John Doe1

All-ETF Portfolios vs. Strategic Mix of Stocks

It appears anyone can call themself a professional. Is there a reason why you do not have any bio information on the "about us" section of your crossprofit.com website? I was curious especially since it says that you have "teams are composed of many of the best and brightest people."

All-ETF Portfolios vs. Strategic Mix of Stocks

No, I did read your "paper." In your "paper" you compared two groups of securities that appear to be portfolios and try to assert that an ALL ETF portfolio is not enough and you try to prove this by comparing a portfolio of highly correlated ETFs to a portfolio with 20% less of the same ETFs and add a stock that has uncorrelated return properties (which you apparently knew very well after reading your fancy description of the "spark spread" of EXC). Which is just plain misleading and intellectually dishonest especially given your "knowledge" of statistics.

Now, with your most recent remark you are asserting that you were only comparing some individual stocks to a "asymptotically maximum diversified fund." Are you serious? If you really wanted to sell some of your software why don't you suggest to readers to use the software to put together uncorrelated portfolios with ETFs which would be safer for the average investor or for the more experienced investor who may want to specialize in single stocks or areas of the stock market they could use your software to mine for this type of stocks? But, instead you created a confusing hypothetical scenerio between two portfolios that fails to satisfy basic logic.

To your aside, it appears you have a habit of making poor assumptions but at least it illustrates you are consistent. Simply because I am the only one silly enough to respond to this article does not mean that others have not read the article and simply decided they have more important things to do than to reveal someone's self serving, misleading article written to the average investor.

All-ETF Portfolios vs. Strategic Mix of Stocks

Geoff,

If you read my first reply you will find that I did not merely say that a portfolio should have "different investments." For convenience I have copied it in this post.

"As a journalist, if you are going to quote Harry Markowitz you should apply his theories as they are being used in portfolio theory like at the Yale Endowment, which is to use mean variance optimization to come up with a portfolio that contains investments which are not correlated to each other."

Thus, I agree with you and often state the same remarks you made. In other words, different investments do not create a better portfolio, it is better to have ones that are noncorrelated with each other. On that note, I have run some correlation studies that go back 10 and 20 years with monthly data and must disagree with you regarding your view on "utilities" because the correlation between utility "stocks" and the S&P500 stock market are often above .70 which illustrates a statistically significant correlation as I am sure you understand (given your work with statistics). I also have to disagree with you when you state that I shouldn't think of stocks as an asset class. I am not sure how you can make a statement that stocks also known as "equities" are not an asset class? I am sure that you can mine the stock market to find some stocks that are not significantly correlated to the S&P500, however, in most instances you might find that they are closely related to another actual "asset class" like commodities or maybe a REIT?

I'm also confused that if you did not intend to set up a portfolio then why would you use a group of stocks and ETFS that appear to look like a potential portfolio to illustrate how another group of ETFs with out a few random stocks is lacking in "diversity." I believe this would appear very misleading to the average investor and appears to be a bit of a plug for purchasing your Quantext Portfolio Planner software. QPP. When in the alternative, if one would take your own advice and use at least 10 years of data and some mean variance optimization for say the Sortino ratio that they would easily come up with an all ETF portfolio that not only has a better return but a dramatically lower risk of loss of money i.e. downside deviation. Moreover, I am not making a "beef" with commodities either, I am merely stating that regardless of their recent tremendous performance that they should have always had in a portfolio because of there unique characteristic of being "non" correlated with stocks, bonds, and real estate, hence primarily why your second portfolio outperformed given you used 13% with one outstanding stock like EXC that has commodity like returns.

While you are correct that "individual stocks can provide a level of diversification that is not entirely available buy buying funds"...The question is what level of diversification and I would argue a much less valuable type of diversity that only increases event risk in the portfolio and is of much less value to the average investor..AND it is much less sophisticated given the nature of the retail investor. Oh, and I read "A Random Walk.." by Burton Malkiel as an intro to investing when getting my MBA and it was a good read although not very sophisticated and a bit outdated which is apparent when it makes fun of technical analysis and analysts as those that have "holes in their shoes." In all fairness, Mr. Malkiel may not have had the opportunity to truly grasp the power of technical analysis or basic technology given that even his 6th Ed. was written in 1996 before the public started even using email or the Internet.

Oh, although your remarks about the "spark spread" seem very interesting and appears very complicated it misses the point I was making which was merely to address that the only reason that your example of adding some of these stocks improved the 2nd portfolio was because the return data stream has similar "uncorrelated" movements of commodities which you failed to add as even an ETF in the first ALL ETF portfolio. Thus, it appeared intellectually dishonest, somewhat self serving to purchase QPP and simply not a fair comparison especially if you have a background of an impressive 7 years with Statistics. And now that it is known that you understand statistics as a professional it is easily arguable that you were intentionally misleading and an unfair pitch to the average guy.

All-ETF Portfolios vs. Strategic Mix of Stocks

It appears both remarks on this article missed the issue with the allocation. As a journalist, if you are going to quote Harry Markowitz you should apply his theories as they are being used in portfolio theory like at the Yale Endowment, which is to use mean variance optimization to come up with a portfolio that contains investments which are not correlated to each other. The investments that should not be correlated to each other should come from different asset classes. Your first allocation appeared to be a negligent shotgun approach to using ETFs especially if you compare the portfolios in the big picture. Portfolio 1, has 50% in domestic equity IYY, IDU, IYM, and 20% in foreign equity for a total of 60% in one asset class, the stock market with only 20% in bonds and 10% in real estate. You forgot a major asset class which is commodities. However, you illustrate the beauty of Markowitz work by reducing the stock market exposure by 20% (helpful when trying to reduce beta to the market) and you add 13% EXC which is another way to get exposure to the energy or "commodity" market, then you say here is a great example of why only ETFs should not be used? Try adding a commodity ETN like the new DJP which tracks the Dow Jones commodity index and you might be shocked to find about a 13% return with a 9% standard deviation of the last 10 years. If anything your article was an excellent example of why journalists should not be creating ETF allocations for the public to invest in. This was some of the most irresponsible journalism that I have read in a long time and it is sad to see reports like this over an investment vehicle which is still a bit confusing to the public with no help from your original article.