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Re: Should I use margin to buy a balanced fund?

Rob, this is not correct. Mean-variance charts are constructed using the expected return estimates for the various assets--in our case, we're simply looking at two assets: total US stocks and total US bonds. The risk-free rate is not removed from the expected returns shown on the mean-variance curv...
by Kevin M
Wed Aug 20, 2014 10:53 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

The current charts that Kevin M is showing and Lee1026 is discussing is a model where the "risk-free rate" is removed from the returns. Rob, this is not correct. Mean-variance charts are constructed using the expected return estimates for the various assets--in our case, we're simply look...
by Kevin M
Wed Aug 20, 2014 9:16 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Using 1.5% over FFR as the interest rate. Using 1% over the FFR instead gets us to 1.3%. And I noticed that you still chose the high range of estimates for the stock market - using the low range will get us closer to 2% over the stock market. I agree that the model is quite uncertain, but you are p...
by Kevin M
Wed Aug 20, 2014 6:44 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

There is a difference between the human meaning of risk (what are the chance that this investment will lose money, and what are the chances that this investment will lose a lot of money), and the statistical sense of risk (what are the chance that this investment will make less then what I am predi...
by Kevin M
Wed Aug 20, 2014 6:29 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Rob tells us that he expect to borrow at the marginal rate of 1.09%, as he will soon be borrowing over 100K. As with anything in economics, you use the marginal rate. Sorry, but this just doesn't make sense to me. If he borrows $100K at 1.6% and $1K at 1.1%, then I don't see how it makes sense to m...
by Kevin M
Wed Aug 20, 2014 6:21 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

<snip> leveraging will get us about 1-2% extra in expected returns while having the same standard deviation as the stock market. However, the leveraged portfolio is actually safer because the expected returns are higher; a 1 sigma down event won't hurt as much. The last statement is nonsense, and d...
by Kevin M
Tue Aug 19, 2014 11:11 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

I don't see any reason to think that stocks will beat FFR by 7% going forward. The historical average is a bit over 5%. And as the US was the most successful stock market in the last century, it is probably better to bake some amount of mean revision into the calculations. 4% over the FFR is probab...
by Kevin M
Tue Aug 19, 2014 6:35 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Assuming 0 correlation between stocks and bonds seems unwise. Using the historical -.15 might be better. Stock standard deviation going forward is 13-14%. That is a number that you can update in real time - the CBOE calculate it from options pricing. If you disagree with it, buy or sell options acc...
by Kevin M
Mon Aug 18, 2014 10:49 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Rob, here is a mean-variance chart with CAL drawn for the parameters I mentioned: Bond ER/SD = 2/2 Stock ER/SD = 6/12 Correlation = 0 Risk-free borrowing rate = 1.5% http://s26.postimg.org/e8qclput5/Mean_Variance_and_CAL_for_TBM_TSM.png Turns out the maximum Sharpe is for 20/80 stock/bond, but as yo...
by Kevin M
Sat Aug 16, 2014 8:55 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Hey Rob, There are a few problems with your latest chart, and still, I think, with your understanding of CAPM (true for me too). You can't mix historical data when bonds returned close to 8% with today's risk-free rates when expected bond return is closer to 2%. If using historical data, you should ...
by Kevin M
Sat Aug 16, 2014 7:49 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Rob, closer, but your graph doesn't look right in several ways. Here is the mean-variance chart from Portfolio Visualizer for Total Stock and Total Bond from 1972 through 2013: http://s26.postimg.org/4pz1b80u1/EF_Total_Stock_Total_Bond_1972_2013.png Unfortunately PV doesn't support scaling axes to s...
by Kevin M
Fri Aug 15, 2014 9:15 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Market valuation analysis

For me, the best part of this thread was thx1138's link to the Philosophical Economics blog post: http://www.philosophicaleconomics.com/2014/06/sixpercent/ Anyone who is serious about understanding the utility of valuation metrics should read it--or at least scan it. Nisiprius's (typically elegant) ...
by Kevin M
Fri Aug 15, 2014 7:42 pm
 
Forum: Investing - Theory, News & General
Topic: Market valuation analysis
Replies: 36
Views: 1653

Re: Rebalance different asset classes within equities? Fees?

