Lazy portfolios: no returns or risk information

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Taylor Larimore
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Investor Home -- Historical data

Post by Taylor Larimore »

Franz:

You may find this link helpful:

Investor Home -- Historical Data

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Frans
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Re: Investor Home -- Historical data

Post by Frans »

Taylor Larimore wrote:Franz:

You may find this link helpful:

Investor Home -- Historical Data

Best wishes.
Taylor
Been there, looked extensively, couldn't find really long-term data beyond Ibbotson (I did pay the $175 for the Ibbotson book, twice) with the exception of CSPR; CSPR data is only available for a price and I haven't tried to find out yet how much that is.
I've asked Vanguard if the long-term index data applicable to their various index funds is available to me and, you guessed it, the answer was no. I would think that Vanguard should make available to me the long-term, relevant index data. After all they quote the indexes right next to their funds' historic data, going back only up to 15 years.
Another issue with Vanguard: when I asked them for the long-term returns data on their Wellington fund, they suggested I search the internet! I kid you not!
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Re: Lazy portfolios: no returns or risk information

Post by LadyGeek »

Frans wrote:Been there, looked extensively, couldn't find really long-term data beyond Ibbotson (I did pay the $175 for the Ibbotson book, twice) with the exception of CSPR; CSPR data is only available for a price and I haven't tried to find out yet how much that is.
I've asked Vanguard if the long-term index data applicable to their various index funds is available to me and, you guessed it, the answer was no. I would think that Vanguard should make available to me the long-term, relevant index data. After all they quote the indexes right next to their funds' historic data, going back only up to 15 years.
Another issue with Vanguard: when I asked them for the long-term returns data on their Wellington fund, they suggested I search the internet! I kid you not!
This is exactly the problem. The generation of indexes is a highly competitive and lucrative business. By releasing data, Vanguard would essentially be giving away their intellectual property. You've already encountered this by paying the $175 for the Ibbotson book (twice).

I'm sure you're already aware of the numerous sites which give this data away for free, which is in the wiki: Financial websites and blogs (Research and other financial articles)

You want to go to the next step, but it will cost you - literally - and the information can't be used by anyone else or you will violate the terms of agreement. This forum and wiki have to work within the bounds of publicly available data - it's the best we can do.
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Taylor Larimore
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Benefit of past fund returns?

Post by Taylor Larimore »

When I asked them for the long-term returns data on their Wellington fund, they suggested I search the internet!
Frans:

How do you use a fund's historical returns (like Wellington)?

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
dbr
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Re: Lazy portfolios: no returns or risk information

Post by dbr »

LadyGeek wrote:Would the answer have been as simple as: Because we are volunteers and keeping the wiki up-to-date on every article is a lot of work.

That's why we put the link to the current data in the article - we can't keep up with this stuff. We show you where to get the information, which is the most important part.

Additionally, having a fund "risk indicator" as Vanguard does (scale of 1 to 5) is making a LOT of assumptions. We don't want to imply any sort of recommendation here. The wiki is intended to provide guidance. It's up to the reader to decide how it fits in his/her own situation. This is a fine line to draw, but we do the best we can.

The article in question: Lazy portfolios
Yes, and that is an absolutely fair statement. I wouldn't intend to imply that someone, somewhere, "should" be doing a "better" job somehow.

But, I think my real point is that it is not the Wiki per se (even if I did make a suggestion) but the authors from whom those portfolios were taken that might want to attach more information concerning why and wherefore. Then the Wiki also would be more complete by inheritance. This also does not ignore that some authors may indeed go into these points.

And, I guess it still has to be said, that it might be presenting these kinds of portfolios absent explanation potentially does more harm than good by implying that asset allocation amounts to picking from a list without thought as to what the consequences of different choices really are.

On the other hand, I do suppose that all the article really says is:

"Lazy portfolios are designed to perform well in most market conditions. Most contain a small number of low-cost funds that are easy to rebalance. They are "lazy" in that the investor can maintain the same asset allocation for an extended period of time, as they generally contain 30-40% bonds, suitable for most pre-retirement investors."

and adds by implication that otherwise you can use any of the portfolios and it doesn't matter which one. Maybe that is good enough advice and should just be left alone. Maybe that last line could be changed to read ". . . period of time, and they generally contain 30%-40% bonds, suitable for those who choose hold a portfolio at that level of stock/bond risk. Bond allocation can be adjusted to suit the investor."
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Re: Lazy portfolios: no returns or risk information

Post by dbr »

pkcrafter wrote: What is Franz suggesting here about the length of past performance. Is long term better than short term? We can compare portfolios in a general sense, but if we are going to try to compare 8 portfolios with only minor differences, it's rather pointless. For most investors, the big picture is worth more than a lot of microscopic views.

Paul
What I don't understand is why we have all those portfolios and in the end we are suggesting it doesn't matter. So is the conclusion that all that generating of recipes is mostly just about filling up pages in books that otherwise would be so short nobody would buy them? That's pretty much what I think except for the fact that these generations of portfolios tend to encourage the view that the more funds you use and the more asset classes you have the smarter and more sophisticated you are, and I don't think that is a good message.
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Simplicity vs. complexity

Post by Taylor Larimore »

The more funds you use and the more asset classes you have the smarter and more sophisticated you are, and I don't think that is a good message.
dbr:

I agree with you.

Bogleheads strive for simplicity -- not complexity.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Frans
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Re: Benefit of past fund returns?

Post by Frans »

Taylor Larimore wrote:
When I asked them for the long-term returns data on their Wellington fund, they suggested I search the internet!
Frans:

How do you use a fund's historical returns (like Wellington)?

