systemseeker

5 Comments

    • Book Review: 'The Intelligent Portfolio' by Christopher Jones [view article]
      Ok, I'm glad to know QPP isn't relying on historical returns to compute future returns. I stand corrected.

      What I like about FE is that their recommendations are derived from the "market portfolio" which (combined with betas) contains the market's best estimate of the future expected return of each asset class. You don't have to guess the asset allocations yourself -- it's done for you, using reverse optimization to generate an efficient portfolio....at a given level of risk, taking into account real fund options, their expenses, turnover, etc.

      Re: commodities. I won't disagree that commodities smooth portfolio returns, but so would anything uncorrelated with the market. There was a fascinating debate between Larry Swedroe and Rick Ferri as to whether commodities have a place in the portfolio, found here:

      www.hardassetsinvestor...

      I'm familiar with Rob Arnott's work. He's created a value-weighted "index", which isn't really -- it's a way to tilt toward value, which has historically provided a premium. Sharpe's "Investors and Markets", final chapter, has several possible explainations for the value premium -- such as, value stocks may be more sensative to economic downturns.

      Thanks Geoff for your replies.       Jun 12 02:24 AM
    • Book Review: 'The Intelligent Portfolio' by Christopher Jones [view article]
      Ok, I understand that QPP is trying not to lean towards sectors that have recently out-performed. But if I increase the "Percentage of Funds" column for assets that have high "Average Annual Return", the resulting "Portfolio Stats, Average Annual Return" goes up, and vice versa. The asset's "Average Annual Return" is coming from historical data, no? Are you saying you're using only volatility and correlation to derive "Average Annual Return"? If that's the case, I stand corrected.

      Well, I don't believe in perfectly efficient markets, just "more-efficient-t... markets. If market-cap weighting isn't optimal, why hasn't the systematic difference been arbitraged away? I have to believe that people smarter than I would have found foudn it already, or else there must exist some other risk implied by the higher return. Of course this is an old debate, so I won't belabor it...       Jun 11 06:38 PM
    • Book Review: 'The Intelligent Portfolio' by Christopher Jones [view article]
      I've read the book, and give it more credit. The chapter on expenses vs. diversification is alone worth the book's price. Diversification must be weighed against its cost, and the lost diversification benefit is vanishingly small compared to differences in fund expenses.

      You state Financial Engines advocates a static portfolio, but actually it doesn't -- the recommended portfolio will shift as the market portfolio changes, and as betas change. Granted those are small changes, but nonetheless reflect the best information the market gives us on optimal asset allocation. As the book argues that diverging from that is making a 'bet'.

      Regarding REITs and commodities, these are already implicitly included in a broad-based equity index; any heavier weighting them is, again, a 'bet'.

      The book makes the case that even rebalancing back to 'target allocations' is (implicitly) a contrarian 'bet'!

      Geoff, while I have much regard for your work, after comparing the QPP with Financial Engines, I'm leaning toward FE. The problem I have with QPP is the "Average Annual Return" you generate for the portfolio, is based upon historical annual returns of each asset. So, for instance, QPP ends up telling me I should bias my portfolio toward VEIEX (Vanguard EM), just because it's had good past returns. How can I trust that? FE, on the other hand, uses only past volatility and market correlation to extrapolate future returns. That's a safe assumption, and the book makes the case for that instead of historical returns. You'd need 1500 years of historical data to estimate an average annual return to within +/- 1%.

      My one major worry with FE's recommendations is the tilt toward growth over value. I understand that growth has greater beta, but how do we reconcile this with the Fama/French research? The book only says, in passing, that value stocks must contain other risks not represented in the volatility of their returns. That is unsatisfying.

      Overall though, I though the book was hard to argue with. Geoff, I appreciate hearing your perspective on it. Thanks for your review.       Jun 11 12:10 PM
    • Momentum Model: Timeless Alpha Rooted in Human Psychology [view article]
      Nice. I like this approach of choosing the top N, to simulate leverage in accounts where leverage isn't allowed. Could you show us the numbers? Apr 16 11:38 AM
    • Maybe a Long/Short Approach Is the Answer... [view article]
      For someone with a 401(k) where taxes and commissions aren't an issue, here's an idea -- A hybrid of "EW" and "2X": for a given month when you're in only 1 or 2 assets, go in 40% each (2X). If you're in 3+ assets, divide the whole portfolio evenly (33% for 3, 25% for 4, 20% for 5, etc). I wonder how that would fare? Apr 03 06:24 PM
Loading...
Symbols:
Authors:
Quick Links:
Contribute an Article Become a Seeking Alpha Contributor

Transcripts

More Transcripts»