"Predicting the Past"
Taylor Larimore 
04-01-2003, 7:27 PM | Post #82343 |  62 Replies
Hi Diehards:
While browsing the Investing During Retirement forum, I came across, what I think, is an excellent Reply by Ozark in that forum's Conversation 1504. Ozark was responding to a linked article recommending two new Ratio's (Sortino and Upside Potential) as being better than the Sharpe Ratio. Because Ozark reflects my own thoughts better than I can express them myself, I have copied his condensed Reply for your consideration:

Title: Predicting The Past:

If you feel you can improve your portfolio's asset allocation by running the portfolio through various computer programs, measuring and grading various risk/reward relationships, feel free. It's okay with me. Honest. For myself, I'm not interested.

I'm also not interested in running reams of data through a computer program in order to discover how much I can withdraw yearly from my portfolio and never go broke.

Without having studied it, I'm willing to assume the Risk Grades deal is similar to the well known Efficient Frontier concept: Invest in a mix of assets that will give the best return for the least risk.

Wonderful. The problem in execution is this; both these approaches would seem to be limited to looking at PAST risk/return relationships, in order to predict FUTURE such relationships.

This approach hasn't worked very well and it never will.

There's lots of stuff we can learn by studying the past. One thing we can't learn, though, is how much the future will resemble the past.

There really is an Efficient Frontier. There really is a withdrawal rate that will allow my wife and I to spend all our money during our life times, but never go broke.

But these things are unknown and unknowable, going forward. Such things are only knowable looking backward.

Given that such things are only knowable looking backward, academics with more letters after their names than I have money in the bank, have spent unconscionable amounts of time goobering through the past. They thus invented Modern Portfolio Theory---Beta, Alpha, R-Squared, and the crowning achievement, Sharpe Ratio. These accomplishments were celebrated and awards were given. Yes.

And then...a funny thing happened on the way to the bank. These numbers turned out to have little or no predictive value, regarding returns. And since they couldn't predict returns, they also failed to predict risk/return ratios.

Joining in the fun, M* invented their first Star Rating system, a system that graded...yep...risk- adjusted, past performance.

I wish I had 10 bucks for every post I've read where the poster said, essentially, "I have a balanced portfolio, made up entirely of 4 and 5 star funds." Too late, these jokers discovered what M* eventually discovered; past risk-adjusted performance doesn't predict future risk-adjusted performance.

I don't want to discover the Sharpe Ratio of my portfolio. I don't want to discover its Beta. I don't want to discover its Risk Grade. I have absolutely no confidence that adjusting the portfolio so that these numbers become more favorable will improve future risk/reward.

If others do want to do that, that's okay with me. I seriously doubt, though, that many successful mutual fund managers select securities in that manner. If any do, or if any money managers set their asset allocations in that manner, I'd be interested in their long-term results---results over periods of, say, 10 years, or more.

In short, computers are wonderous tools, but that's all they are. Every computer on Earth, all linked up and working 24/7, from now on, won't tell me my surviable withdrawal rate. Neither will they tell me what asset allocation would give me the best risk/reward ratio.

In my opinion, these things can't be calculated. We have to forge ahead without knowing these things. Deal with it."

Thank you Mr. Ozark.

Best wishes.
Taylor

Originally posted in thread: 26652
62 Replies
Thanks Bill
04-10-2003, 2:51 PM | Post #1428883
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for answering my questions. It will be interesting to follow your progress going forward. As we are all aware investing is a gamble no matter what method is used. Virtually every scheme, including buy and hold, is based on utilizing statistics of the past to estimate the probabilities for the future.
Lets just hope that reversion to the mean does not deviate to far during one's lifetime :-).

aurel

Originally posted in thread: 26652
I Agree Taylor
04-10-2003, 12:39 PM | Post #1428836
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Hi Taylor,

All methods uses past data to predict the future. This is not unique to investing, since one has to make forecasting models from past data to come up with a reasonable forecast of the future such as in marketing. Any tool must be constantly updated and re-evaluated in order to keep the data as current as possible and to generate more accurate forecasts.

As I stated in my last posting, if I didn't use a MVO, I would just have two funds (Total Stock Market Index and Total Bond Market Index) and allocate my equity portfolio by subtracting my age from 100 and the rest would be in the fixed income fund. I would only have to change my allocation by 1% per year, optimize by rebalancing twice per year and let things go as they may.

I do understand the limitations of any method, but I have stated that I have the ability to update and assess my portfolio on a daily basis without having to pay transaction costs. I just provided my data to illustrate a different method and with actual results rather than the normal banter a posting like this would get from people who claim to know more without showing their methods in a transparent way. I prefer to expose my method to scrutiny and as you are aware I have no problems discussing the weaknesses of my methods and any mistakes I made along the way. If someone can benefit from my experiences, then these discussion boards have served their purpose.

When I am finished backfilling each VG fund data to their inception dates, maybe with your help we could come up with different strategies to illustrate the the different methods such as simple indexing, different asset allocation models, etc. I don't have an axe to grind, therefore it might be an interesting exercise. I don't have any problem doing the legwork and seeing what develops under different scenarios. Hopefully we could put some tangible results along with fund names that may help other investors.

I do agree that the past provides no guarantees, but it can give one a reasonable expectation of the future. My method requires diligence and an understanding of the underlying data, which is not for everyone.

Best Regards,

Bill

Originally posted in thread: 26652
Aurel
04-10-2003, 10:46 AM | Post #1428791
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Aurel,

You are correct that if Solver could handle all the calculations for the VG funds, I would just run one MVO. The number of calculations in the Covariance matrix is equal to the the total number of funds squared. Thus 70 funds would equal the sum of 4900 Covariance calculations that would then have to feed the variance matrix (i.e., the sum of another 4900 calculations). While this is going on, Solver would have to test each combination of funds to see what is the best portfolio solution. Adding any other parameters such has increasing the risk level of the portfolio (i.e., increasing the standard deviation of the portfolio) or assigning asset allocations would cause Solver to sometimes give incorrect results.

I understand your question about why there aren't more selections within each group so I will give some of my own observations:

INTERNATIONAL FUNDS:
VHGEX is the only fund with an average expected return that is positive and greater than the risk free rate of VG Prime Money Money Market. The other funds in the International category (i.e., VEURX, VWIGX, VTRIX, VEIEX, VPACX, VGTSX) have an expected monthly return that is negative. VTMGX and VDMIX do not have five years of data yet. Any fund that does not have an average rate of return higher than the risk free rate would not be selected since the investor is currently not being compensated for the risk they are taking.

AGGRESSIVE GROWTH FUNDS:
The following funds were omitted because they require a minimum initial investment of $25,000 (i.e., VGHCX, VHCOX). VGPMX is currently closed to new investors. VISGX, VISVX, VIMSX, VCVLX, VTMSX do not have five years of data.

Looking at the remaining Aggressive Funds we see the following results based on trailing 60-month data:

Ticker Avg Return StdDev
VGENX   0.55%     7.00%
VEXPX   0.31%     7.65%
VGEQX  -0.16%     8.40%
NAESX  -0.07%     6.81%


Of the final four funds that are left in this category, only VGENX and VEXPX have positive expected returns. The MVO does select a portion of VEXPX as a counter to VGENX. The result is that the overall expected return of the portfolio is 98% of VGENX (i.e., 0.54%), but the standard deviation of the portfolio is 6.88%, which is less than either of the two funds.