Thank you and best wishes.
Taylor
Taylor, I put long-term (1928-2011) index information in a spreadsheet, calculate and plot risk/return curves and find the Efficient Frontier portfolios based on those indices (38 in all). You can find this in my write-up at: https://drive.google.com/file/d/0ByZzqh ... sp=sharing
Once I analyzed Wellington returns, I lost interest in it.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

LadyGeek wrote:I'm sure you're already aware of the numerous sites which give this data away for free, which is in the wiki: Financial websites and blogs (Research and other financial articles)
Ladygeek, thanks for the reference, but I can't find long-term, say 1925 till present, return data on anything beyond generic stock and bond indices. If you know that that kind of data is part of that page, could you point me in the right direction? Thanks.
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Re: Lazy portfolios: no returns or risk information

Post by LadyGeek »

FWIW, the source we use for "generic" stock and bond indices is from Aswath Damodaran's Useful Data Sets page (Historical Returns on Stocks, Bonds and Bills - United States, going back to 1928).

However, that doesn't answer your question; you want something more. OK, let me point you to a different thread. Take a look at my post here: Re: Spreadsheet for backtesting (includes TrevH's data), which has some very helpful information from William Bernstein. The backtesting spreadsheet has a "Data_Sources" tab which may prove useful. Maybe.

In any case, I think you'll get a more focused audience in the Spreadsheet for backtesting (includes TrevH's data) thread. Perhaps some collaboration would help you find what you're looking for, as well as help backfill the spreadsheet - which is always looking for more data.
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Re: Lazy portfolios: no returns or risk information

Post by telemark »

What I find interesting about the lazy portfolios is that they were developed independently by different people over a period of ten to twenty years, and yet they have a lot in common: using low cost, diversified funds (often but not always index funds), diversification across asset classes, and an emphasis on discipline over market timing. There are many roads to Dublin, as someone here likes to say, and the lazy portfolios demonstrate a few of those.

Which is simpler, 50% large cap and 50% small cap, or 70% large cap, 20% mid cap, and 10% small cap? What if the only mid cap fund is a managed fund with a high expense ratio, or if you don't have one at all? Not everyone has access to low-cost total index funds in their retirement plans, and the three fund portfolio may not be the best choice for them.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

LadyGeek wrote:FWIW, the source we use for "generic" stock and bond indices is from Aswath Damodaran's Useful Data Sets page (Historical Returns on Stocks, Bonds and Bills - United States, going back to 1928).

However, that doesn't answer your question; you want something more. OK, let me point you to a different thread. Take a look at my post here: Re: Spreadsheet for backtesting (includes TrevH's data), which has some very helpful information from William Bernstein. The backtesting spreadsheet has a "Data_Sources" tab which may prove useful. Maybe.

In any case, I think you'll get a more focused audience in the Spreadsheet for backtesting (includes TrevH's data) thread. Perhaps some collaboration would help you find what you're looking for, as well as help backfill the spreadsheet - which is always looking for more data.
LadyGeek, that data only goes back to 1972 and that's too short in my opinion to use for finding the Efficient Frontier.
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Re: Lazy portfolios: no returns or risk information

Post by czeckers »

True. However, even if we had 100 years of pristine data, I'm not sure that would be enough. The past is not prologue. Even with precise data, you're still left with making generalized assumptions about the future.
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Re: Lazy portfolios: no returns or risk information

Post by pkcrafter »

Franz:
Once I analyzed Wellington returns, I lost interest in it.
Why did you lose interest?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

pkcrafter wrote:Franz:
Once I analyzed Wellington returns, I lost interest in it.
Why did you lose interest?

Paul
Paul, I lost interest in Wellington because of less than acceptable long-term results.
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Re: Lazy portfolios: no returns or risk information

Post by stlutz »

Ken French has slice-n-diced returns on his website free of charge back to the 1920s.

The indexes that VG is using for it's funds haven't been around long at all. The oldest real small/value index (Russell) goes back to the 1970s. The MSCI EAFE index goes back to the late 60s. In terms of real indices going back to the 20s, you have the S&P 500 (and it's predecessors) and the Dow series. Everything else is calculating backwards, which has a whole host of challenges associated with it.

But, back to the original question, it would probably be worth reading the books in question to find a deeper analysis of risk/return characteristics of these various portfolios.

Additionally, considerations of risk and return are worthy of a little more imagination than just projecting the past forward or defining risk as standard deviation and ending there. For example, we've more recently gone through a period when stocks and T-bonds have been negatively correlated. In other times historically, they have been positively correlated. Which way it works out in the future has a lot of impact on the return volatility of one's overall portfolio (2008 would have been a lot worse had bonds gone down, not up, that year). Considering a case where stocks and bonds both go down is well worth it, and at least as valuable as looking at how various allocations held up in the last 2 bear markets.
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Re: Lazy portfolios: no returns or risk information

Post by grayfox »

Frans wrote:It seems to me that returns and risk information is lacking when lazy portfolios are discussed. The bogleheads wiki for instance doesn't say anything about past or to be expected performance, both in terms of returns or risk: http://www.bogleheads.org/wiki/Lazy_portfolios
I know the pitfalls of putting numbers on past and to be expected future performance, but discussing any portfolio without at least some data to indicate potential returns and risk parameters seems pointless to me.

Any comments?
dratkinson wrote: Could also check out the Wiki topic, "Simba's backtesting spreadsheet", for listed data sources.
Should also check out the referenced/linked forum topic for listed data sources used to create the backtesting spreadsheet.

Wiki: http://www.bogleheads.org/wiki/Simba's_ ... preadsheet
Historic Risk & Return Data
It looks like dratkinson answers provides a source for historic data.

So I downloaded the latest Simba's spreadsheet. On the tab titled Lazy_Portfolios_85, there is there is all kinds of return information for 25 lazy portfolios.

Just one example P12 Bill Schultheis Coffee House

There are tons of statistics to compare. Then they are plotted on a return vs. risk chart

Code: Select all

Average	Std. Dev.	Down SD	Up SD	CAGR	Sharpe Ratio	Sortino Ratio	Mkt. Corr.	Intl. Corr.	