A quick follow-up question - one person mentioned not reinvesting dividends in their taxable account so they had freedom to rebalance when needed. Do these purchases invoke a commission/fee and if it was automatically reinvested in the original fund there would be no fees. At Vanguard and Fidelity ...
by Kevin M
Fri Aug 15, 2014 7:05 pm
 
Forum: Investing - Help with Personal Investments
Topic: Rebalance different asset classes within equities? Fees?
Replies: 10
Views: 601

Re: Should I use margin to buy a balanced fund?

If I could borrow at the risk-free rate, then every portfolio along the CML would have the same Sharpe ratio. I can't, so the Sharpe ratio goes down a bit but not much at 2x and 2.5x leverage. Rob, here you go again abusing CAPM. Do you have an investment textbook? If so, pull it out and read about...
by Kevin M
Fri Aug 15, 2014 5:23 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Vanguard Lost My Account

This is a good reminder to keep local copies of statements. I've been getting lazy about that.

Thanks,

Kevin
by Kevin M
Thu Aug 14, 2014 9:38 pm
 
Forum: Personal Finance (Not Investing)
Topic: Vanguard Lost My Account
Replies: 89
Views: 9414

Re: Rebalance different asset classes within equities? Fees?

1. Yes. Have you read this: Rebalancing - Bogleheads ? 2. Hopefully not; it depends on the plan. A common practice is to charge a fee if you sell shares of a fund within 30-90 days of purchase. Another practice (e.g., at Vanguard) is not to allow online purchase of a fund for 60 days after selling s...
by Kevin M
Thu Aug 14, 2014 9:31 pm
 
Forum: Investing - Help with Personal Investments
Topic: Rebalance different asset classes within equities? Fees?
Replies: 10
Views: 601

Re: Should I use margin to buy a balanced fund?

On the topic of how well the CAPM models reality, here is a 2004 Fama French paper that I just started reading that reviews how well CAPM has held up to empirical tests: The Capital Asset Pricing Model: Theory and Evidence . You might find it interesting. Thanks! It was a good read. Though, I need ...
by Kevin M
Thu Aug 14, 2014 7:05 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

On the hand, if this is not possible, then all investors would be best served by buying only the TSM, and then use leverage to adjust risk to taste. But then who are the fools that owning bonds? This one just puzzles me, since I don't see any disagreement in what we're saying. Bottom line is that i...
by Kevin M
Wed Aug 13, 2014 8:38 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Next ... <snip> the CAPM also predicts that the market portfolio is going to be the optimal portfolio. Therefore, we can cut though all of the estimating and just look at the total amount of bonds and stocks outstanding in the world. That ratio for bonds and stocks is 60-40. The fact that backtest e...
by Kevin M
Wed Aug 13, 2014 8:27 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

One at a time ... The holding period as either a single day or a month. The margin rate is entirely predictable within a single day, and extremely predictable within a month. He is counting on the fund managers to rebalance each day as the stock market rises and falls. And he is going to adjust the ...
by Kevin M
Wed Aug 13, 2014 8:06 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Should I use margin to buy a balanced fund?

Well, backtesting showed that a more conservative portfolio (about 20/80) had a higher Sharpe Ratio. This just further supports the point that one of the reasons for the high Sharpe ratio for past performance had a lot to do with the strong performance of bonds, which is pretty much mathematically ...
by Kevin M
Wed Aug 13, 2014 5:01 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Can't decide to keep 401k with previous employer or move

I count cash as part of my fixed income allocation (bonds, CDs, cash, I Bonds, etc.). If I could earn 6% safe on cash, I'd put as much as possible into that--I wouldn't own any stocks. If what I could earn 6% on was limited, I certainly wouldn't move it elsewhere. That's a much, much higher yield th...
by Kevin M
Tue Aug 12, 2014 4:21 pm
 
Forum: Investing - Help with Personal Investments
Topic: Can't decide to keep 401k with previous employer or move
Replies: 48
Views: 4430

Re: Should I use margin to buy a balanced fund?

