Category: Asset allocation

There are various models attempting to simulate the history of small/value factors for US investors, before corresponding funds and indices actually existed. Some of those models suffer from significant deficiencies (e.g. not matching the reality of modern index funds), making difficult to calibrate expectations about real life funds. Furthermore, one might ponder if we read too much in the history of one single ‘in-sample’ market (e.g. the US).

Fortunately, we now have 25 years of market history across 16 developed countries thanks to MSCI indices. This should provide a rich source of ‘out-of-sample real-life’ information, which this article will analyze.

This article is the third part of a study looking at global and domestic investing from the perspective of local investors.
In Part 1 and Part 2, we took the position of a local investor in one of 16 countries of interest and we explored opposite positions of either investing 100% global or 100% domestic. In Part 2, it became clear that global bonds tend to hurt local investors, while global stocks definitely helped for most scenarios. It is now time to try a middle ground and study portfolios mixing global and domestic stock investments. We will notably look at the mitigation this could bring to the countries having fared the worst, but also consequences for countries having fared better. Of course, it is easy to look at such numbers in hindsight and draw hasty conclusions, so let’s keep in mind that nobody could have predicted winners and losers ahead of time.

Many North American investors tend to look carefully at historical returns in the US and in Canada and draw various conclusions. Occasionally, some references are made to Japan and the UK, but few people look any further. The world changes though. The UK was undoubtedly the world economic leader at the end of the 19th century, while the US clearly dominates nowadays. Japan was on a roll in the 80s, with a bigger market capitalization than the US at some point, and yet badly faltered since then. The world changes in ways we cannot predict and it would be naive to assume that a few decades in the future, the situation will be similar to today’s environment. One thing we can do to get some perspective is to analyze what happened in a larger sample of economies.

This article focuses on the historical returns from 16 developed countries over the past 50 years, looking from the perspective of a local investor and assuming a strong home country bias to begin with (i.e. solely using domestic stocks and domestic bonds). We will look at more diversified portfolios mixing domestic and global investments in Part 3.

Bogleheads know the power of diversification. And yet many such investors (including John Bogle himself!) are reluctant to diversify beyond domestic investments.

This raises an interesting question. Could one simply invest in the world, using global stocks and global bonds? And if this proves unsatisfying, is there a proper middle ground between domestic and global allocations?

This article is the first part of a study looking at global and domestic investing from the perspective of local investors.

This article provides updated Telltale charts, including returns up to 2019. It analyzes the relative past performance of value and size factors compared to the total US market, as well as studying international and real estate market segments.
Using Telltale charts can be very informative, truly ‘telling the tale’ of what happened over time to portfolio trajectories, illustrating return to the mean properties or lack thereof.

In the past decade, a specialized type of fund gained increased popularity, funds implementing leverage over a given index. A previous article explored funds leveraging the S&P 500 index. This article will focus on a portfolio-level approach mixing stocks and …

Leveraged Portfolios – Quantitative Analysis Read More »

A previous blog article explored income-centric risk and reward definitions, which could be viewed as more suitable to retirement than the usual academic definitions. Corresponding quantitative analysis of some simple US portfolios was provided. A follow-up article explored the perspective of retirees located outside the US.
This article extends this investigation by exploring in more technical depth the tie-in between Safe Withdrawal Rates (SWR) and variable withdrawal methods, through the use of a clever metric named Withdrawal Efficiency Rate (WER). 

A previous blog article explored income-centric risk and reward definitions, more suitable to retirement than the usual academic definitions. Corresponding quantitative analysis of some simple US portfolios was provided.
This article extends this investigation by taking the perspective of investors located in various developed countries (a form of ‘out of sample’ testing).

Financial literature from academics has been strongly influenced by the ground-breaking work of Harry Markowitz and William Sharpe, and the concept of risk & reward for a multi-asset portfolio. Although brilliantly innovative, this work is often misused, equating risk with (portfolio) volatility and reward with (portfolio) returns, and applying such principles without acknowledging the fundamental differences between investors and speculators, or accumulators and retirees.
This article will explore risk and reward from a perspective more suitable to retirement, and perform corresponding quantitative analysis of some simple portfolios.

This article provides updated Telltale charts, including 2017 returns. It focuses on the relative past performance of value and size factors compared to the total US market, as well as studying international and real estate funds. 
Using Telltale charts can be very informative, truly ‘telling the tale’ of what happened over time to portfolio trajectories, illustrating return to the mean properties, or lack thereof.