10.36%	10.77%	5.65%	6.02%	9.08%	0.60	0.95	0.90	0.74	


Total - Rebalanced (Nominal)	"Total - Unbalanced (Nominal)"	Total - Rebalanced (Real)	1$ Portfolio
124426.26	117696.58	58357.18	12.44


Scroll down to find the series of annual returns 1985-2013

27.07%
18.92%
1.51%
16.56%
16.61%
-5.58%
25.74%
10.20%
16.72%
-0.40%
22.60%
14.08%
17.43%
6.75%
8.27%
7.25%
1.88%
-5.56%
23.54%
13.80%
6.24%
15.15%
2.63%
-20.21%
20.26%
14.68%
2.02%
11.93%
14.74%

I don't think you can find more information anywhere.

But if you want data going back further, I don't know where you would get it. Does such data even exist? For instance Coffeehouse has 10% REITs. When were REITs created? This says REITs were created in 1960. But I didn't hear anyone mention them until about the late 1990s. Vanguard VGSIX started in 1996. I do recall back in the 1980s, there used to be RE limited partnerships that were tax shelters. Many of those RE LP investors lost their shirts.

Many modern day investment instruments have only been around for a couple of decades. U.S. TIPS only since 1997.

I know that researchers try to synthesize time series that go back further, but I think that data is suspect. I have more faith in data from actual funds and ETFs that real people invested in, rather than data that has be reconstructed by some researcher with an axe to grind.

Expected Risk & Return
As far as expected risk and return, everyone is entitled to his opinion about the best method forecasting risk and return for assets classes and portfolios. There's no one answer.

Some examples, some people use a Constant Expected Return (CER) Model with historical data to forecast. Other's use a valuation model. Others read tea leaves.

Who is right? The fullness of time will reveal all.
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Taylor Larimore
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"Less than acceptable"

Post by Taylor Larimore »

Frans wrote:
pkcrafter wrote:Franz:
Once I analyzed Wellington returns, I lost interest in it.
Why did you lose interest?

Paul
Paul, I lost interest in Wellington because of less than acceptable long-term results.
Franz:

Morningstar ranks Wellington in the top 6% of all funds in its category for 15 year returns (longest period shown). Wellington also has below average risk. Morningstar analysts give it their highest Gold rating.

What did you find less than acceptable ?

Thank you and best wishes.
Taylor
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leonard
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Re: Lazy portfolios: no returns or risk information

Post by leonard »

Frans wrote:
leonard wrote:As an investor:

1. I set my asset allocation to manage My risk - not based on market data. Primarily, stock-bonds - but also other slices within. I set this allocation based on MY risk tolerance, not based on market indicators. This is not a market dependent activity.
2. Once I have my AA - I then buy the lowest cost index funds that fill out my AA requirements. Barring an index fund missing it's index, this is primarily about the cost of the fund. Again, no market data required - other than to verify that the fund tracks it's index. Not the performance of the index or fund itself over time.

Neither of these 2 activities requires looking at historical portfolio performance data. I set my risk tolerance through AA and simply get market returns less a small ER.
leonard, how can you set you AA to manage your risk without looking at past performance? No historic market data required?
Sorry - I assumed you wanted some sort of ongoing backward looking data. Once I have set AA - I have not need for the history. In addition, I was highly skeptical of the past data for setting future AA. But, I have never looked at it since I set up me portfolio. So.

Sure - the "TrevH" data has been around on this forum almost since inception. You can analyze the data forever.

There was a collection of the lazy portfolios on marketwatch for a long time - with performance metrics.

Also, Paul Merriman wrote a great article on how adding various asset classes to a lazy portfolio impacts the risk-return equation. Great article - have no idea if it's still on the Merriman website - but worth a look.

So, there are tons of sources for the information - just Bing it and Google it. It's there.

So, ongoing analysis of lazy portfolios is unneeded. Do it once with historical data - but be highly skeptical of how it will apply to the future when constructing AA - then ignore it after.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: "Less than acceptable"

Post by Frans »

Taylor Larimore wrote:
Frans wrote:
pkcrafter wrote:Franz:
Once I analyzed Wellington returns, I lost interest in it.
Why did you lose interest?

Paul
Paul, I lost interest in Wellington because of less than acceptable long-term results.
Franz:

Morningstar ranks Wellington in the top 6% of all funds in its category for 15 year returns (longest period shown). Wellington also has below average risk. Morningstar analysts give it their highest Gold rating.

What did you find less than acceptable ?

Thank you and best wishes.
Taylor
Taylor, I lost interest in Wellington because a) it's an actively managed balanced fund with all the drawbacks of active management and b) because my own 2-fund portfolio's 15 year return is almost 1 percentage point higher (8.41% vs. 7.55%) with lower risk (st.dev. of 8.37% vs. 11.30%).
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High performance funds ?

Post by Taylor Larimore »

Taylor, I lost interest in Wellington because a) it's an actively managed balanced fund with all the drawbacks of active management and b) because my own 2-fund portfolio's 15 year return is almost 1 percentage point higher (8.41% vs. 7.55%) with lower risk (st.dev. of 8.37% vs. 11.30%).
Frans:

What are your 2-funds? They sound like winners!!

Are they in a taxable or tax-advantaged account?

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Lazy portfolios: no returns or risk information

Post by pkcrafter »

Taylor, I was going to follow up on Franz's reply about Wellington. I suspect Franz was only looking for a portfolio or fund suitable for him. He was not looking at the bigger picture. It explains a lot. Of course, the problem is everyone has their own idea of what their portfolio should look like, so no one can really provide the "best" portfolio and assume it's best for everyone. That's why there are many lazy portfolios. Different people came up with variations. They are all good and none best because investors will hit periods, sometimes extended periods, that do not perform as calculated.

The following explains my point about the long term.