You are also correct that if I had more than say 12-13 funds, I would drill down until I had a "final" MVO with less than 12-13 funds. I do that with a MVO that I run on the DOW 30, where I have three MVO's with ten companies in each one and a cumulative MVO that includes the funds that come from the subset MVOs.

For example, if one were to use an asset allocation model, they could have separate MVO's based on asset class (i.e., Large Cap, Small Cap, etc.)and not just the investment style that VG uses. The possibilities are only limited to the parameters you set and making sure that you understand the limitations of Solver.

I hope I answered your questions satisfactorily.

Bill

Originally posted in thread: 26652
Getting clearer Bill
04-09-2003, 7:17 PM | Post #1428625
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Thanks for your response. I realize my questions may have been unclear but I was confused on your sequence of events. I now realize that you had to do subset MVO's on each asset class due to Excel Solver limitations. Assuming that was not the case you could have done 1 MVO on the whole universe of funds.
The only other question I have is it appears the style MVO's selected just 1-3 funds to cover 100% of the allocation to each style. I would have thought there would have been more of a distribution since there are 6 or more funds in each style. Unless in your case it so happens that the sum of all winners in all categories turned out to be just 13 funds covering 100% in each category.. Assuming your winners were greater than 12-13, say 18 what would you have done, split the winners and run a couple more MVO's to reduce the results to a manageable size? Thanks again for your responses.

aurel

Originally posted in thread: 26652
Aurel
04-09-2003, 1:03 PM | Post #1428414
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Aurel,

My methodology for selecting the VG funds in those posting through the use of a MVO is as follows:

1. I have a MVO that runs on each investment style as defined by VG (e.g., Aggressive, Growth, Bond, etc.) on their quarterly newsletters that they send to us. The percentage of each investment style portfolio will equal 100%. Therefore, if one were allocating say 20% of their asset allocation to Aggressive Funds using the MVO, they would allocate approximately 19% to VGENX and 1% to VEXPX. If you look at the 2/28/2003 and 3/31/2003 Aggressive Funds selections you will see that the same two funds were selected with similar percentage allocations.
2. The cumulative portfolio includes all the funds that were selected in their respective investment style (excluding money market funds) and combines them into another MVO.
3. I don't understand what you mean by the fact that the March portfolio implies a sector allocation. With the exception of the money market funds, the same funds are selected in March (#26677) in February (#26319), with slight variations in their percentages.
4. The MVO is running on the total returns of the individual funds and not their underlying asset classes. One could modify the MVO to that if that is what you were trying to do.
5. The MVO looks for the most efficient frontier based on the data that is inputted. Since I am using a fund-based MVO, it will be selecting individual funds within their investment style and the cumulative portfolio will select among the funds that were the "winners" in their respective investment style category. The categories are purely to make sure I don't forget a VG fund and to get around the inefficiencies of the Solver tool in EXCEL.

The strength of the MVO is that one can learn how the underlying investments within a portfolio interact. Its only limitations are what an investor is trying to do. I do not have as much experience as many in this forum have, but I am willing to exchange my own personal investing experiences (good or bad) and put my ideas out there for intelligent discussion. Again, the MVO is a good learning tool and I have the ability to maximize its strengths, but unfortunately there is no silver bullet out there.

I hope I have answered your questions.

Bill

Originally posted in thread: 26652
Bill - Please clarify a few questions
04-09-2003, 9:41 AM | Post #1428328
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Bill

I may have missed the answers to the following
questions on previous post. Thanks for any repeats.

1. On posts you #26319 & 26667 you posted a list of
funds and percentages. How did you select the funds
in each category and their percentages? I would have
thought that you would have had to MVO the complete
universe of Vanguard funds using your initial 6 point
criteria filter. Then the sum of all funds would add
up to 100 percent if you do not invest based on
classical sectors such as stocks, bonds,etc.

2. How did you determine/select your Cumulative
portfolio from your selected universe since it
implies a sector allocation ?

3. Your March portfolio also implies a sector
allocation. This seems contrary to what one would
expect if using MVO since it seems all sectors were
represented again. Would am I missing?

By the way I share your interest in MVO and feel it
does have relevancy in optimizing a portfolio. I also
appreciate your taking the time to share your ideas
and responses. It is people like you that make this
such a great resource. Thanks again for your time,
patience, and knowledge.

aurel

Originally posted in thread: 26652
Taylor
04-08-2003, 11:20 PM | Post #1428282
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Hi Taylor,
Again, I thank you for your insight and comments. My rational for stating that I look at funds on a risk to reward basis rather than asset classes is that I am not really buying an asset class such as an individual bond. This month I noticed that according to M* my "Core Bond Fund", which is classified as an intermediate-term bond fund currently has 10% of its holdings in 24 equity issues. Another fund in my plan is Fidelity Contrafund which is defined a large cap growth fund, but it has a substantial stake in mid-cap and foreign stocks, and has a beta approximtely half that of the S&P 500. Thus with these focus shifts, I feel I am better served by looking at the risk to return of the fund rather than the underlying asset classes, since they are rather fluid.

If I was an indexer, then I would probably optimize based on asset classes provided I was able to select funds that were true to their asset class. Many of my small cap funds have 10% in cash, which again makes selecting by asset class a futile exercise.

The shifts in the MVO are subtle and not some knee-jerk reactions since I have the combination of long-term data (i.e., trailing 60-months of data) along with current information as of the last trading day. I know that Rick Ferri has used MVO's on a few of his postings, which he bases on 20-25 years of data by asset class. In Willliam Bernstein's book "The Intelligent Asset Allocator", he states that one would need 20 to 30 years of data to be able to see the risk to return of an investment, but that only 5 to 10 years of monthly data would provide the same knowledge.

Since bonds are the rock solid portion (usually steady returns with lower volatility)of any diversified portfolio and equity funds are more speculative portion of the portfolio, I would doubt that an MVO would not have a substantial portion of its investments in fixed income securities. Now if bonds were to fall by 50% like equities it might get close, but then again, the MVO would be moving toward the new efficient frontier (towards the asset class or fund that is rising while bonds are falling). I assume we aren't talking about a 50% collapse in the bond market overnight. I have even had the opportunity to see all my funds capitulate to a level below (i.e., in 7/2002) the expected rate of a GIC.

The type of fixed income secutities (i.e., short-term versus long-term bonds) selected by the MVO would change based on the interest rate environment at the time and/or the performance of the funds relative to the other investment options in the portfolio. If you wish to substitute asset class for fund that is fine with me, just that I am buying a fund and not an asset class. That is why I don't concern myself with categories since they are always changing (i.e., was is value becomes growth and vice-versa). I don't look at asset classes since I really am not buying the underlying asset class in my plan.

I understand that if one were to use a simple index model portfolio (maybe 4-5 funds) then one may be able to actually buy the underlying asset class.

Thank you for your warning about any potential bumpy roads, but I do run my MVO on a daily basis, therefore, I am up to date with current market conditions for my particular funds.

