Phil DeMuth

16 Comments

    • Global Giants and Diversifiers To Supercharge a Portfolio [view article]
      Hi Roger --

      Yes, you can calculate the monthly returns based on Yahoo! historical quotes or you can enter a transaction portfolio into Morningstar and they will keep track of it for you. You would still need to use Yahoo! to get the historical prices when you set up the portfolio, but from then on Morningstar would have it on autopilot for you. Good luck with it.       Feb 18 04:57 PM
    • Global Giants and Diversifiers To Supercharge a Portfolio [view article]
      Hi Roger -- You'll get no argument from me here, I love charts. Perhaps Geoff will put this idea in the hopper for QPP version 5.0. In the mean time, if you have QPP, you can enter the tickers and date ranges and do the analysis yourself.

      Imagine that the 25%ile rank showed a loss of 1%. Then, a year later, the portfolio is down 1%. Is that a successful prediction? Perhaps. It would take a lot of samples to confirm -- you are likely to run out of lifetime before you accumulate enough data points, and by then it will be too late anyway.

      So it's really the tails that are of interest, and why the past few months are so relevant to examine here. Since the whole thing is based on the currently unfashionable but nevertheless highly relevant normal distribution curve, all the information (Mean - 2SDs, for example) is really contained in the tail values. Unless I'm mistaken, the shape of the chart in every case would be a standard curve.

      The issue of how to graphically present the risk/return tradeoffs in the most compelling way is one I often think about. For clients, I might present it as median expected return vs. 1 percentile loss at different equity allocations. I think this is more communicative than just mean vs. standard deviation.


      Feb 16 01:42 PM
    • Global Giants and Diversifiers To Supercharge a Portfolio [view article]
      Mike & Geoff: Thank you for your comments.

      Roger: Thank you for your helpful suggestion. I tend to take a rather unsophisticated view of these things. I look at where the estimated median returns are, and then I look at the 1st percentile value-at-risk for an educated guess as to what I might experience in a really terrible year, short of World War III. Then, if I can't do the time, I don't do the crime, and I make adjustments. As for the upside, I figure it will take care of itself. As Peter Bernstein says, I can't control the returns, but I can control (at least to some extent) the risk. This is part of the message of the book as well. We see people devoting endless attention to returns but insufficient attention to risk.       Feb 15 11:12 PM
    • A Practical Demonstration of the Value of Portfolio Theory [view article]
      Hi Roger --

      Ben does not have a Seeking Alpha site, but his writings can be found all over: he's a regular columnist for Yahoo! Finance and the Sunday New York Times Business Section (available online as well). He's also a regular on "Cavuto on Business" on Fox and "Kudlow & Company" on CNBC.

      Feb 13 10:57 AM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hi Micht --

      Yes, the simplest approach would be to rebalance back to specs whenever you add or subtract cash.       Feb 11 09:55 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hi Roger --

      You might want to put your question to Geoff Considine, who is the resident expert on QPP.       Feb 11 01:04 AM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Smart ETF: The excerpt says nothing about 60/40 portfolios except that rebalancing studies based on simple 60/40 stock/bond portfolios are inadequate. It makes no mention whatever of Mean-Variance-Optimiza... I have no idea what you are referencing here.

      You asked me to run a 60/40 stock/bond mix after the 1950s so I obliged: a portfolio of 60% S&P 500/40% Treasury Bonds had an average annualized return of 7.1% for 1960-1980. This hardly jives with your statement that "no combination of stocks or bonds made positive returns for that 20 year period." It made 321%.

      You reference Mandelbrot, but the very book you cite urges portfolio managers to build portfolios using Monte Carlo simulations ("The (Mis)Behavior of Markets" p. 267). Mandelbrot says of the people trying to apply his methods in finance, "...in truth, our knowledge is still so limited that no one has yet to report great success." If you are having great success, why not publish and collect the Nobel Prize that is your due?

      I like your point about the number of asset classes. I used seven because it was more than 2 (stocks/bonds) I had often seen in rebalancing discussions. I don't know how many asset classes there really are: my guess is that a factor analysis would reveal not many more than 7, and very possibly fewer (Fama/French find 3 factors account for almost all the variance, for example). Asset classes are determined by behavior, not by nomenclature, as I am sure you would agree.
      Feb 10 11:46 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hi Roger/Ken --

      I don't think your question can be answered apart from a consideration of the specific portfolio and stocks in question Even if I had the portfolio in front of me, I suspect the answer would be above my pay grade. Sorry!       Feb 10 05:47 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Snowman: I wouldn't call the data "muddy" -- the correlations, means and standard deviations were all derived from historical data. Since we don't have 250,000 years of historical data, we use Monte Carlo to fill in the gaps as best we can.
      The point is not that we could just choose a higher risk/return profile initially -- it's that rebalancing at a 20% tolerance produces a more efficient risk/return trade off than rebalancing frequently or rebalancing not at all. We are looking at the rebalancing effect here separate from the % equities effect. The returns and risks are determined by the % equities --but the 20% tolerance rebalancing strategy seems to tweak the risk-adjusted returns for a small free lunch (above the line of best fit in the first figure).

