Geoff Considine

Testing Forward Looking Asset Allocation

SmartETF:

As far as I can see, ASENX does nothing special--the holdings show it has 60% or so in bonds and a bit of cash. Compare it to STLBX which is a target date fund with about 60% in bonds and cash and they track perfectly:

finance.yahoo.com/q/bc...

Please tell me/us what is special about this? Is this proof of a superior model?

Testing Forward Looking Asset Allocation

To SmartETF:

It has been suggested to me that you are a representative of the firm Smart Portfolios LLC. Please confirm or deny this. Further, if you are, despite your fantastic claims, I note that the mutual fund based on your models is not performing especially well (ASENX) given that it is 60% fixed income. If you are not from this firm, I apologize for the mixup. If you are touting the models from this firm, theb track record of ASENX will speak for itself and perhaps confirm your claims in some way.

Testing Forward Looking Asset Allocation

SmartETF:

As always, we have a post from somone with no public analysis making extravagant claims. If you are credible, you need to show some meaningful analysis aside from diatribes attacking other peoples' articles. Please--give us some links to evidence that your approach works. Even Mandelbrot says that his approach is not ready for application. In all your posts, you make tremendous claims, but where is the evidence? You have provided none. Your comments do not address mine--they are just your standard diatribe.

Tactical Asset Allocation, Part II

Oleg:

QPP uses three years of data to initialize the model as the baseline input--but projections have been extensively tested out of sample over decades. Black Swans may exist that defy the model---no one did well with 9/11 or 1987 crash---fair points. I have written about testing for extreme tails in a range of articles if you are interested.

Tactical Asset Allocation, Part I

Mynion:

Okay--here's the argument: Volatility (up or down) represents the markets uncertainty as to how to value the future earnings stream of a company--this uncertainty is a measure of risk. An investment with very high skewness (asymmetry between upside and downside) would have important implications but realized volatility is a measure uncertainty and the magnitude of changes in opinion in the overall market. Frankly, I have nothing against modeling skewness but every increase in statistical complexity brings its own challenges. Estimating skewness is harder than estimating variance because skew is a cubed statistic...a few data points can easily sway the stats. I do lean towards the simplest possible models--you are correct--largely because additional parameters lead to their own issues.

Geoff

Tactical Asset Allocation, Part I

To phdinsuntanning:

If you can time the direction of the market well enough to consistently be short when the market is going down (and vice versa), you don't need to worry about things like SAA, TAA, or risk management--you will make such large returns that you will own a large investment bank in no time at all. My writing is for those of us who lack your powers.

Risk Management and Concentrated Positions

Flav:

I profiled a couple of homebuilders back in March:

seekingalpha.com/artic...

Ouch!! I have not run them recently.

Geoff

Is There Good News in This Market?

Larry:

Bravo! Amidst all the fear that the sky is falling, it is worth looking at the longer landscape of investing. Investing is risky--and it is precisely the ability to bear that risk that equity investors are paid for! If the markets couldn't drop severely, there would be no equity risk premium. We never know what the next crisis will be, but there will always be a next crisis and it will always be something else--some other confluence of events.

Geoff

A Flight to Safety, But What's Safe Now?

One thing I find odd is just how risk averse people are when risk shows up. Conservative estimates put the long-term standard deviation of annual return on S&P500 at 15% and then say 8% nominal expected return. 2-standard deviation events happen--and that would be an annual return of -22% (8%-2*15%). Why do people assume the entire system is going donw the tubes? I do not believe that this is a black swan--though I may yet be proved wrong.

The Nature of Risk

Flav: the chart of mine you asked about is from the earlier article I wrote on this topic--and there is a link to it right below the chart. The calculations come directly out of QPP's forward projections. The only inputs are historical price data--no credit ratings or fundamentals, though I showed earlier that QPP's projected tails map quite nicely to Moody's market implied ratings that are derived from Credit Default Swaps.

QPP suggests that a portfolio of all individual stocks--even a fairly small number (<20) can provide a well-diversified portfolio that is near the efficient frontier--though commodities almost always improve the portfolio somewhat. In fact, a lot of my point with the first article on this topic was to show that a concentrated portfolio of stocks can be as well diversified and no more risky than many mutual funds that contain hundreds of stocks. BUT you must choose those stocks with care, understanding and being able to estimate their default risks.

The Nature of Risk

Jmorace:

Nothing in my analysis assumes an infinite holding period--where did you infer that?

The Nature of Risk

Hi all:

To a large extent, the comments suggest that the authors have never encountered the relationship between risk, volatility, implied volatility, credit default swaps, and the academic standard for models of corporate failure (like Z scores and their later evolution). I understand that this is new stuff for many (most non institutional) investors. I am a bit surprised by the vitriole but not entirely. In many ways, the comments suggest that the authors have a knee jerk reaction that has nothing to do with the article. One guy is down on Beta---did I mention Beta? nope. Also, there is extensive data on implied volatility being a solid predictor--having real information content--this is not just driving by looking out the back window, as some have implied.

Good luck.

Energy Sell-Off Overdone

Well, one reason for this decline may be that a range of institutional investors have been dumping energy commodities in fear that congress will ban their investments here. There is also probably a tactical issue here---a lot of people smelled a sell-off and wanted to be first out the door. As commodities drop, people sell off energy firms. It is always good to remember that energy firms tend to be high volatility--comes with the territory. Clearly the rate of gains in energy commodities was too high to be sustainable, but the long-term narrative for sustained high demand for energy in the developing world is hard to dicsount.

More Thoughts on Mohamed El-Erian's 'When Markets Collide'

jmorace:

Thanks for the comments--and it does not hurt my feeling when thoughtful people disagree with me. Please understand: I am not saying that the time is nigh to invest heavily for those with cash--it is beyond my abilities to 'time' this market contraction. That said, this decline is not so bad for those with truly well diversified portfolios. The S&P500 is down a lot, but it has not been hard to build a diversified portfolio that is in far better shape. The decline looks bad for people whith high Beta portfolios and those who have chased the trends--but they were simply taking on extra risk because of a recent low volatility environment (a la Minsky). This has also allowed a lot of hedge funds to lever up to silly levels.

Geoff

More Thoughts on Mohamed El-Erian's 'When Markets Collide'

Guys:

Great comments all! There are a number of good points here. Let's start with the fact that when Mr. El-Erian is talking about an allocation to U.S. equities, for example, its a safe bet he does not mean the S&P500--he states very clearly that he is not a fan of market cap weighting. Portfolio theory also supports specific sector allocations that do not match market cap weights.

Now, I like the liquidity argument--its a good one. If liquidity is extracted from the market, asset prices will fall---people are taking money out to stash it under their mattresses and the banks are making it harder for leveraged speculators to speculate. This is volatility. This makes assets cheap for investors with available cash and gives them an incentive to inject liquidity back in...there are contractions and periods of deflation and there is no reason to believe they cannot occur---but none of these ideas is inconsistent with a view that markets are, long-term weighing machines. We may see a long-term period of contraction--I for one will not predict one way or the other. If one can make this case, it leads to certain actions. QPP puts a probability on long-term poor performance of even diversified portfolios--see my article on The Lost Decade. Thats as far as QPP goes.