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I think an even sneakier example of this is when bond funds own bonds that act like stocks because the credit quality is so low. Makes it really hard to understand your risk allocation.

Another important thing to keep in mind is that gold and silver have been perfectly investable in since the early 1970s. I think squabbling over the commodity indices is missing the bigger picture. One can use gold and silver as a proxy for the commodity universe and understand the diversification s...

rmelvey, Can you do this for commodities? And explain how, if one ignores ex-post returns, one can be sure the macro theory was correct, and applied correctly? use simple macro theory to understand the diversifying properties of certain investments, ignoring their ex-post correlation coefficients W...

Active management is what makes indexing work. Rick Ferri Hah, much more succinct than my post :) There are few arbitrage opportunities because people think that there are arbitrage opportunities. Contrarily, if everyone thought that there were no arbitrage opportunities, they would be plentiful. T...

I feel like most of the commodity detractors in this thread here haven't internalized the difference between a supply shock and a demand shock. Citing the 2008 crisis as a reason to not hold commodities is a prime exhibit of this. If you hold the stock market: -bonds offer a demand shock hedge -comm...

Personally, I think that active managers play a crucial role in keeping the markets sane. I especially respect value investors, who IMO, help the markets function as they are supposed to. With that said, I index because it makes sense from a cost perspective. When you index, you basically have all o...

If you want to dive really deep into the non-normality of markets than I would check out Benoit Mandelbrot's book "The (mis)Behavior of markets." He proposes a way of describing the stock market using fractal mathematics. In one of the final models he proposed before he died, he suggested ...

Hi Larry, Since monetary policy has such a huge affect on the bond market (explicitly altering the short end of the curve, and implitly changing the long end because of pure expectations hypothesis), couldn't one make the argument that gold is the better inflation hedge in the context of a diversifi...

Well, I am not sure the OP is referring to holding money under the mattress. Probably at very least held in interest bearing cash equivalents. BWZ is the best proxy for an international ST debt portfolio, although you can't backtest it very far. Personally I wouldn't count on currency diversificatio...

Hi Larry, I just did a little messing around in simba's spreadsheet and I would appreciate your thoughts... I looked at excess returns (above the T-Bill return) for stocks, commodities, gold, and inflation. With respect to inflation (in excess of the T-Bill rate) gold has a beta of 5.4, commodities ...

Yes I think it varies depending upon the job/field. For most young people the present value of their human capital is the most valuable asset they own. I think it makes sense to get a rough grasp on the approximate equity beta of their human capital before deciding on a stock/bond mix. For example, ...

I think human capital has a risk/reward profile similar to a junk bond. The coupon payments give the appearance of stability, but in a nasty recession they dry up very quickly. For me, incorporating human capital into the mix prompts me to take less equity risk, not more.

"Causation" would be great if you knew what caused what, but I'm not convinced you do. I don't "expect" much of assets, because my observation is that whenever I check out statements about how various investments "tend to" act--even statements with "causality"...

I think they decided to go hedged because they didn't want their bond funds to become a proxy for speculative currency bets. Making it hedged makes it more boring, creating a sticker asset base. I am not sure how I feel about it. Part of me thinks that foreign currency exposure feels risker than it ...

March, 2013, Consumer Reports Money Advisor : But the thing is: either you have to believe there are simple stay-the-course strategies that just work, or you believe that you need to be agile and understand the markets and do some kind of white-water slalom through them. Well, in the first place, I...

March, 2013, Consumer Reports Money Advisor : Worth the trouble? We created two hypothetical portfolios that were worth $100,000 at the beginning of 2008. We invested one in an traditional mix of 60 percent stocks and 40 percent bonds. The other contains 51 percent stocks, 34 percent bonds, and 15 ...

The idea of time horizon having anything to do with risk tolerance is actually extremely controversial in the academic community. I think everyone should check out Zvi Bodie, and at least try to come up with a decent counter argument to his thoughts on the subject. Thus far, I haven't seen a decent ...