I am looking to validate my application of CAPM and how leveraging a less risky portfolio can match relative returns to something like TSM. There is no doubt that an appropriately leveraged, risky portfolio will have the same return as TSM with less risk (or higher return with same risk) if the ris...
by Kevin M
Tue Aug 12, 2014 3:42 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: What's an acceptable stable value fund rate?

Yes, the quoted yield should be net of expenses, but the yield can change. The 1.6% comes with no interest-rate risk and probably minimal credit risk (although you need to dig a bit to determine how much). The TBM 2.1% comes with significant interest-rate risk and some credit risk. The 1.6% rate isn...
by Kevin M
Mon Aug 11, 2014 6:58 pm
 
Forum: Investing - Help with Personal Investments
Topic: What's an acceptable stable value fund rate?
Replies: 18
Views: 1359

Re: Thinking of signing up with Vanguard this week...

With a relatively short time horizon, your ability to take risk is limited. You might want to read this article by Larry Swedroe: Asset Allocation Guide: How much risk should you take? . Note that Larry's recommended maximum equity allocation for 0-3 years is 0%. For the type of low-risk investment ...
by Kevin M
Mon Aug 11, 2014 6:50 pm
 
Forum: Investing - Help with Personal Investments
Topic: Thinking of signing up with Vanguard this week...
Replies: 3
Views: 482

Re: Does domestic over weighting qualify as active managemen

I think of it more as tilting away from "the market" portfolio, which I think is a good challenge question for those who believe in total market investing. It seems to me that the default market portfolio is the cap-weighted global portfolio--at least to the extent we can practically own i...
by Kevin M
Mon Aug 11, 2014 4:27 pm
 
Forum: Investing - Theory, News & General
Topic: Does domestic over weighting qualify as active management?
Replies: 26
Views: 1191

Re: Should I use margin to buy a balanced fund?

Rob, just finished catching up on this thread. When you first described your idea, I immediately visualized the efficient frontier, the tangency portfolio, and Capital Market Line (CML), with the leveraged portfolio moving up and to the right of the tangency portfolio on the CML. LIke you've said, t...
by Kevin M
Mon Aug 11, 2014 3:45 pm
 
Forum: Investing - Theory, News & General
Topic: Should I use margin to buy a balanced fund?
Replies: 265
Views: 16940

Re: Drastic pay cut-Crack CD (w/penalty) to payoff mortgage?

I have slightly over 1.5M amassed from the good 'ol days working in tech, 1/2 of which is in balanced low-cost diversified retirement vehicles. The other half ($757k) is in a balanced low-cost portfolio ($322k), a CD ($270k, 2.47%, matures 10/2015), savings account ($140k, which I'm DCA'ing into th...
by Kevin M
Fri Aug 08, 2014 9:52 pm
 
Forum: Personal Finance (Not Investing)
Topic: Drastic pay cut-Crack CD (w/penalty) to payoff mortgage?
Replies: 26
Views: 1069

Re: My bank lowered my interest rate on my checking account

See reward checking accounts at www.depositaccounts.com. Rates and balance caps change on these accounts, but I currently am earning 3% on up to $20K.

Kevin
by Kevin M
Thu Aug 07, 2014 5:09 pm
 
Forum: Personal Finance (Not Investing)
Topic: My bank lowered my interest rate on my checking account
Replies: 11
Views: 1224

Re: Is 30% SCV/ 70% Bonds really a good idea?

Interesting; thanks for sharing your analysis. Note that Larry recommends including international stock funds as well, so just using the US SCV fund isn't what he recommends for someone who wants to implement something along the lines of the Larry portfolio.

Kevin
by Kevin M
Wed Aug 06, 2014 4:05 pm
 
Forum: Investing - Theory, News & General
Topic: Is 30% SCV/ 70% Bonds really a good idea?
Replies: 21
Views: 1696

Re: Is Medigap insurance really needed?

That in itself is interesting, though, because you apparently believe in the "annual physical." Actually, the main reason I went is that I know my doc won't refill certain prescriptions unless I see him now and then. Another reason is that it is free, so why not? Also, I'm lucky in that t...
by Kevin M
Sun Aug 03, 2014 5:52 pm
 
Forum: Personal Finance (Not Investing)
Topic: Is Medigap insurance really needed?
Replies: 83
Views: 4131

Re: Is Medigap insurance really needed?

