/Volatility ratio is approximately 3/4 not one to one. At least if we are comparing Return and Volatility. The scales are in percentages and are presented correctly. The percentages make more sense when you look at the graph where the origin is set to (0,0). At least that gets one away from those pesky decimals.

    The graph is not generated by one ETF, but all the ETFs used to populate the portfolio and the percentages that make up in the portfolio. The graph also presents an optimized portfolio based on the constraints one sets for each asset class or each ETF. In the above case, I set constraints for each ETF, something that is not shown in this article.

    Lowell
    http://itawealth.com
    Mar 22, 2015. 12:37 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    Moosb,

    The software used to generate the Efficient Frontier data is written by Peter Hoadley. It is called a Financial Add-In and requires Excel to operate. The cost is approximately $140. This link should help.

    http://bit.ly/1FQ0nCp

    Lowell
    http://itawealth.com
    Mar 22, 2015. 12:29 PM | Likes Like |Link to Comment
  • Portfolio Construction Using Asset Allocation, Momentum And Efficient Frontier Analysis [View article]
    Packer Man,

    VTI has certainly been the place to be over the past six years. No argument from me on that point. The unknown question is - will it repeat over the next six years? Projections are it will not.

    Lowell
    Mar 22, 2015. 09:58 AM | 1 Like Like |Link to Comment
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