I said it in the last thread on this, but I think it's worth reiterating. P/E = (P/B) / (ROE) You can see P/B as a proxy for what the academics call "value" and and ROE as a proxy for "quality." There is really nothing new with combining these two metrics. P/E is already a perfec...

Hi Larry, Fed tightening brings up something I have meaning to ask you... :happy I was wondering if you could shed some more light on why you don't like the barbell strategy. Your other article on pure expectations theory makes me think you understand some of the subtle benefits of a barbell. I like...

I am a big believer in Mr. Bogle's "costs matter hypothesis." That is why I stick with total market indices

So, DFAs approach to getting market exposure makes sense to me because they are largely sticking with that hypothesis. I just find their ERs a wee bit high personally.

I guess I lack the standard deviation-aversion gene or something, because I'd tend to accept a moderate overall short or medium term fluctuation risk in a long-term portfolio before I'd sleep well introducing CCFs (some sort of derivative based on commodity speculation, right?) to theoretically low...

If you have a 15 year time horizon, your risk free asset is a 15 year inflation protected security. With a shorter duration bond, you are actually exposing yourself to another kind of risk: reinvestment risk. Long bonds are not riskier than short bonds. Risk comes from not matching the duration of y...

Here is a link to the spreadsheet:
https://docs.google.com/spreadsheet/ccc ... MbVE#gid=0

It's very clear to see that it is pure randomness.

rmelvey, I wish you would state clearly what it is that you think rebalancing accomplishes. Because this thread is about the reality of a rebalancing bonus or lack thereof. But on your web page you certainly seem to be implying that rebalancing does something or other to increase returns. nisi, You...

Here is my take on gold/inflation: If you want something that tracks inflation then buy an I-bond. If you want something to round out a diversified portfolio of stocks, bonds, and bills, then consider adding gold. Looking at assets in isolation is always dumb. For something like gold it is even dumb...

nisi, I think taking the game to it's next logical extreme will help you realize the importance of geometric means. Let's say the game was a 50/50 chance of losing 100% or gaining 1000%. If you knew that you were going to repeat this game forever, would you still bet all of your money? It's pretty c...

rmelvey Holding P/E constant, a lower P/B implies a lower ROE. Don't think this is true. Book value is historical long-term while p/e is current. It MIGHT be true over the long term but untrue today. Larry Hi Larry, I am talking about the algebra of the metrics when looking at a single firm. ROE = ...

rmelvey, I'm just going to state what I believe but not try to defend it here. I do not believe a zero return asset can ever improve a portfolio by virtue of low correlation or zero correlation. The only way it can improve a portfolio is through negative correlation. Nisiprius - Just saw this comme...

Jumping off of Larry's point, the best regression I have personally been able to run for annual gold price changes is using annual changes in the spot price of oil... R^2 in the mid 30s. Those gold miners are not going to like higher energy prices. Rising cost of production is bad for the producers,...

Here is some "voodoo" for the commodity haters 8-) 100% Stocks CAGR: 9.68% 100% Gold CAGR: 8.9% 50% Gold / 50% Stocks CAGR: 10.74% Diving in a little bit further, that combined portfolio CAGR is 1.44% higher than the weighted average of the components CAGRs. Whenever people try to trash g...

Here is some "voodoo" for the commodity haters 8-) 100% Stocks CAGR: 9.68% 100% Gold CAGR: 8.9% 50% Gold / 50% Stocks CAGR: 10.74% Diving in a little bit further, that combined portfolio CAGR is 1.44% higher than the weighted average of the components CAGRs. Whenever people try to trash go...

The coin flip game has an average arithmetic return of 25% Let me repeat myself. What are you averaging? And I will probably add why should I care about that particular statistic? The final distribution always has zero expected return, your just rearranging the tails. Hey ED hopefully this post wil...

The coin flip game has an average arithmetic return of 25%

Respectfully: this retiree has not, does not, and will not go through the following thought process to keep my retirement income flowing--e.g., "You are forgetting that commodities combination of high volatility and low correlation boosts the geometric average return of the portfolio. Even if ...