Best regards,

Bill

Originally posted in thread: 26652
Menon
04-08-2003, 10:18 PM | Post #1428268
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Thanks for the confidence, but like all of the investors in this forum, I am just trying to make sure I get to Dublin. According to financialengines.com I am ahead of schedule (even with my current conservative allocation), but we all know that investing can be a cruel art and/or science.

The purpose of my postings was to add another perspective that was based on my own actual experiences without the usual bantering about which method is best. In my opinion, all the methods expressed here have excellent data to support their methodologies. I fortunately have some advantages that make using my method effective than many may not have, such as no transaction fees and the ability to be my own portfolio manager on a daily basis.

While I am able to articulate my own opinions, I am also humble enough to understand the opinions and reasons of others, some who have much more experience than I do. This forum is where we share our experiences and ideas. I never try to convince anyone of my own thoughts.

Bill

Originally posted in thread: 26652
Bill
04-08-2003, 6:21 PM | Post #1428159
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You are almost diehard like in principles. None of us here are alike matter of fact, and follow strategies based on individual needs, yet agree on some common things.

You mentioned eliminating emotions from decisions, keeping costs low, following a set plan, not worrying about benchmarks, and what the market does tomorrow. We agree on those parts of investing that matters most. Implementation is almost irrelevent. Reading your posts it is evident that you know what you are talking about, and has clear logical reasoning.

- Menon.

Originally posted in thread: 26652
Life Strategy Income
04-08-2003, 5:16 PM | Post #1428129
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Roger,

The key word in my posting describing my current asset allocation was the word "current". As the market conditions change and the performance results of my funds change, so will the underlying fund allocation. I did state in a prior posting that I use fund specific data rather than asset allocation models, therefore my reference to my asset allocation was just to answer a question posted by another contributor. Concerning the issue of benchmarks, I have clearly stated that I am not one that compares my results to a prescribed benchmark, and that I agree with William Bernstein's assessment of benchmarks. There is no solace in saying I only lost 20%, but my benchmark lost 30%. Our purpose is to make money not look at our results on a relative basis.

Life Strategy Income is an excellent choice (on a risk-adjusted basis) in the current low-interest rate environment and I assume that its asset allocation fits your particular investment needs. I have a posting where LifeStrategy Income is one of the balanced funds that my VG MVO selects (the other is VWINX). If interest rates rise, then the MVO will move to another fund over time since a risk-free rate is one of the key components of a MVO along with the average rate of return for a fund and its standard deviation.

LifeStrategy Income is not a good comparison since my 401k Plan does not have any VG funds and my fund allocation is based on the performance of the underlying funds. It should also be noted that in 2001-2002, my plan did not have an Intermediate-Term Bond Fund, which would have meant that I would have made positive returns in both periods. I did use the MVO to help my plan administrator select MCBDX, which is a good intermediate-term bond fund, with three year average returns in excess of 8%.

If you look at my data, you will see a large loss in 7/2002, which coincided with the first testing of the market lows. It also was the time period when all of the funds in my 401k Plan capitulated below the risk free rate. My only fixed income option in 2002 was a Multi-sector bond fund (OSIYX), which had a five year annualized return of less than 4% through 2002. My GIC was paying a higher rate and it had no price fluctuations.

Again, for me creating a MVO is easy since I am familar with the underlying data and I set it up as an EXCEL database where each fund resides on a separate worksheet that feeds the MVO. All I have to do is input the new prices and run the MVO using Solver. We are talking about inputting 15 close prices, then hitting the Solver button. All the calculations are automated. Within fifteeen minutes, I have the MVO completed and my selections confirmed at my Plan's website.

I hope I answered your questions.

Bill

Originally posted in thread: 26652
Thanks Menon
04-08-2003, 4:17 PM | Post #1428099
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You are correct that it can be time consuming, especially if one is not familiar with the data and how to look at multiple sites to confirm its accuracy. The backfilling of old data is the hardest exercise since most of the free data information sites have their particular weaknesses.

For example, Yahoo does not show distributions on bond funds and if you export their prices on an EXCEL spreadsheet, they do not allow you to export the historical closing prices, just the adjusted closing prices. I prefer to use as reported data since I do not know if Yahoo adjusted the NAV's for all distributions. Since I am using monthly total returns, I do not need to calculate an adjusted NAV. Adjusted NAV's are good if you want to calculate annualized returns for display purposes.

On a going forward basis, it is easy especially for fund companies like VG, where the data is readily accessible. I have mined data from other fund company websites such as Oppenheimer, Fidelity, Pimco, Oakmark, Fremont, etc, and VG has the best data by far.

The key to investing is to set a plan that eliminates emotional decisions and then stick with it. Taylor is correct that there are many ways to Dublin and I just wanted to provide another method with real life data and results. I do have some advantages in that I know the underlying data and I can set my efficient frontier on a daily basis without transaction costs.

I wish you well in your investments and I hope to complete the remaining data on VG funds so we can see what the results are.

Bill

Originally posted in thread: 26652
Life Strategy Income
04-08-2003, 4:09 PM | Post #1428097
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My current allocation in broad asset class terms is 78% in fixed income, 16% equities, and 6% in cash.

Since we are talking about benchmarks, based on the above comment it looks like Vanguard Life Strategy Income would fit the bill. The quarterly returns that correspond to the information that was provided are as follows:

12/01 2.60%
3/02 0.16%
6/02 -1.18%
9/02 -2.49%
12/02 3.74%
3/03 0.08%

A comparison to the MVO result is quite favorable, and I would suspect required a lot less work to accomplish. Any reason why this is not a meaningful comparison?

Roger

Originally posted in thread: 26652
Bill
04-08-2003, 3:52 PM | Post #1428090
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Good luck with your investments, and thanks for explaining your investment outlook in detail. To me this line summarizes how it can be time consuming and overly complex for most investors:

The hardest part is to get the data and make sure you have accurate underlying data, otherwise garbage in will generate garbage out.

I think most portfolios would perform better than market during a bear and lower in a bull, due to the presence of fixed income and other assets. Just that variations will be dependent on how far tilted from market.

My own portfolio has performed better than the market during last three years, thought not postive, and I expect it to perform lower when there is bull run. My variations are about 1/4th of market movements. On days market moves up by 4%, my portfolio would go up from anywhere to 1%-1.3% and vice versa. All I am doing is holding a bag of very diversified assets and re-balance periodically.

To each their own. I like to quote Taylor and say "There are many ways to Dublin".

Good luck.

- Menon.

Originally posted in thread: 26652
Menon
04-08-2003, 3:03 PM | Post #1428074
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Menon,

You are correct that my portfolio will be a step behind a bull market, but it will be a step ahead in a bear market. The very definition of a diversified portfolio (any asset allocation model) or one that is always set to the efficient frontier will do that. One would expect a diversified portfolio to include some funds that are underperforming and outperforming the braod market in any given point in time. My current allocation in broad asset class terms is 78% in fixed income, 16% equities, and 6% in cash.

I prefer to use data on a fund specific basis rather than an asset class, since it is the fund that I am buying. Again, I do not have any issues with those who choose to use index funds or to create portfolios using an asset allocation that meets their needs.