It's interesting to see that Wellington has beaten the S&P 500 and small cap blend from 1982 through 2012
Start 9/30/1982- $10,000 in each

Total Cumulative Returns (rounded)
12/31/2012 -
S&P500 - 243,300
Wellington - 257,500
Sm Blnd - 155,500

Why did I start from 9/30/1982? Because it was at that point that Sm Blnd had a spike in returns--the kind that attracts investors.

Sm Blnd -

9/30/1982 - 10,000 start
6/30/1983 - 19,400 Spike Peak
Wellington - 13,300
S&P 500 - 14,300

investors would have bought into sm blnd during that spike, and then... From the peak to the end of 2012, Sm Blend upderperfomed Wellinton by more than 50%.
M* data.

The point of all this is we can get what we would call long periods of unexpected performance. However, when mathematicians are looking at long term data, they wouldn't consider using "only" 20 years. You can't get the big picture using only 20 years because of the wide variation that occurs.

Like any good mathematician, Franz wants data going back to 1926, but in the real world, investors do not live with these kind of time frames. A 20 year "anomaly" is more than half an investors accumulation or withdrawal phase. Not to mention that one anomaly is followed by another.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Frans
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Re: High performance funds ?

Post by Frans »

Taylor Larimore wrote:
Taylor, I lost interest in Wellington because a) it's an actively managed balanced fund with all the drawbacks of active management and b) because my own 2-fund portfolio's 15 year return is almost 1 percentage point higher (8.41% vs. 7.55%) with lower risk (st.dev. of 8.37% vs. 11.30%).
Frans:

What are your 2-funds? They sound like winners!!

Are they in a taxable or tax-advantaged account?

Thank you and best wishes.
Taylor
Taylor, the portfolio is #18, one out of many described here: https://drive.google.com/file/d/0ByZzqh ... sp=sharing
I have those in IRAs at Vanguard.
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Taylor Larimore
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Link doesn't work.

Post by Taylor Larimore »

Frans:

Your link did not work for me. Just name your two funds with ticker symbols.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
grayfox
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Re: Lazy portfolios: no returns or risk information

Post by grayfox »

Here is the mean return, standard deviation, annualized return, and Sharpe Ratio for the 25 lazy portfolios 1985-2013 from the Simba spreadsheet.

Code: Select all

     Average	StdDev	CAGR	Sharpe
P1	11.23%	11.49%	9.97%	0.64
P2	10.40%	9.20%	9.08%	0.71
P3	11.00%	14.56%	9.55%	0.49
P4	11.41%	15.32%	9.44%	0.49
P5	11.47%	15.36%	9.50%	0.49
P6	11.37%	14.51%	9.54%	0.52
P7	10.34%	11.58%	8.98%	0.56
P8	10.93%	14.05%	9.21%	0.50
P9	10.34%	11.58%	8.98%	0.56
P10	10.56%	12.98%	9.27%	0.51
P11	11.91%	14.52%	9.95%	0.55
P12	10.36%	10.77%	9.08%	0.60
P13	11.52%	11.92%	9.84%	0.64
P14	11.01%	12.28%	9.42%	0.58
P15	11.67%	12.25%	9.93%	0.64
P16	11.92%	16.89%	9.74%	0.48
P17	10.53%	12.84%	8.89%	0.52
P18	10.00%	9.70%	8.95%	0.63
P19	11.09%	13.89%	9.22%	0.52
P20	10.07%	10.94%	8.65%	0.57
P21	10.54%	11.16%	9.05%	0.60
P22	11.26%	11.60%	9.80%	0.64
P23	 8.20%	 5.62%	7.05%	0.77
P24	11.12%	11.64%	9.73%	0.62
P25	10.09%	8.29%	8.76%	0.75
The highest Sharpe slopes are P23 (0.77), P25 (0.75) and P2 (.71), so they had the most bang for the buck. Will they have the highest Sharpe slope for the next 20 or 30 years? They might.

Look at which they are: Harry Browne, Wellesley and Larry Swedroe. :beer

_______________________
Key:
Wellington P1
Wellesley P2
P3 P3
Taylor Larimore 3 Fund P4
Taylor Larimore 4 Fund P5
Rick Ferri Core Four P6
Bill Berstein No Brainer Cowards P7
Bill Berstein No Brainer P8
Bill Bernstein Smart Money P9
Dilbert's Portfolio P10
Ted Aronson Family Taxable P11
Bill Schultheis Coffee House P12
FundAdvice Ultimate Buy & Hold Portfolio P13
David Swenson Lazy Portfolio P14
David Swenson Yale Endowment P15
2nd Grader P16
Frank Armstrong Ideal Idx P17
Scott Burns Couch Portfolio P18
Scott Burns Margaritaville P19
Scott Burns Four Square P20
Scott Burns Five Fold P21
Scott Burns Six Ways from Sunday P22
Harry Browne Permanent P23
Larry Swedroe Simple Portfolio P24
Larry Swedroe Minimize FatTails Portfolio P25
grayfox
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Re: Lazy portfolios: no returns or risk information

Post by grayfox »

On page 8 google doc, Model Portfolio #18 says 50% SVS / 50% ITGB.
SVS = Small Value Stocks
ITGB = Intermediate-Term Government Bonds

I plugged these into Simba Spreadsheet using VISVX for SVS and VFITX for ITGB, 1985-2013

Code: Select all

       Average  StdDev  CAGR   Sharpe
MP18	10.51%   9.79%   9.23%   0.68
If we use Sharpe slope as the criteria, that is respectable, but came in 4th out of 25, behind P23 Harry Browne, P2 Wellesley and P25 Larry Swedroe Minimum Fat Tails.
Last edited by grayfox on Mon Mar 31, 2014 2:47 pm, edited 1 time in total.
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Frans
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Re: Link doesn't work.

Post by Frans »

Taylor Larimore wrote:Frans:

Your link did not work for me. Just name your two funds with ticker symbols.

