WC Whiner

A Model All-ETF Portfolio That Works

You don't even have to look at the tickers to know what's going on here: Large Cap 36% and Foreign 28% say it all. Remember, almost everything has beaten the S&P 500 the last half-decade. If you are underweight it, of course you beat it. I was all set to regress their backtest against some indexes, but they have (gag) a Flash site. If anyone wants to post their monthlies for me, I'll pump them into R real quick.

FD: my little account "soundly beat" the S&P 500 for the five years ended 3/31/06 (alpha 0.8% per month vs that index, t-stat 2.5), but I do not think that speaks to anything than a couple lucky plays and my particular style having been in favor.

Stress Testing Risk Metrics Pays Off: A Case Study Portfolio for the Sophisticated Investor

A couple quick comments for Will.

One, he's got a big metals/oils overweight, of about 10% on top of the ~15% materials/energy weight in index ETFs. That's worked really well for him the last few years, and may well in the future. Still, it's not going to have an inconsequential effect if those holdings pull back.

Two, he's paying out fees where there are cheaper alternatives. IYY charges 20 bps, VTI only 7. EFA charges 35 bps, VPL and VGK charge 18. TRRIX charges 45 bps, while TIP charges 20. EWJ charges 59 bps, and COY despite selling at a discount to NAV charges 200+. Swap out a few of those names and you can save 10-20 bps a year over the entire portfolio and keep the same risk profile.

Foreign Stock Investing and Diversification (EEM, EFA)

Holy jeepers, I think he was regressing prices, not returns. Could you be a little more clear on what you mean by, "if you do factor analysis?" The only way I get .97 with daily numbers from Yahoo back to EEM inception is with price regression. Using returns (including VIX "returns"), I only get daily r-squareds around 0.7.

Foreign Stock Investing and Diversification (EEM, EFA)

Wow, that table didn't work.

Check out the R output at www.bignose.org/~wcw/GFDEMregression....

As I said, .97 it surely, surely ain't.

Foreign Stock Investing and Diversification (EEM, EFA)

All you need to know about his data set is found in the three letters "EEM". That fund started in May 2003. It is my distinct suspicion that as a result of the very short time frame, our intrepid analyst used daily price movements. Me, I am a fan of using monthly numbers (which tend to flatten out daily noise to a certain extent) and time periods as long as I can get, to maximize the market regimes I can analyze. 5/03-present includes precisely two regimes: a trending global equity upswing favoring emerging markets, and a trending global equity downswing hitting the same group the hardest. Of course his PCA has .97 explanatory power -- it just says very, very little.

Let me grab some slightly longer time frames and run a simple monthly regression. While non-US equity investing can never diversify away your systematic market risk, the idea that it is of little or no benefit does not pass the smell test. Lessee... scribble scribble..

OK, I can't get total returns on short notice. I can grab GFD's price indexes through my old university library. Here's an ordinary least-squares run of the S&P versus GFD's World-ex-US and Emerging Markets price indexes, for which I have concurrent returns from July 1920, so over a thousand months and many different market regimes:

> print(summary(lm(SPXpr ~ xUSpr + GFD.EMpr, data=emp)), digits=1)

Call:
lm(formula = SPXpr ~ xUSpr + GFD.EMpr, data = emp)

Residuals:
Min 1Q Median 3Q Max
-2e-01 -2e-02 -5e-04 3e-02 4e-01

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 0.003 0.002 2 0.03 *
xUSpr 0.442 0.042 10

Adjusted r-squared here is 0.2. A little different than .97, don't you think?