I know that you used the word "benchmark" in your posting. I think I remember that William Bernstein stated that the purpose of an investor was to make money and that there was no solace in saying that my my investments bested a particular benchmark even though they both may have lost considerable amounts of money. I think I read it in an except from his book "The Intelligent Asset Allocator".

As for having Small Value, REITs, and Large Value funds, I don't have any problem with any fund or type. Again, I am fund specific and not asset class, benchmark or category specific. My own personal problem with many slice and dice portfolios is that they wind up buying so many funds they might as well buy an index fund and skip the additional expenses. I have seen some portfolios where people seem to be a little too cute for their own good. Again, I know that all reasonable investment methods have excellent data to back up their opinions.

The methodology of the MVO is to create a portfolio where the risk of the portfolio is less than the risk of any of its underlying investment options, while generating a return that is somewhere between the lowest and highest performing funds. Again, I run my MVO on specific funds and not by their investment stratgeies. I think we can agree that many funds suffer from focus drift, so I stay away from using categories that are really the marketing arm of the fund companies.

You are correct that my method may be too complex for the casual investor and for them, I would probably allocate between Total Stock Market Index, some bond fund(s), a money market and an international fund if they liked some international exposure. I know that Taylor Latimore has provided many people with the typical 4-5 funds that will get the job done.

For people who are mathematically inclined and have a good grasp of MPT, creating a MVO isn't that hard. The hardest part is to get the data and make sure you have accurate underlying data, otherwise garbage in will generate garbage out.

The MVO can be used to creat asset allocation models (or S&D), because it eliminates funds that are redundant in their correlation, etc. It can be tailored to any investors needs.

I fully expect the MVO to lag behind a quick runup in the market, but I also expect it to give me a good chance to generate positive returns in any market. If I make 12%, while the S&P 500 is up 20% and then make 6% while it is down 20%, I will be just fine. I do run the MVO on a daily basis, therefore it will shift as the efficient frontier moves. While it should lag a quick runup in the market, it also has not gotten me to follow the many false starts we have had over the last year either. The key to any investment method is to understand its strengths and weaknesses.

You are correct that I am not interesting in beating the market, but I interested in getting the best possible return (on a risk-adjusted basis) for a given set of investment options. One of the key components of an MVO is interest rates and any changes in those will affect its selections.

For me persoally, civility should be a given and the purpose of these forums is to share knowledge and viewpoints. I do make sure that my data is always accurate, since it serves no purpose to not have good data.

I am currently backfilling my MVO on VG funds and I hope to re-engineer it over an extended period of time so that we can see the results. It would be good to compare an MVO, with various asset allocation models comprised of index funds.

Bill

Originally posted in thread: 26652
Bill's MVO
04-08-2003, 1:42 PM | Post #1428037
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Bill,

I did not go through S&P returns in detail for those periods, however I have this quick observation. It appears that during periods when S&P 500 had big gains your portfolio performed poorly in comparison, and vice versa. Since the last 3 years saw S&P 500 performing poorly for the most part, your portfolio did well as expected. Is this because of the large percentage of fixed income assets that you may be using. If so can we not achieve similar results by simply holding an appropriate Stocks/Bonds mix without the complex math. Also how about a S&D portoflio with Small Value/REIT/Large Value etc -- we know this too would have done better than S&P 500. In other words aren't you comparing with the wrong benchmark. I am not saying your method is not valid, just that it may be too complex to achive a result otherwise possible.

Have you thought of times when S&P 500/TSM will have major gains -- and the possibility of your method producing inferior returns then? I know from previous posts that you are not focused on beating the market, but what about getting guarantted market returns.

Good luck with your investments, your posts have been refreshing for it's civility and logical reasoning, and should be an example for all those who wish to present contrarian viewpoints. The fact that your posts have received good responses is an indication that diehards is not a close minded group.

Best Regards,

- Menon.

Originally posted in thread: 26652
Thanks
04-08-2003, 1:40 PM | Post #1428035
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Taylor,

As always, I appreciate your wisdom in this forum. I am a person who has always maxed out their retirement plans (profit sharing, 401k, Roth IRA, and stock purchase plans) for over 28 years in addition to having a defined pension plan, I know that I will do just fine in my golden years. There is no substitution for the compounding effect.

I seriously doubt that I will publish a newsletter, although I do publish an internal document to other employees within my company that provides real data (such as what I displayed in posting 42) on my results including using the MVO to create various asset allocation models. Like yourself, I believe that there are many roads to Dublin. For me, I am able to understand the mechanics of creating and using an MVO. In addition, I have the advantage of not incurring transaction costs, which could be a barrier to others trying this method.

I agree that for most people selecting an asset allocation model and plugging in a few good funds will get the job done without having to monitor one's investments too closely.

I don't know, if I have found a faster road to Dublin, but I do expect it to be less bumpy. I also appreciate your comment about having a spare anchor in the storm.

Bill

Originally posted in thread: 26652
MVO versus S&P 500
04-08-2003, 12:43 PM | Post #1428019
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Taylor,

I have attached the monthly and quarterly results of the MVO that I created and use for my own 401 k plan. I am one who makes sure that anything that I write in my postings is accurate, therefore all the information below is correct.

I have compared the results of my MVO, which are net of the fund's undelying management fees and the 40 basis points that my plan charges for admininstation fees. Next to the MVO results are the raw total returns of the S&P 500, which do not include any fees. In spite of much higher costs and funds that are limited to a finite number of institutional funds, I have been able to outperform the bear market by a large margin, while my volatility is much lower than the S&P 500.


Month   MVO   S&P 500
11/01   2.54    7.52
12/01   4.57    0.76
01/02   0.02   -1.56
02/02  -1.47   -2.08
03/02   4.23    3.67
04/02   1.12   -6.14
05/02  -2.58   -0.91
06/02  -1.38   -7.25
07/02  -8.97   -7.90
08/02   0.34    0.49
09/02  -0.75  -11.00
10/02   0.16    8.65
11/02   2.68    5.71
12/02  -0.87   -6.03
01/03   0.83   -2.74
02/03   1.20   -1.70
03/03  -0.39    0.84



Quarter  MVO   S&P 500
12/01    7.23    8.33
03/02    2.72   -0.06
06/02   -2.85  -13.23
09/02   -9.35  -17.63
12/02    1.95    7.92
03/03    1.64   -3.60

Again, I am not against indexing or any other method that is based on sound information, but I just wanted to illustrate that there are many ways to invest and get the job done.

Bill

Originally posted in thread: 26652
Even better
04-06-2003, 10:13 PM | Post #1427422
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Ozark, your post (#40) is even better than the excellent post that started this conversation. I only disagree with one of your comments:

"My post was much ado about nothing...." I think your original post (and your additional one here) is in fact about everything. Understanding investing as you describe separates the truly enlightened from the, well... not-so enlightened.

Please, I am not being critical of people who wish to persue whatever satisfies them, I'm just agreeing with Ozark, Taylor, J.Bogle, Wm Bernstein, Bill Schultheis, Larry Swedroe, Rick Ferri, Burton Malkeil and many, many others.

KISS - Keep it simple, studly (or sweety)

The greatest destructor of a good plan is the search for a perfect one.