Thank you and best wishes.
Taylor
Taylor, they are 50% Small-Cap Value Index Fund Admiral (VSIAX) and 50% Intermediate-Term Treasury Fund Admiral (VFIUX).
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

grayfox wrote:On page 8 google doc, Model Portfolio #18 says 50% SVS / 50% ITGB.
SVS = Small Value Stocks
ITGB = Intermediate-Term Government Bonds

I plugged these into Simba Spreadsheet using VISVX for SVS and VFITX for ITGB, 1985-2013

Code: Select all

       Average  StdDev  CAGR   Sharpe
MP18	10.51%   9.79%   9.23%   0.68
If we use Sharpe slope as the criteria, that is respectable, but came in 4th out of 25, behind P23 Harry Browne, P2 Wellesley and P25 Larry Swedroe Minimum Fat Tails.
grayfox, why in heaven's name does this spreadsheet state average returns? It's totally meaningless and misleading!
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Re: Lazy portfolios: no returns or risk information

Post by grayfox »

I believe that Simba's spreadsheet calculates two kinds of averages for returns. The first one labeled "Average" is arithmetic mean and the second labeled "CAGR" is geometric mean. By definition, Expected return = E[return] = arithmetic mean. Annualized return is geometric mean. Both are useful.

If you run Monte Carlo simulation, you would use expected return. And usually risk versus return plots show Expected return vs. standard deviation, and it's used for Sharpe slope. On the other hand, geometric mean tells you how much money you end up with.
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The Three Fund Portfolio has not specific allocations.

Post by Taylor Larimore »

Bogleheads:

There is no such thing as a "Taylor Larimore 3 Fund Portfolio (P4)" or a "Taylor Larimore 4 fund Portfolio (P5)" as shown on Simba's list.

The Three Fund Portfolio has no specific allocation. The three funds are allocated according to each investor's goals, time-frame, risk-tolerance and personal financial situation.

Best wishes.
Taylor
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A reasonable two fund portfolio.

Post by Taylor Larimore »

Taylor, they are 50% Small-Cap Value Index Fund Admiral (VSIAX) and 50% Intermediate-Term Treasury Fund Admiral (VFIUX).
Frans:

Thank you for your reply. In my opinion you might do a little better, but you could do a lot worse.

Best wishes.
Taylor
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Re: The Three Fund Portfolio has not specific allocations.

Post by Sunny Sarkar »

Taylor Larimore wrote:The Three Fund Portfolio has no specific allocation. The three funds are allocated according to each investor's goals, time-frame, risk-tolerance and personal financial situation.
Hi Taylor,

I was wondering whether you were ever tempted to add to the 3-fund portfolio a starting point AA like Jack's "age in bonds" or Bill's "a third of each" for beginners. How else could a beginner go about it?

Best wishes,
Sunny
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: A reasonable two fund portfolio.

Post by Frans »

Taylor Larimore wrote:
Taylor, they are 50% Small-Cap Value Index Fund Admiral (VSIAX) and 50% Intermediate-Term Treasury Fund Admiral (VFIUX).
Frans:

Thank you for your reply. In my opinion you might do a little better, but you could do a lot worse.

Best wishes.
Taylor
Taylor, how and why could I do a little better? Would you want to read my write-up that you couldn't see? I'm more than willing to email it to you.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

grayfox wrote:I believe that Simba's spreadsheet calculates two kinds of averages for returns. The first one labeled "Average" is arithmetic mean and the second labeled "CAGR" is geometric mean. By definition, Expected return = E[return] = arithmetic mean. Annualized return is geometric mean. Both are useful.

If you run Monte Carlo simulation, you would use expected return. And usually risk versus return plots show Expected return vs. standard deviation, and it's used for Sharpe slope. On the other hand, geometric mean tells you how much money you end up with.
grayfox, using the arithmetic or average return as the expected return and showing arithmetic or average return vs. risk is meaningless in my opinion.
Last edited by Frans on Mon Mar 31, 2014 4:32 pm, edited 1 time in total.
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The Sharpe Ratio.

Post by Taylor Larimore »

Bogleheads:

Personally, I place little weight on the "Sharpe ratio." Mr. Bogle explains in Common Sense on Mutual Funds:
Although it is essential to consider fund returns in the context of fund risks, the Sharpe ratio is a bit of a blunt instrument to measure risk-adjusted returns. Past returns don't predict future returns. And although relative risks among funds have a good deal of consistency over time, standard deviation is only a rough proxy for a concept as elusive as risk. Further, weighting risk as equal to return in importance in the formula is completely arbitrary.

Here is the reality of investing, as I see it: An extra percentage point of standard deviation is meaningless, but an extra percentage point of return is priceless. Large differences in risk are extremely important - there is a difference between a stock portfolio and a bond portfolio - but the expedient of weighing risk and return equally, in a simple formula, leaves much to be desired. In the final analysis, risk-adjusted returns, like beauty, may be in the eye of the beholder.
Best wishes.
Taylor
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Re: Lazy portfolios: no returns or risk information

Post by Taylor Larimore »

Taylor, how and why could I do a little better? Would you want to read my write-up that you couldn't see? I'm more than willing to email it to you.
Suggestions:

* Add Domestic Large Cap stocks--the most successful companies in the U.S.-- for diversification.

* Add International stocks--for diversification (think Japan).

* Add more than 50% stocks if you are under age 60--for higher expected return.

You may find these asset-class returns* interesting. They are for periods ending 6-30-00:

Style.......1 Yr...3 Yrs.....5 Yrs...10 Yrs...15 Yrs.

LCG......27.19...27.04...24.98...17.85...17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42..20.86....17.12....15.64
SCB......17.77...10.08...15.30...13.03.....12.02
SCV......3.29....3.55...12.58..11.80.....11.34

* Source: Morningstar

Why not put your "write-up" here? Many heads are better than one.