      VennData: I think the above addresses your point as well.

      Joinvestor: The biggest risk is really to new retirees. They need enough in the way of fixed-income investments so that they don't have to sell stocks when they are down just to raise money for living expenses, so their stocks have time to recover. In our book on retirement (Yes, You Can Still Retire Comfortably), we recommended that new retirees rebalance their portfolios annually for the first five years for this very reason.
      Against this, the second figure in the article shows that even in very bad cases (the fifth percentile) infrequent rebalancers had more money 25 years later. But (and this is the critical fact) they were not making withdrawals along the way. To the extent that lowering risk supersedes all other goals, more frequent rebalancing is useful. So would more studies be along these lines.
      Feb 10 01:20 PM
    • A Practical Demonstration of the Value of Portfolio Theory [view article]
      Hi Mark --

      Thanks for your comment. The lack of conviction implied by diversification is a strategy for dealing with uncertainty. But even where one has conviction, it can be very useful. Let's say we have a strong conviction that China will dominate global markets in the 21st century. Even so, are we 100% sure? Well...probably not. China is great, but who knows what might go wrong? So let's overweight China but also keep some investments in other things that are going to still be there even if China goes down the drain. Here is where Monte Carlo can help us estimate what to add in what proportion to what plausible effect on our future risks and returns. It's not a time machine but it is as good a tool as we have at present for dealing with this kind of issue.       Feb 09 11:25 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hi Snowman --

      Thanks for your comment. Fear not: the historical correlations among the seven asset classes were built into the experiment. The classes were : Large Cap US Stocks, Microcap US Stocks, MSCI EAFE Stocks, Emerging Market Stocks, REITs, Treasury Bills, Long Bonds. The point of Monte Carlo simulation is to try to look at a broader range of outcomes than just the one entombed in the historical record -- exactly as the article you cited recommends.       Feb 09 11:08 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hi David,

      The purpose of bonds in a portfolio is either for income or to control volatility, so an investor should have whatever allocation to bonds is appropriate to his or her goals. My guess is that rebalancing just among equity classes would slightly lower risks and possibly raise returns as well but I would rather see some numbers put to this before assuming that this would be so. Rebalancing is basically a grudge match between two effects: momentum and valuation. In theory, rebalancing too often cuts off momentum at the knees, but rebalancing too infrequently fails to take advantage of misvaluations. Or something like that.       Feb 09 07:36 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      Hello David --

      Thanks for your comment.

      I think the reason that rebalancing is not increasing returns here -- even long term -- is that some of the asset classes were fixed income, which are inherently lower-return than equities, so that even as the equity asset classes forged ahead, their wings were clipped by being periodically re-weighted down with bonds. It would be interesting to follow up and look at rebalancing with an all-equity portfolio and see whether long-term rebalancing improves returns while cutting risks.       Feb 09 01:13 PM
    • A Practical Demonstration of the Value of Portfolio Theory [view article]
      Machine Ghost: Interesting points, thank you.

      As to the Forbes 400, why exclude inherited wealth? The wealth came from somewhere; if market timing were the original source, it would be evident, or if market timing were so lucrative, then market timers would have long ago displaced the idle rich layabouts and Daddy Warbucks types still remaining on the list.

      Even though people like Buffett and Zell buy low I would not call them "market timers" in the sense that term is ordinarily used. They are really doing long-term market valuation, which I would endorse, and is a skill that can be acquired by will and discipline, to use your words.

      I definitely agree that hedge fund managers may use market timing (in nanoseconds, sometimes) to great profit, but these usually are frontrunning (="quantitative&q... strategies or market-manipulation strategies based on their ability to briefly dominate certain markets with their massive trading firepower. Just my opinion.

      Whatever it is that hedge funds might be doing, it is not a strategy that can be appropriated by retail investors or anything that bears much resemblance to the brand of short-swing market timing based on technical analysis or forecasts of macro economic trends (or newsletters doing the same). I would call skill in this domain elusive. This conventional definition of market timing is what I was referring to and what Sharpe criticized. But certainly it has many devotees.       Feb 09 12:25 PM
    • Rebalancing Can Be Hazardous to Your Portfolio [view article]
      RIchjoy: By the way, there is an recent article in the Journal of Financial Planning that makes the same point.

      www.fpanet.org/journal...
      Feb 09 11:22 AM
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