Paul

Originally posted in thread: 26652
Predicting tomorrow's weather
04-05-2003, 11:50 AM | Post #1426985
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Note: I am eager to gain more stars for this conversation in the search box.

Predicting stock market trends could be compared to predicting astronomical events such as tomorrow's weather if the human element would be taken into consideration as well. Regardless, there are many phenomena around in which the human element is very much involved but in which we can put our trust in with a high level of predictive accuracy.

Examples:

1)The US highway accidental death rate during the coming Memorial Day weekend will be N plus or minus 5%.

2)The next newborn will be a male with a plus or minus
2% chance.

3) Readers of this post will reach an age of N with P % chance.

4) During the next decade the S & P 500 will return R% with almost 90% chance.

The objective: If an investor got the time horizon then, does he/she needs to be more than 51% sure that the S&P 500 will be good to them during the next decade? If yes, why not try to understand better the parameters involved in order to increase this chance? And, aren't return/risk measures part of it?


Interesting books on the subject of predicting astronomical phenomena are:

The "Book of Nothing" and the book "Constants of Nature".

By John D. Barrow

Here is a short commentary on the first book:

"The constants of nature are the fundamental laws of physics that apply throughout the universe: gravity, velocity of light, electromagnetism and quantum mechanics. They encode the deepest secrets of the universe, and express at once our greatest knowledge and our greatest ignorance about the cosmos.

Their existence has taught us the profound truth that nature abounds with unseen regularities. Yet while we have become skilled at measuring the values of these constants, our frustrating inability to explain or predict their values shows how much we have still to learn about inner workings of the universe.

What is the ultimate status of these constants of nature? Are they truly constant? And are there other universes where they are different?

John D. Barrow, one of our foremost mathematicians and cosmologists, discusses the latest thinking about these and many more dramatic issues in this accessible and thought-provoking book."

Cheers.


Vig

Originally posted in thread: 26652
Ditto!
04-03-2003, 2:39 PM | Post #1426395
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I also enjoy "the Humble Hillbilly's" posts. Keep them coming.

Regards, Jean

Originally posted in thread: 26652
Hello Ozark
04-03-2003, 2:19 PM | Post #1426392
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I would like to nominate you for a Pulitzer Prise in Economic Opinion jounalism. Why most people insist on turning one of lifes most simple endeavors, successful investing, into a difficult process has always amazed me.

People want stuff, more stuff and extra stuff. Results of the past are just that, results of the past.

The fact that the stock market has historicaly returned an average annual return of 10% is not a road map to a certain result. It is only an indication that that is what will PROBABLY happen in the future. Nothing more and nothing less.

Ozark, please keep writing. I always enjoy reading what you have to say.
Regards, Wick

Originally posted in thread: 26652
Greetings Diehards!
04-03-2003, 11:09 AM | Post #1426342
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It is I, the Humble Hillbilly! Yes.

Thank goodness this conversation turned into a food fight. Thirty-something replies discussing my meager little post would have been a bit much.

While my post actually was, in the immediate sense, written to address some new methods of measuring risk, in a broader sense it was meant to address the current mania for smashing numbers into various computer programs, attempting to discern everything from an ideal asset allocation, to the "best" specific investment vehicles, to a "survivable withdrawal rate", in retirement.

In my opinion, using data from the past to discern these kinds of things is a bad idea.

Let me put it this way: Suppose a farmer is looking at buying 10,000 acres in a nearby state, to plant, say, sorghum. He'd be well advised to study the annual weather records for the area, going back to, say, 1926.

He'd do well to look at the driest year on record, the wettest year on record, average yearly rainfall, the number of times hail has occurred, so forth. He might then be able to estimate his chances of having a given number of bumper crops, over a 10, 20, or 30 year period. Yes.

But Diehards? He wouldn't be able to use that data to predict if it's gonna rain next Tuesday! No.

I believe it was my cousin Jethroe who said "Those who forget the past are doomed to repeat it." Computer studies using actual past performance of stock and bond indexes, demonstrating how various allocations would have performed in the past 75 years, or so, these are helpful.

Using the past volatility and correlation of various stock and bond indexes and creating a "Monte Carlo" type of simulation, demonstrating not what happened but what COULD have happened, these are also helpful.

In addition to being helpful, we can also say of such investigations that they have already been performed. Repeatedly. Furthermore, their conclusions, within reason, support each other. It is from such investigations of the past that we now have our ideas of what broad asset allocations, and which withdrawal rates, and which methods of adjusting withdrawal rates, are reasonable.

Some now want to continue these computer investigations, trying to determine if an allocation to bonds of 52.37% might be better than 50%. Or if 9.23% allocated to small-cap stocks might be better than 10%. Or if an inflation-adjusted withdrawal rate of 4.17% might be "survivable", where a 4% withdrawal rate would be wasteful and a 4.4% rate would be disastrous. Or if replacing Longleaf Partners Fund with Oakmark Select would give better results, going forward.

Not only that, friends, but get this. The poster Vig has repeatedly implied that I and others have some kind of duty to join him in making these investigations, using various web sites available for that purpose!

My post was written to point out that I personally have no confidence in such investigations of the past, when they are used to make detailed and specific predictions about the future. I used Bill Sharpe's Ratio as an example of one such investigation, that, while it may tell us what risk-adjusted performance a given mutual fund had in the past, has proven to have no apparent predictive value for the future.

Similarly, the original M* Star rating system, as well as measurements like "Alpha", from Modern Portfolio Theory, have turned out to have no useful value in predicting which mutual funds will be best for risk-adjusted returns, going forward.

That was the point of my post. That and the fact that I have no objection to others attempting to use these techniques to discover whatever it is they'd like to discover. I simply don't intend to pursue that course, myself.

I'd say, BuyHighSellHigher had it about right. My post was much ado about nothing, or at the very best, much ado about very little, and that very little already being known and accepted, anyway, by a great many people.

I guess one could say I spend a lot of time in posts like the one Taylor presented here, belaboring the obvious. I do that because as far as I can see, lots of people have yet to appreciate the obvious.

Which is, as now becomes daily more apparent, a common human failing.

Best regards.

Originally posted in thread: 26652
Risk Can Be Measured
04-03-2003, 10:12 AM | Post #1426318
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Uh,

You stated in your posting that risk as it applies to MPT, Risk Grades, M* is measured by volatility. You forget that volatility (i.e., standard deviation) is only the denominator of the risk measurement equation. The the other components or numerator of the equation is the expected average return over a risk free rate (i.e., T-bills, MM, etc.) The key word I think is relative risk and whether one is being adequately compensated for taking on the additional risk.

Bill

Originally posted in thread: 26652
Jimmy
04-03-2003, 9:25 AM | Post #1426299
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Consider yourself haveing the last word on this subject. Now take some of your millions and go get a good education.