This is the best analysis I've seen of the rebalancing bonus. http://www.iinews.com/site/pdfs/JWM_Fall_2012_Parametric.pdf Overall, diversifying and rebalancing is a valu- able discipline and can be used to exploit volatility. Theoretically, rebalancing reduces concentration risk, downside risk, an...

The authors conclude that commodities provide diversification from stocks, but so does burying money in glass jars [my input]. They also conclude that you needed to be a good market timer to make a real return on commodities and that not all commodities have provided the same return. So, to win the...

nisi, Look at the link that I posted earlier. There is no mean reversion in that example but there is a positive effect associated with rebalancing. It's an issue of arithmetic versus geometric returns. Mean reversion can certainly help, but it is not a necessary condition for rebalancing to boost r...

Rebalancing brings your portfolio's geometric return closer to the weighted average arithmetic return of its components. Momentum need not have anything to do with it. It is a function of diversification reducing steep losses, which we all know kills compounding. I made a post awhile ago that shows ...

Everything I have seen indicates that adding commodities to a stock/bond/bill portfolio provides more consistent rolling real returns. Isn't that what investors care about? This is true. From Le Simba, 1972-2102: 50/50... TSM/5YR CAGR (real) -> 4.79 Sharpe -> 0.45 40/10/50... TSM/Commodity/5YR CAGR...

At first glance this paper caused alarm bells to go off in my head. Notice how they are looking at commodities in isolation, not in the context of a portfolio that holds stocks, bonds, and bills. Sophisticated investors only care about what an investment contributes to an already diversified portfol...

Step 1: Fire your broker. Step 2: Take all of your money and buy a one year TIP. Step 3: Take that entire year to learn about asset allocation. Try to stick with authors that focus on index funds. Your portfolio is large enough where the effort will have an extremely high hourly wage. Plus learning ...

My FI allocation is a blend of bills and 30 year Treasuries (that will be rolled over to fresh 30 year ones when they reach 25 years) Have you considered some EE bonds as substitutes for the 30 year treasuries (are the limits too low to be practical)? I have! What I have settled on instead is to tr...

connya, I believe that everything you said is correct. Some other things to google are "pure expectations theory" and "liquidity premium" with regards to bonds. Those two should help you round out your thoughts. I think the correct statement is that the barbell outperforms when s...

Are there any low cost options available that avoid problems with rolling contracts over? am, Concerns about high expense ratios, contango, and hedge funds front running the ETFs led me to gold. IAU can be had for .25 bps. GTU is another great CEF option, and you get a better tax treatment (not tec...

Google "bullet" vs "barbell." Assuming a parallel shift in interest rates, you are correct that the same weighted duration means they will act similarly. However the yield curve has many moments of non-parallel shifts. Check out this thread for more details: http://www.bogleheads...

Check out the credit suisse 2012 year book and scroll towards the end. The US has an incredibly charmed history, but there are plenty of equity markets that have done terribly. Its possible that this could reverse going forward, who knows. Owning the entire world just means that you have one less th...

Larry, I was wondering about your thoughts about choosing which piece of the portfolio to carve commodities out of. You showed that it has low correlation to both stocks/bonds, and you mention that it is a great bond hedge for retirees, but you choose to take it out of equities in this example. So f...

rmelvey and gold coins have liquidity/trading costs issues (:-)) Larry Haha, I knew you wouldn't let me get away with that. :o Yes, I have found that the American Eagle coins have a bid/ask spread of around 2.5%. So they best used with quite wide rebalancing bands and perhaps some ETF gold used on ...

rmelvey What I can tell you is that if you screen for value first and then GROSS profitability you get signficantly higher returns than if you just screen for p/E, If it was just p/e we would not be talking about a profitability factor. Larry Well, it would be interesting then to see a screen of ju...

rmelvey Holding P/E constant, a lower P/B implies a lower ROE. Don't think this is true. Book value is historical long-term while p/e is current. It MIGHT be true over the long term but untrue today. Larry Hi Larry, I am talking about the algebra of the metrics when looking at a single firm. ROE = ...