About three years until I have to decide, but I think I probably would get medigap or medicare advantage. With respect to linuxizer's point, I can see in my own behavior that what he says is true. Since switching to a high deductible plan last year to cut my monthly premium almost in half, I have no...
by Kevin M
Sun Aug 03, 2014 2:22 am
 
Forum: Personal Finance (Not Investing)
Topic: Is Medigap insurance really needed?
Replies: 83
Views: 4131

Re: Investing with uncertain 1-3 year window

You can earn 3% on up to $20K in a reward checking account, if willing to jump through the hoops. Other than that, a 5-year CD earning 2.3% with an early withdrawal penalty of six months of interest (1.15%) is about the best you can do without taking risk. Early withdrawal at one year earns 1.15%, a...
by Kevin M
Sun Aug 03, 2014 1:53 am
 
Forum: Investing - Help with Personal Investments
Topic: Investing with uncertain 1-3 year window
Replies: 4
Views: 552

Re: Prove adding SV will lower the risk, given the same E(r)

Another observation from these graphs is that there is no obvious, consistent reduction of the small and value premiums since their "discovery".

Kevin
by Kevin M
Sun Aug 03, 2014 12:58 am
 
Forum: Investing - Theory, News & General
Topic: Prove adding SV will lower the risk, given the same E(r)
Replies: 79
Views: 3989

Re: Factor investing - A parody

To clarify, the article linked by Ketawa was written by Fama Jr. (Fama's son).

Kevin
by Kevin M
Sat Aug 02, 2014 9:37 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Factor investing - A parody

I also don't understand how you're jumping from something's a "common risk factor for stocks" to it should be expected to have higher risk adjusted returns(which is the claim always made for tilting.) I don't believe I made that claim; that's not at all my understanding. EDIT: To clarify,...
by Kevin M
Sat Aug 02, 2014 9:04 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Prove adding SV will lower the risk, given the same E(r)

Can't remember if it's been shared in this thread yet, but here's a paper by Fama and French on the market, SmB and HmL premiums and their volatility: us.dimensional.com/pdf/Volatility_And_Premiums.pdf I think this graph and the similar one for SmB volatility are helpful: http://s11.postimg.org/s9d2...
by Kevin M
Sat Aug 02, 2014 8:14 pm
 
Forum: Investing - Theory, News & General
Topic: Prove adding SV will lower the risk, given the same E(r)
Replies: 79
Views: 3989

Re: Changing cost basis from Average Cost to Specific ID

<snip> funds with zero balances actually drop off the view entirely, so there is no way to reconstruct the history <snip>. These former funds do not appear even in the "Customize this page" view where you can hide or show funds. Although it doesn't solve all of your problems, there is a w...
by Kevin M
Sat Aug 02, 2014 7:13 pm
 
Forum: Investing - Theory, News & General
Topic: Changing cost basis from Average Cost to Specific ID
Replies: 33
Views: 1860

Re: Ultimate Buy and Hold - 8 slices vs 4

Hey I used that tool PortfolioVisualizer to analyze my ILV fund, IDV. According to the tool, it has: I'm no expert, but I think the problem may be that you're using a model based on US stock returns to try and explain international stock returns. The tool allows you to select Global Developed Marke...
by Kevin M
Fri Aug 01, 2014 9:04 pm
 
Forum: Investing - Theory, News & General
Topic: Ultimate Buy and Hold - 8 slices vs 4
Replies: 610
Views: 209875

Re: Factor investing - A parody

Why is an Apple factor considered an unreasonable tilt? There seems to be two primary objections: 1) not enough data, since returns started in 1900 and 2) a STD of 80% in the stratosphere. Neither of those objections apply to a SA tilt. Actually, my original two objections were the high standard de...
by Kevin M
Fri Aug 01, 2014 8:09 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Factor investing - A parody

I think you may be putting more emphasis on the factor models than is warranted. Really? What I meant to be putting emphasis on was using straw man arguments to mock the results of academic research. I'm very interested in summaries of research that presents evidence for or against the reliability ...
by Kevin M
Fri Aug 01, 2014 5:09 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Clean investing in a single stock

There is no tax reporting for dividends or realized capital gains within a Roth IRA. Tiny point: you do not "convert" your Roth to a brokerage. You add a brokerage account to your existing Roth. You will designated a money market fund as the "sweep account". The money market fund...
by Kevin M
Fri Aug 01, 2014 2:57 pm
 
Forum: Investing - Help with Personal Investments
Topic: Clean investing in a single stock
Replies: 28
Views: 2641

Re: Prove adding SV will lower the risk, given the same E(r)

acegolfer wrote:I didn't mention this because this thread is not about where to tilt.