Have a nice life,

Samlee

Originally posted in thread: 26652
Predictability of the future
04-03-2003, 9:17 AM | Post #1426297
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I believe that was the topic that started this thread.
I agree that Ozark makes a valid point when he states that the future cannot be known. I also agree that he is a very articulate writer.
While the future cannot be precisely known, we can look at history and make reasonable assumptions of what the future will most likely be like. We can also use those assumptions to make investments that are most likely to be productive.
Where my problem with MPT, Risk Grades, M* ET All comes in is their universal definition of risk. All of them measure risk by measuring volatility. I agree that volatility can be an indication of risk, but I strongly disagree that measuring volatility, measures most risk. I also do not believe that risk can be adequately measured mathematically. Risk is far too subjective and variable to be measured by something as simple as math.
uh

Originally posted in thread: 26652
I make 7 figures
04-03-2003, 9:03 AM | Post #1426292
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and I just wish that the 6th and 7th were integers like the first 5.

Originally posted in thread: 26652
Sammy
04-03-2003, 7:58 AM | Post #1426278
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Thanks for nothing. I happen to make six figures without the skills you mentioned. I'll take the money, thank you very much. You have proven that you are not any good at debate either. Only difference between you & me is that I happen to be preserving my capital while you are getting 'it' handed over to you.

Originally posted in thread: 26652
Buy and hold
04-03-2003, 7:36 AM | Post #1426276
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Jim -

I think the premise that everyone here blindly buys and holds is incorrect. First, most people here rebalance. Secondly, many here are constantly plowing money into the market on a regular basis. So, when you said...

...people who bought from '00 can kiss that money goodbye for a long time to come.

...you are basically correct. However, I also bought in 88, 91, 94, 97, etc. You pick the month and year and I've had money going in since 1988. Secondly, because I rebalance, I bought relatively little large growth in 1999-2001. I was buying bonds and value in 1999-2000, International in 2001-2002 and am finally buying S&P 500 after a 50% or so drop. Seems reasonable to me.

The reason everyone here is comfortable and happy is not due to brainwashing; people here are comfortable because they understand how markets work, have a plan and understand how to execute the plan. I think my plan is more effective for me than trying to time the markets on a large scale.

I for one have not lost my shirt.

Ken

Originally posted in thread: 26652
Jimmy
04-03-2003, 12:00 AM | Post #1426247
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You are misquoting a number of statements made by posters in this thread. I would recommend you brush up on your reading and language skills prior to attempting to engage in meaningful dialogue and debate. There are many good GED programs and remedial English courses available.

Goodbye,

Samlee

Originally posted in thread: 26652
One more thing
04-02-2003, 9:54 PM | Post #1426234
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Taylor Larimore is a true gentleman - he has tried to set examples for all you emotionally charged people. If only you follow his examples then this place will not find any 'trouble makers'. However some 'psuedo' leaders and book writers (ahem) have proven time and again they are not in the same league.

Originally posted in thread: 26652
Dear diehards
04-02-2003, 9:45 PM | Post #1426228
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Why do you get so 'upset' about someone who may call buy & hold 'blind'. Look at the last four posts .. things were going smooth on this thread until some of you started getting visibly disconcerted. I am not responsible for the things that you imply I did. For example, I said blindly buy & hold, Samlee inferes that is equivalent to calling 'stupid'. how is that? did Bogle not say 'don't just blindly buy & hold' do you infer then Bogle called all buy & holders stupid?

it is strange, why some of you get emotioanlly charged at sight of someone not to your liking post something.

I did not start the trouble here now, look at you in the mirror. You'll see the trouble is inside. Denial and insecurity are a dreadful combination.

Originally posted in thread: 26652
Mr. Anderson...........
04-02-2003, 9:28 PM | Post #1426215
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Your comment "2. do not be scornful of others with whom you disagree" seem like pretty empty advice, based on your usual posts. Your credibility here is lowered by post like the following recent example on the Market Insights Forum:

"BTW the dirhard forum is is on it's last legs, just as a certain dictator in Iraq is. The DH leaders who display the same qualities are facing their fate. If you notice most of the conv on that board for past weeks are on other topics (or OT as they indicate in subject). Soon they don't need to place an OT as most posts are of that type. And about booksellers, one seller ran away after a fued with another advisor who 'exposed' him. Now, rest of the sellers are fighting for leadership. What a pathetic group. But don't worry they will all leave as the forum will cease to exist before the end of the bear."

Now there is a stupid prediction.......

best,

Bill

Originally posted in thread: 26652
I was wondering what happened to Miss Cleo
04-02-2003, 8:07 PM | Post #1426179
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"3. stay out of stock markets until valuations are much cheaper"

Well said, Samlee. Well said.

Best wishes,
Michael

Originally posted in thread: 26652
Taylor I'm glad to see some DieHards
04-02-2003, 8:00 PM | Post #1426175
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living up to that name. I have no doubts many a DieHard will reap the benefits of investing for the long term .

Jim, to each his own.

Bob the PLOD (Prudent Long-term Ordinary Diversified investor)

Originally posted in thread: 26652
Jim
04-02-2003, 7:37 PM | Post #1426162
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Look in the mirror and take your own advice. The tone of my post was a pure reflection of your scornful and cynical posts:

#10 "smart people are on the sideline" implies that we buy and holders are not smart, i.e. stupid

#12 "we blindly buy and hold" basically says that we are unable to process the known information about markets and investing and make informed, intelligent decisions on those facts

#17 "we are in denial about the bear" would indicate that we suffer some sort of mental disturbance which affects our thinking ability

Jim, you get what you give; at least from me. I am not the gentleman Taylor is. I call them like I see them. I do pride myself on intellectual honesty and have admitted when I am wrong about things on this forum.

I do not feel that disagreeing with you makes me, blind, in denial or not a smart person. That's about it for me on this post. Please proceed and best of luck in your investment future.

Regards,

Samlee

Originally posted in thread: 26652
Samlee
04-02-2003, 7:10 PM | Post #1426155
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I doubt your cynicism & disdain at people with whom you don't agree will take you anywhere, let alone succeed at investing.

Nonetheless, I have an advice for you going forward these things might help you.

1. keep an open mind that there might be way other than blindly buy & hold.

2. do not be scornful of others with whom you disagree

3. stay out of stock markets until valuations are much cheaper

4. for the former I would look at improvements in economic data, especially companies should start making profits, and employment situation should improve.

5. both of the above is not happening, and no signs of it happening too anytime soon.

6. in the meantime there are things like gold & commodities, if you are careful enough to get in when prices are down and sell after certain level of profits.

there is much more you can do .. but i doubt if you can come out of denial until another 40% drop.

Originally posted in thread: 26652
Jim
04-02-2003, 4:53 PM | Post #1426106
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You have demonstrated a high degree of proficiency in "predicting the past". Your review of financial markets in recent years is 100% accurate. Your ability to tell us that we are in a bad bear market is second to none. Your point that virtually anyone who owns stocks has lost valuation in this market is sudhiesque in style.

Now, please lend us your wisdom, going forward and tell us exactly how and where to invest our money to guarantee maximum returns. Please be precise as to what investments in what amounts in real time that we need to invest. Also, please give us precise instructions on how to monitor these choices, going forward so that we don't get trapped in future bear markets. This should be an easy task for you.

I appreciate the benefit of your wisdom.