Best wishes.
Taylor
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

Taylor Larimore wrote:
Taylor, how and why could I do a little better? Would you want to read my write-up that you couldn't see? I'm more than willing to email it to you.
Suggestions:

* Add Domestic Large Cap stocks--the most successful companies in the U.S.-- for diversification.

* Add International stocks--for diversification (think Japan).

* Add more than 50% stocks if you are under age 60--for higher expected return.

You may find these asset-class returns* interesting. They are for periods ending 6-30-00:

Style.......1 Yr...3 Yrs.....5 Yrs...10 Yrs...15 Yrs.

LCG......27.19...27.04...24.98...17.85...17.15
LCB........8.93...17.29....20.35...15.60....15.23
LCV.......-5.21....8.74.....15.16..13.36....13.45

MCG.....57.24....31.09...24.81...18.14....16.82
MCB.....11.87....12.36...16.09...14.12....14.23
MCV.....-2.56......7.23...13.20...12.77....12.64

SCG......55.14...24.42..20.86....17.12....15.64
SCB......17.77...10.08...15.30...13.03.....12.02
SCV......3.29....3.55...12.58..11.80.....11.34

* Source: Morningstar

Why not put your "write-up" here? Many heads are better than one.

Best wishes.
Taylor
Taylor, you make recommendations without telling me how those would improve my return and risk in the long term. I did put my write-up here on the bogleheads forum with the title "Higher Returns at Lower Risk - please comment": https://drive.google.com/file/d/0ByZzqh ... sp=sharing
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Re: Lazy portfolios: no returns or risk information

Post by Taylor Larimore »

Taylor, you make recommendations without telling me how those would improve my return and risk in the long term.
Frans:

I gave you three suggestions to improve your expected return and expected risk and I also gave you my reasons.

It is the best I can do. I have no crystal ball.

I also went to some effort to supply figures showing that investors in Small Cap Value have endured very long periods of underperformance.

Best wishes.
Taylor
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Re: Lazy portfolios: no returns or risk information

Post by leonard »

Frans wrote:It seems to me that returns and risk information is lacking when lazy portfolios are discussed. The bogleheads wiki for instance doesn't say anything about past or to be expected performance, both in terms of returns or risk: http://www.bogleheads.org/wiki/Lazy_portfolios
I know the pitfalls of putting numbers on past and to be expected future performance, but discussing any portfolio without at least some data to indicate potential returns and risk parameters seems pointless to me.

Any comments?
Ok. I just took a second look at this string and specifically - Fran's responses.

Your OP said "return and risk" information is "lacking".

Yet, you go on through out the posting so show that you are able to calculate return and standard deviation of your own portfolio vs Wellington. You also indicate that you didn't like "average return" as misleading.

You obviously have access to lazy portfolio data (in order to calculate those standard deviations) and you obviously have opinions on the data and how to use it for calculation. All of this together would indicate there's plenty of data available on lazy portfolios to do all this.

So, is the information lacking? Or is there plenty enough available - since all this data and calculation has been done? Can't be both.
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Re: Lazy portfolios: no returns or risk information

Post by bogle2013 »

Frans -

Do you think it is possible that Small Cap Value will underperform the next 20 years like it has done in other periods? Or 30 years?
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Re: Benefit of past fund returns?

Post by dratkinson »

<multiple drafts>



The short answers.

Efficient Frontier. The Noble-recognized, BH-recommended investing literature suggests the efficient frontier lies near 70-60/30-40 (US/foreign), is time dependent (it varies over time), and can't be calculated until after the fact. This means data from the distant past (Garden of Eden apple crop production) can not predict it any better than current data (Brazilian coffee crop production). Any assertions otherwise must be proven... which will duly impress the Nobel committee... that the future can be predicted... and the market timed... without Efficient-Market-Hypothesis ramifications.

Lazy Portfolios. Lazy portfolio authors do enough to support their situation-dependent (age, available options,...) creations when they compare them against the (past 1-15 years) market---the only relevant gauge. It is optional if they reference any of the investing literature. Why? Because it is the sole responsibility of every investor to educate themselves. It is foolish for any new investor to accept any advice without first studying the literature; this is what everyone requesting a BH situational review is told---read the books, decide for yourself/situation. This requirement is not diminishing for lazy portfolio readers, nor does it obligate their authors more.

Highest risk-adjusted return. The recommended literature says the highest risk-adjusted return comes from owning the total market. This apparently-trivial solution was only possible after 115 years (1900: academic beginning of investing study, 1975: Bogle's Vanguard founding, 2007: BH forum's independent founding, to present) of ongoing work by many, so I am shocked to hear any forum reader suggest anyone is a lemming for following a thoroughly-researched, never-before-available investing option. If anyone is willing to accept more risk in an attempt to earn more return, then under the "many roads to Dublin" concept, they are free to do so. However, those choosing not to veer from the hard-won highest-risk-adjust-return option... are not lemmings!

Predicting the future (for OP). The best prediction of future conditions are current conditions. Of course, they will be wrong... too. See first point.

/r





Edit: Completeness. Clarity.
Last edited by dratkinson on Mon Mar 31, 2014 7:17 pm, edited 1 time in total.
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Re: The Three Fund Portfolio has not specific allocations.

Post by Taylor Larimore »

Sunny Sarkar wrote:
Taylor Larimore wrote:The Three Fund Portfolio has no specific allocation. The three funds are allocated according to each investor's goals, time-frame, risk-tolerance and personal financial situation.
Hi Taylor,

I was wondering whether you were ever tempted to add to the 3-fund portfolio a starting point AA like Jack's "age in bonds" or Bill's "a third of each" for beginners. How else could a beginner go about it?