But the title of the thread mentions "adding SV", which is what we mean by tilting to SV. If this thread is not about tilting to SV, then what is it about?

Kevin
by Kevin M
Thu Jul 31, 2014 10:17 pm
 
Forum: Investing - Theory, News & General
Topic: Prove adding SV will lower the risk, given the same E(r)
Replies: 79
Views: 3989

Re: Factor investing - A parody

There are other multi-factor models that have been researched, but I don't see any mention of a such a model that incorporates Apple stock or South African stocks. If you wanted a model that could explain returns of a global portfolio instead of portfolio returns restricted to a single country, the...
by Kevin M
Thu Jul 31, 2014 8:23 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Factor investing - A parody

^Yes, I have read it. You missed the irony. You responded to my point that I prefer referenced articles and books to silly parodies, but without providing a reference to any such articles or books. Your reply had absolutely nothing to do with the part of my reply you quoted. To help you out, I provi...
by Kevin M
Thu Jul 31, 2014 7:35 pm
 
Forum: Investing - Theory, News & General
Topic: Factor investing - A parody
Replies: 42
Views: 3153

Re: Prove adding SV will lower the risk, given the same E(r)

First, Kevin, would take a whole book to discuss all the literature on why one should expect the premiums to persist---in fact huge debate even as to whether risk, behavioral or some of both (my personal view). But there is whole literature on the subject as I have posted many times. Yes, understoo...
by Kevin M
Thu Jul 31, 2014 7:02 pm
 
Forum: Investing - Theory, News & General
Topic: Prove adding SV will lower the risk, given the same E(r)
Replies: 79
Views: 3989

Re: CD interest payments

Can I assume that now CDs are merely another line of data on you account listed below "savings account"? Yes, this is basically the way it appears at all banks/CUs at which I have both savings accounts and CDs. All CUs I use require you to keep a small amount in a savings account. Each CD...
by Kevin M
Thu Jul 31, 2014 6:00 pm
 
Forum: Investing - Help with Personal Investments
Topic: CD interest payments
Replies: 23
Views: 1809

Re: Ultimate Buy and Hold - 8 slices vs 4

The argument that the small and value tilts multiply and make SV better than combinations of LV and SB does not mean you should put everything in SV. It just means you bias SV. For the same reason that stocks outperform bonds does not make 100% stocks optimal, nor does the reason that SV outperform...
by Kevin M
Thu Jul 31, 2014 5:52 pm
 
Forum: Investing - Theory, News & General
Topic: Ultimate Buy and Hold - 8 slices vs 4
Replies: 610
Views: 209875

Re: Young investor blending SUBH and Minimized Fat Tails?

There's my problem, I am easily swayed by well-crafted arguments! :) Now of course I am reconsidering tilting to SV and eliminating home-country bias. But given my personality perhaps it is best to stick with what I currently have so I don't fiddle with my AA every time I read a convincing post? Pe...
by Kevin M
Thu Jul 31, 2014 5:31 pm
 
Forum: Investing - Help with Personal Investments
Topic: Young investor blending SUBH and Minimized Fat Tails?
Replies: 40
Views: 2539

Re: Prove adding SV will increase E(r) given the same risk

Sorry for asking all these questions. I really want to understand the rationale behind tilting before I jump to SV. I rarely make decisions, if I don't understand what's going on. I hope anyone can answer my questions related to Larry's post. If you think these questions are outrageous, let me know...
by Kevin M
Thu Jul 31, 2014 4:38 pm
 
Forum: Investing - Theory, News & General
Topic: Prove adding SV will lower the risk, given the same E(r)
Replies: 79
Views: 3989
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