Regards,

Samlee

Originally posted in thread: 26652
Only 1.1%
04-02-2003, 3:28 PM | Post #1426077
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Taylor,

Bill (#19) posted the reply I wanted to. The 1.1% differece equates to a huge amount over 30 years. You know that already, that is why costs matter right?

point is valuations does matter, buying at peak valuations will result in lower returns. for many people investing small amounts through 401(k) etc this may not be a problem. as some of it gets mitigated by added employer contributions.

I think in smaller bear markets such as ones we had in '87 the advice to ignore noise works well .. it does not work well in the face of this mega bear caused by insanity reached in the peak of roaring '90s.

if someone buys the market now, they may not lose much as we have had a decent drop in last 3 years, and we are much closer to the bottom. people who bought from '00 can kiss that money goodbye for a long time to come. problem was people were in denial that we are in a mega bear for first two years, hoping that the bull would return, moreover afraid that they'll lose out if it does return. but now that they held through it makes no sense to sell. what you've lost is gone forever. but it may be prudent to open up to newer avenues to capture some returns.

it makes no sense to be in denial about this bear .. and that gold has a place in this type of scenario. as people who've bought gold in past years and reduced to cash (including your truly) has reaped the rewards.

Originally posted in thread: 26652
Ozark's Post reminds me of a Shakespeare Play
04-02-2003, 1:52 PM | Post #1426039
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Much Ado about Nothing

Originally posted in thread: 26652
Recently,
04-02-2003, 12:59 PM | Post #1426006
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I saw a quote that applies (slight liberty taken):

The definition of an investment advisor is someone who will tell you tomorrow why his/her predictions made yesterday did not come true today!

Best wishes,
Tim

Originally posted in thread: 26652
Looks A Little Different in Dollar Terms
04-02-2003, 12:55 PM | Post #1426002
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Taylor,

That was some interesting data, but to put it in dollar perspective, Investor 1 would have a portfolio valued at a minimum of $184,363, Investor 2 would have a minimum of $227,723, and Investor 3 would have $220,913 after the thirty years.

Investor 3's results are almost equal to Investor 2's minimum results since that investor put their money to work at the beginning of each year. I used the word minimum for Investor 1 and 2, since we can't calculate the FV of the portfolio using Type 1 or 0 in Excel. I set the value to '0' for those two, which means the amounts were invested at the end of the period or the timing of the payments was omitted (which is the case here). Investor 3's timing of payments would be Type 1.

Bill

Originally posted in thread: 26652
Buffett
04-02-2003, 12:13 PM | Post #1425988
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Taylor,

Sorry, but I have to disagree. Buffett never blindly buy & hold. He buys stocks that he feels are cheap based on valuation etc .. and then holds them. No similarity to blindly buying & holding when market valuations are sky high. Secondly, Buffett do not hold Gold, but he does have Silver, he bought huge amounts of Silver bullion few years back. In essense he holds Precious Metals, similar to buying gold. Lastly, Buffett did lower his equities over the years, take a look at his holdings in M* article today. Last three years saw his stock holdings gradually reduce to just 25% in common stocks. And oh, he is not diversified, and he do not belive in it.

Buying at peak valuations and holding will result in losing money over long periods. Those who have been buying TSM from 2000 onwards will not see their capital brak even for several years to come.

Originally posted in thread: 26652
Warren Buffett is buying
04-02-2003, 11:58 AM | Post #1425978
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Jim
04-02-2003, 11:21 AM | Post #1425959
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You are wrong. Buy and Hold is the best market strategy in any market, by definition.

Samlee

Originally posted in thread: 26652
Predictions
04-02-2003, 11:20 AM | Post #1425958
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Hi all,

Every investment we make is a prediction of the future. Every stock, every bond, every mutual fund we buy is a prediction that we will make money.

Every prediction we make is based on the past. It must be. The past is all we know. The future is "unknown and unknowable".

The question is, how do we make the best predictions we can?

Speaking of predicting the past, have all of you seen this thread on the Hands On forum?

Ron

Originally posted in thread: 26652
Proof That Other Methods Work
04-02-2003, 11:03 AM | Post #1425952
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Taylor,

Every method whether its using index funds, risk adjusted asset allocation models or MPT are all predicting the future from data from the past. Unlike some people on these message boards, I understand the compelling logic for each method. For me it is just a matter of finding what method works for a particular individual.

As you know from our previous conversations I am using MPT by running a MVO on a daily basis, where I do not have transaction costs. My plan charges an administration fee of 40 basis points per year (payable monthly), regardless of how many transactions I make. I also pay higher fund fees (i.e., 25 basis points per year) for funds like FCNTX that are not part of the MassMutual funds companies.

The following table compares the total monthly returns of my MVO, net of plan administration fees and fund expenses to the raw S&P 500 (which does not include any fees):

Daily MVO S&P 500
Month Return Price Return Price
$ 100.00 1059.78
Nov-01 2.54% $ 102.54 7.52% 1139.45
Dec-01 4.57% $ 107.23 0.76% 1148.08
Jan-02 0.02% $ 107.25 -1.56% 1130.20
Feb-02 -1.47% $ 105.67 -2.08% 1106.73
Mar-02 4.23% $ 110.14 3.67% 1147.39
Apr-02 1.12% $ 111.37 -6.14% 1076.92
May-02 -2.58% $ 108.50 -0.91% 1067.14
Jun-02 -1.38% $ 107.00 -7.25% 989.82
Jul-02 -8.97% $ 97.41 -7.90% 911.62
Aug-02 0.34% $ 97.74 0.49% 916.07
Sep-02 -0.75% $ 97.00 -11.00% 815.28
Oct-02 0.16% $ 97.16 8.65% 885.77
Nov-02 2.68% $ 99.76 5.71% 936.31
Dec-02 -0.87% $ 98.89 -6.03% 879.82
Jan-03 0.83% $ 99.72 -2.74% 855.70
Feb-03 1.20% $ 100.91 -1.70% 841.15
Mar-03 -0.39% $ 100.52 0.84% 848.18

During 2001-2002 my plan had the following funds:
OSIYX, MVEDX, MBLTX, FCNTX, TWCUX, MIGYX, MMIEX, MIEDX, MSGSX, MSCDX, MCGSX, and a GIC that was paying a blended rate of 4.1%

In 2003, the following funds were added to the Plan:
MCBDX, DLBVX, DLBMX, OGLYX, JABAX (replaced MBLTX). The blended rate for the GIC was reduced to 3.2% in 2003.

The prices above 11/2001 are the closing prices on the S&P500 as of 10/31/2001 and I chose an arbitrary price of $100 for my portfolio so others can see that my MVO has gained a net 0.52% over the same period that the S&P 500 has dropped 19.97% over the same period. I would have done even better had I had a true bond fund in 2001 and 2002 like I do in 2003.

Those of you who are interested, you can look up the above equity fund ticker symbols and see that most of them are bleeding red heavily in excess of 20% on a trailing 12-month, but I was able to incurr only a loss of 7.78% in 2002 and a 1.63% gain in 2003 (i.e., through 3/31/2003).

In closing there are other methods that work, and I have provided real life data where I have real money riding on it to show the results.

Bill

Originally posted in thread: 26652
Jim
04-02-2003, 10:39 AM | Post #1425944
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This time it really is different, heh?

