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Ranger Ric

Ranger Ric
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  • Defining a Set of Core Asset Classes [View article]
    Geoff:

    Your finding that there are minimal diversification benefits between large, mid and small cap stocks is interesting. During the first half of this decade my portfolio outperformed the S&P 500 because I was overweighted in small cap stocks which prospered while large cap stocks were flat (This is not any brilliance on my part but simply reflected my opposition to using a market weight portfolio. I equal weighted rather than market weighted different portions of my portfolio giving me a higher smaller cap weighting than if I had had a market weighted cap approach.)

    Perhaps the disparity can be explained by findings made by William Coaker in the September 2007 Journal of Financial Planning, "Emphasizing Low-Correlated Assets;The Volatility of Correlation" Coaker compared the long-term correlation of 18 different categories. Nine of the categories were the nine Morningstar categories. He found very high levels of correlations between some categories, large growth-large blend; mid growth-mid blend; small cap-small blend; large value-mid value. He found less correlation, however, between other categories. For example, he found a .96 correlation between large growth and large blend stocks but a .78-.79 correlation between mid blend and each of the small cap categories. This correlation is still higher than he found for other categories like international stocks, bonds and real estate but much lower than other domestic correlations. So perhaps there are some correlation benefits within domestic stocks but investors may need to be more sophisticated than just choosing large, mid and small cap stocks.

    I continue to enjoy your insights.
    Aug 16 10:24 AM | Likes Like |Link to Comment
  • From The Horse‚Äôs Mouth: Yale's Endowment Officer Makes Financial Sense [View article]
    Geoff:

    I have always supported the concept on diversification and your excellent work has put some important refinements on this concept. I have three questions.

    Retail investors have some ability to invest in "hedge-like" funds through long-short mutual funds and private equity through individual companies like Blackstone and Fortress and the Powershares ETF PSP. You have not discussed these alternatives in your work. Do these alternatives not adequately address the asset areas that Swenson is using or do you believe that these asset classes do not add any diversification benefits?

    Why do you think that Swenson not have utilities as an asset class as you recommend?

    Finally, it appears that diversification benefits are not static. You have pointed out that foreign stocks do not provide the diversification benefits today that one might expect. I believe this is due to increasing globalization. While your models make sense to me, do you see them changing over time?
    Jul 6 11:35 AM | Likes Like |Link to Comment
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