F/U on Merriman's seminal article "Perfect Portfolio"

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F/U on Merriman's seminal article "Perfect Portfolio"

Postby ilan1h » Sat Dec 29, 2012 9:30 pm

In 2009 Jeff Cohen-Merriman published a seminal article in which he compared the balance of risk and return on various asset allocations. The data,compiled from 1970 to 2008 showed various mixes of SP500 and T-bills and their accompanying annualized return, standard deviation, worst month, worst 12 months, worst 5 years. The idea was to match risk tolerance with asset allocation. The numbers clearly show that their is a "sweet spot" somewhere near the center of this allocation ie: having 40-50% bonds allowed you to get a comparable return at a much lower risk profile than being 100% SP500. The numbers up to 2008 are a very clear indication of the benefits of diversication. I assume that the last 4 years of data (2008 to 2012) would only reinforce this compelling lesson.
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Re: F/U on Merriman's seminal article "Perfect Portfolio"

Postby chaz » Sat Dec 29, 2012 9:48 pm

Diversification wins.
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Cohen/Merriman's "Sweet spot?"

Postby Taylor Larimore » Sat Dec 29, 2012 10:05 pm

ilan1h wrote:In 2009 Jeff Cohen-Merriman published a seminal article in which he compared the balance of risk and return on various asset allocations. The data,compiled from 1970 to 2008 showed various mixes of SP500 and T-bills and their accompanying annualized return, standard deviation, worst month, worst 12 months, worst 5 years. The idea was to match risk tolerance with asset allocation. The numbers clearly show that their is a "sweet spot" somewhere near the center of this allocation ie: having 40-50% bonds allowed you to get a comparable return at a much lower risk profile than being 100% SP500. The numbers up to 2008 are a very clear indication of the benefits of diversication. I assume that the last 4 years of data (2008 to 2012) would only reinforce this compelling lesson.


Ilan:
Vanguard has been tracking different allocations of stocks, bonds and short-term reserves since 1926. The greater the percentage of SP 500 stocks (in 10% increments) ALWAYS resulted in a greater "worst year loss."

https://personal.vanguard.com/us/insigh ... llocations

Bogleheads adjust their stock/bond ratio based on their goals, time-frame, risk-tolerance and personal financial situation. This Vanguard asset-allocation tool is helpful:

https://personal.vanguard.com/us/funds/ ... mmendation

Happy Holidays!
Taylor
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Re: F/U on Merriman's seminal article "Perfect Portfolio"

Postby livesoft » Sat Dec 29, 2012 10:21 pm

The table was a link out of the "Ultimate Buy-and-Hold Portfolio". Here is a link to an August 2012 update (without the table): http://www.merriman.com/PDFs/UltimateBuyAndHold.pdf
and here is an article with the table from 2011:
http://www.merriman.com/wp-content/uplo ... ng2011.pdf
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: F/U on Merriman's seminal article "Perfect Portfolio"

Postby magician » Sat Dec 29, 2012 10:28 pm

I've looked at Merriman's Ultimate Buy and Hold portfolio a number of times. His advice on how to put together a well-diversified portfolio is generally sound. However, when I looked at the funds he was using to implement that advice, I found that the correlations of returns were unusually high, and that the diversification benefits were much lower than they could have been with a better choice of investments. Paul and I have talked about this a few times.
Simplify the complicated side; don't complify the simplicated side.
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