Best wishes,
Sunny
Sunny:

In my original post, I included this starting point for beginners (and others):
Addendum:
* Use this link for an asset allocation that matches your personal situation.
* Place Total Bond Market in a tax-advantaged account.
* In taxable accounts (when tax-advantaged accounts are full) high-income investors should substitute a tax-exempt bond fund for Total Bond Market.
Best wishes.
Taylor
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Re: Lazy portfolios: no returns or risk information

Post by TimeRunner »

Without being any sort of economist, it just seems commonsense to weight the more recent past than look back to 20s,40s, even 60s. "The past is prologue", but the rate of change is exponential.

There's a certainty of outcome in the paper that is disquieting and rings my intuition alarm bell.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

Taylor Larimore wrote:
Taylor, you make recommendations without telling me how those would improve my return and risk in the long term.
Frans:

I gave you three suggestions to improve your expected return and expected risk and I also gave you my reasons.

It is the best I can do. I have no crystal ball.

I also went to some effort to supply figures showing that investors in Small Cap Value have endured very long periods of underperformance.

Best wishes.
Taylor
Taylor, I know that you gave your advise to help me and I appreciate that, I really do. Your suggestions make a lot of sense in broad, general terms, but it is my opinion that in my particular situation, with my portfolio based on a long-term analysis of 10 different asset classes, I wouldn't want to add large cap or international stocks. As for how much you should have in stocks depending on your age, I don't agree with those guidelines, mainly because they are kind of disassociated from the level of risk that is very personal and varies from person to person; again, good, broad, general starting points for people that don't have a good idea of how to go about investing. I always want to quantify the long-term effect that suggestions or ideas have and that's one reason I started this thread in the first place.

I totally agree that small cap value has underperformed over long stretches of time, like most asset classes. I take a long-term view (my analysis is based on more than 80 years of historic returns) and don't lose sleep over such characteristics of the investment world.

Thanks again, Frans.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

leonard wrote:
Frans wrote:It seems to me that returns and risk information is lacking when lazy portfolios are discussed. The bogleheads wiki for instance doesn't say anything about past or to be expected performance, both in terms of returns or risk: http://www.bogleheads.org/wiki/Lazy_portfolios
I know the pitfalls of putting numbers on past and to be expected future performance, but discussing any portfolio without at least some data to indicate potential returns and risk parameters seems pointless to me.

Any comments?
Ok. I just took a second look at this string and specifically - Fran's responses.

Your OP said "return and risk" information is "lacking".

Yet, you go on through out the posting so show that you are able to calculate return and standard deviation of your own portfolio vs Wellington. You also indicate that you didn't like "average return" as misleading.

You obviously have access to lazy portfolio data (in order to calculate those standard deviations) and you obviously have opinions on the data and how to use it for calculation. All of this together would indicate there's plenty of data available on lazy portfolios to do all this.

So, is the information lacking? Or is there plenty enough available - since all this data and calculation has been done? Can't be both.
leonard,

Yes, I calculate and show returns and risks of my suggested portfolios using a data set covering 10 asset classes between 1928 and 2011. I kind of expect others to do the same; indicate what the associated risks are and over what kind of period the analysis has been done for their suggested portfolios, but that information is either missing or very hard to find. I don't have access to other people's analysis. It has even been suggested to buy certain books to find that information, which in my opinion goes way too far. I feel that if you propose a portfolio, you need to tell the folks what data it is based on and what projected returns and risks are.
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

bogle2013 wrote:Frans -

Do you think it is possible that Small Cap Value will underperform the next 20 years like it has done in other periods? Or 30 years?
Bogle2013,

Anything is possible over any time period. I also believe that basing my analysis on a 80+ years of historic returns, not 10, 15 or 20 years, improves the confidence in projected future results, but... and you fill in any and all of the usual disclaimers.
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Re: Benefit of past fund returns?

Post by Frans »

dratkinson wrote:<multiple drafts>

The short answers.

Efficient Frontier. The Noble-recognized, BH-recommended investing literature suggests the efficient frontier lies near 70-60/30-40 (US/foreign), is time dependent (it varies over time), and can't be calculated until after the fact. This means data from the distant past (Garden of Eden apple crop production) can not predict it any better than current data (Brazilian coffee crop production). Any assertions otherwise must be proven... which will duly impress the Nobel committee... that the future can be predicted... and the market timed... without Efficient-Market-Hypothesis ramifications.

Lazy Portfolios. Lazy portfolio authors do enough to support their situation-dependent (age, available options,...) creations when they compare them against the (past 1-15 years) market---the only relevant gauge. It is optional if they reference any of the investing literature. Why? Because it is the sole responsibility of every investor to educate themselves. It is foolish for any new investor to accept any advice without first studying the literature; this is what everyone requesting a BH situational review is told---read the books, decide for yourself/situation. This requirement is not diminishing for lazy portfolio readers, nor does it obligate their authors more.

Highest risk-adjusted return. The recommended literature says the highest risk-adjusted return comes from owning the total market. This apparently-trivial solution was only possible after 115 years (1900: academic beginning of investing study, 1975: Bogle's Vanguard founding, 2007: BH forum's independent founding, to present) of ongoing work by many, so I am shocked to hear any forum reader suggest anyone is a lemming for following a thoroughly-researched, never-before-available investing option. If anyone is willing to accept more risk in an attempt to earn more return, then under the "many roads to Dublin" concept, they are free to do so. However, those choosing not to veer from the hard-won highest-risk-adjust-return option... are not lemmings!

Predicting the future (for OP). The best prediction of future conditions are current conditions. Of course, they will be wrong... too. See first point.

Edit: Completeness. Clarity.
dratkinson, I take the biggest exception to your assertion that a 1-15 year time frame to judge a portfolio is a relevant gauge, let alone the only relevant gauge. Furthermore, when you propose a certain portfolio it is totally up to the reader to evaluate it? You surely must be joking!
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Re: Lazy portfolios: no returns or risk information

Post by Frans »

TimeRunner wrote:Without being any sort of economist, it just seems commonsense to weight the more recent past than look back to 20s,40s, even 60s. "The past is prologue", but the rate of change is exponential.

There's a certainty of outcome in the paper that is disquieting and rings my intuition alarm bell.
TimeRunner,

With asset classes under- and over-performing over long periods of time (5, 10, 20 or more years) it appears to me that putting a heavy emphasis on the more recent past is a losers game.

I really do appreciate your concern about what you call the certainty of outcome. I kind of assumed that readers of my write-up would automatically apply the usual cautions and disclaimers. I'll add some comments to this effect when I update my write-up in the next month or so.
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Re: Lazy portfolios: no returns or risk information

Post by grayfox »

I think you need to look at the history of Modern Finance. The theory was developed in the 1950's and 1960's by Markowitz and guys like William Sharpe. The basic idea was Mean-Variance Optimization (MVO). You want to have portfolios on the Efficient Frontier (EF) -- portfolios with minimum variance at some return. That seems to be what the google doc is about.

At some point, maybe the late 1980s, PCs became widespread and everyone had access to MVO software. Wonderful! Now anyone can have an MV optimal portfolio. The only problem was, when people started actually using MVO's they got screwy results. When finding optimum portfolio weights for, say, the 500 stocks in the S&P 500 using past return data, the results would be something like 90% in one stock, 9% in a second stock, 1% in a third stock and 0% in the remaining 497 stocks. Highly concentrated portfolios.

When they looked at what was going on, researchers figured out that MVOs were actually Error Maximizers. You can find papers written about it. Just by the way the problem is defined, MVOs would heavily weight stocks with high return or low volatility. If one stock had just a smidge higher return than others, all the weight went in it even if it just improved return by just a smidge. To overcome these shorting comings, people would add constraints like max 10% in any single stock.

But the big problem was that the EF changed from period to period. So optimum weights for one period were completely different from period to period. The highest returning assets in the past period got all the weight. They found that they would do just as well or better by just giving equal weighting to each asset, or even just using random weights (monkey's throwing darts).

:idea: People have been down the MVO path before and mostly abandoned it decades ago. Today a few places are using something called Black–Litterman to try and overcome the weaknesses of MVO. But even this is kind of a cheat because you have to input your opinion about the market and your level of confidence in that opinion.

:!: It looks like the google doc MP18 is doing the same thing as MVO and comes up with the same kind of answer. All the stock portion is in just one asset class, SCV, because past statistics show it was the best. On the other hand, lazy portfolio like Coffeehouse decided that it was better to be agnostic and just put 10% in each asset class, rather than betting the farm on one asset class.

:arrow: To summarize, they came up with MVO theory, but found it did not work so well in practice. Great in theory; in practice, not so great.
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Re: Lazy portfolios: no returns or risk information

Post by in_reality »

Frans wrote:
I totally agree that small cap value has underperformed over long stretches of time, like most asset classes. I take a long-term view (my analysis is based on more than 80 years of historic returns) and don't lose sleep over such characteristics of the investment world.
https://drive.google.com/file/d/0ByZzqhAlLZJxWXVia3BmM1d5TFU/edit?usp=sharing wrote:While nobody can predict with certainty that small value stocks will continue to outperform the other stock classes, chances are that they will.


I don't believe that 80 years of historic returns can predict whether the small cap value will continue. I don't see taking a long-term view as being particularly relevant.

You can use data to illustrate what has happened in the past, but unless you know why it occurred, I think you have no chance of predicting the future.

What we know from research about the small cap premium is that it occurs in down markets, when less risky assets are preferred and prices become fuzzy (valuation separate from fundamentals). So we know there exist certain market conditions that are conducive to or drive the premium. Now since you state "chances are that small value stocks will continue to outperform other stock classes", I want to know how you know QE, which is by most accounts unprecedented, will have no impact on the market conditions in which the small value premium thrives.

The best account for HML I have seen says that when things get bad, small value appears riskier than usual, and this is why investors demand a premium. Actually their research shows that HML is a proxy for asset liquidity. High book-to-market firms (value) are illiquid because of their inefficiency. This means they have a lot of assets in place to generate profits, but those assets are for a dedicated purpose and in a down market especially may not fetch a good price if no-one else can make use of them and are not likely to try in the current environment. Growth by contrast have fewer assets that would need to be liquidated in case they go under. Again, this particular dynamic occurs in really down markets when it's tough to predict what companies will survive, how much ones that go under could fetch, and investors have a desire not to undertake more risk.

If, and this is a big assumption, QE becomes an ongoing practice -- meaning investors know the Fed. may pull it out of the hat in downturns -- then it would seem to follow that the increased capital liquidity may affect how willing investors are to hold small value in downturns. Perhaps QE can't provide the liquidity that small companies would need anyway -- I am not an economist who analyzes these things.

What I know is:
1) QE is unprecedented
2) the small value premium occurs during the type of market that QE is targeted to
3) there seems to be plausible research suggesting that the small value premium is a risk story in certain types of markets that accounts for a heightened risk of a companies value dropping below it's fundamentals due to the illiquidity of assets.

Whether or not this analysis is right on the money or not, I can't say for certain. What I can say, is that using historical data is not particularly reassuring to me that I should really overweight small value and expect to have the same returns with lower risk (by also loading up on safe long term bonds).

I don't think you actually know enough to say chances are the small value premium will continue. You don't really have an explanation for it, do you? Just to say that it has always done so is not enough in my book. Yeah the sun is in the sky but unless you understand it, you are liable to get snookered when there is a solar eclipse and someone is saying I made the sun disappear.

So yeah I do overweight small value myself, and I also pay heed to J. Bogle's view about doing so too much puts you at risk of serious market underperformance (especially if it becomes apparent that it is not really outperforming and the performance chasers bail out of the asset).
Last edited by in_reality on Tue Apr 01, 2014 9:00 am, edited 2 times in total.
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