Ken

Originally posted in thread: 26652
Reap market returns
04-02-2003, 10:30 AM | Post #1425942
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Enjoy life and reap market returns

The anomaly here is you can't have both. How can you enjoy life when the market returns are over -ve 40% ;) you cannot reap negative returns. your money is getting wasted in the market gyrations. Smart people are in the sidelines and other assets like gold. this market is not like your 20 year bull from '82, so last 20 years wisdom won't work. one by one the bastions of buy & hold are falling. Peter Bernstein is the latest one. wait until Bogle says market timing is the way to go. that will be the time to buy & hold. Warren Buffett do not find anything of interest to buy after 3 years of bear market .. wanna bet against the smartest investor of all times? better not.

there are many ways to investment success, buy & hold is one of them .. but not in time and this market. this market is for people who are open minded to try new things.

Originally posted in thread: 26652
I also somewhat agree with Ozark but
04-02-2003, 10:25 AM | Post #1425939
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I do not think using these tools in conjunction with
other factors is fruitless. I can not see how one can
discount these tools on one hand and turn right
around and construct portfolios using other criteria.
This is hypicritical. Tell me how does one assemble a
portfolio? What criteria does one use if the past has
no value? I see strawman portfolios all time from
conservative to aggresive allocations. Where do these
percentages come from if past performance is not a
factor? What criteria is used to construct these
strawmen and why do they have anymore validity?I
think it is grossly unfair to discount MPT and other
tools. No one said MPT was a panacea. The name of the
game is statistics. When its all said and done one
bets on the future regardless of the tools used.
Knowing and using the statistics of the past is
just placing an educated bet but with no guarantees.
Even the 3-4 fund approach with a TSM anchor is just
placing a bet based on past performance statistics
over long periods. Its great if you can withdraw
before the reversion starts working against you. Then
you say one should prepare for the withdraw phase by
migrating to a more conservative portfolio. Again you
are making bets on your new allocation. Many retirees
confornted that reality these last 3 years.
Thanks for your patience.

aurel

Originally posted in thread: 26652
Off topic but as important
04-02-2003, 8:38 AM | Post #1425906
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Here is my reply to Davese at # 26651 in this forum:

Davese, as a Diehard, you have access to Instant X-Ray. You get there a stock style box, a bond style box, an expense ratio and a yield of the portfolio, and very few other items. Even if you become a full premium paying member you get very little in portfolio analyzing tools. The two other "important tools" are Asset Allocator and Stock Intersection. The rest are for the birds.

Only M*'s Principia which cost around $500 per security type and the Work Station which cost around $5,000 would do a decent portfolio analysis. The T. Rowe Price tool mentioned above is also for the birds.

You could try the free website www.RiskGrade.com. I have a conversation about it in this forum (enter avilynn in the search box and look for RiskGrades) and also a couple of recent ones in the Investment During Retirement forum.

It beats me why when M*'s Harry Milling came recently to pick Diehards brains for improving M*'s "Personal Finance" window (i.e. making more money for M*) there was no one in this forum to demand something in return. Why nobody asked to have all those lousy tools available to all diehards for free? They are hardly good anyway. Just mediocre. I also see no reason why M* should not offer the Principia (which is being replaced by the Work Station) to premium paying members at cost and the rest for free as I said above.

Any comments?


Vig

Originally posted in thread: 26652
Aim Funds
04-02-2003, 8:18 AM | Post #1425901
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It seems like yesterday that Aim Weingarden was a four star fund. Looking at a five year chart, and even longer, it is a total disaster! Most of us on this board know why.TSM for me!

Originally posted in thread: 26652
GIGO
04-02-2003, 8:01 AM | Post #1425894
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Hi,

I agree with Ozark. I'll put it my way, the numbers are overworked and manipulated.

How many times have we been presented different conclusions based on people analyzing the same data? It's madness. Every time someone issues a landmark report we have to sift through the conditions and assumptions under which the data was analyzed. The result, just another run-of-the-mill analysis. This leads one to TSM, let the market decide and be done with it! I'm reminded of the card-playing truism regarding shuffling and queens, but I'll leave it at that.

I think putting a man on the moon is easier than trying to analyze investment data. We've been to the moon, but all the analysts in the world still can't consistently beat the market. There are just too many unkowable parameters in the analysis to make the analysis worthwhile.

And that's only the honest analysts! What about the people fudging data, and you can bet your life it's being fudged. Whenever so much money is involved you can always count on the roaches to come crawling out of the woodwork.

Investing is simpler than the eggheads would have us believe, but don't let this get out or they'll be out of a job.

The computer jocks among you know about GIGO, Garbage In, Garbage Out. The models, the inputs, and the outputs are all suspect. Why bother?

Enjoy life and reap market returns,

Ken

Originally posted in thread: 26652
OOPS, forgot to mention:
04-02-2003, 3:18 AM | Post #1425878
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I have an infinite amount of respect for Ozark (and his eloquence!), but he does admit to using that notorious 4% withdrawal rule ... in a manner of his choosing.

Originally posted in thread: 26652
predicting the past
04-02-2003, 3:13 AM | Post #1425877
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Because the future is unknowable, people often make claims that it's pointless to analyze the past in order to estimate the future. Nevertheless, these same people invest in x% stocks + y% bonds or maybe 4 x 25 slice & dice or maybe passive not active or maybe u% domestic + v% foreign or maybe withdraw 4% at retirement or maybe ... etc.

It always seemed strange (to me) that, without investigating the past, they are able to make these choices.

And, as for ignoring all the mathematical gadgetry that is used in investment analysis, it may come as a surprice that devoting a portion of our portfolio to an asset class with smaller returns can actually increase portfolio returns. (Well, it came as a surprise to me :^) One can "prove" this (with mathematical slight-of-hand and magical assumptions) or observe it by ... uh, investigating the past.

When I describe my own investment techniques I avoid claiming that it maximizes the MickeyMouse Ratio or minimizes the DonaldDuck Average (although it's more effective to replace Mickey & Donald by a Nobel prize winner.) I always end with the phrase:
"It's more fun that way!".
Then, who can argue, eh?

Originally posted in thread: 26652

The problem with old technology.
04-01-2003, 11:54 PM | Post #1425859
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There really is an Efficient Frontier. There really is a withdrawal rate that will allow my wife and I to spend all our money during our life times, but never go broke.

But these things are unknown and unknowable, going forward. Such things are only knowable looking backward.


... is that it doesn't account for advances in financail planning strategies or new investment vehicles. No doubt any black box given garbage in can only produce garbage out. But an income guaranteed for life for both Ozark and his wife (inflation indexed) is an easily solved problem given the modern tools available. TIPS, Stripped TIPS, Inflation Indexed Life Annuities and other structured/engineered investment vehicles.

MPT on the other hand is very old technology (1950's), not bad just old and incomplete. No where near up-to-date.

We wouldn't send soldiers out with 50 year old equipement and there is no need to limit yourself to using fifty year old investment vehicles and/or methodology either.

Regards
Ellis

Originally posted in thread: 26652
A message overflowing with wisdom
04-01-2003, 10:16 PM | Post #1425830
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Thank you, Taylor for posting Ozark's message here. And thank you, Ozark for a splendid explantion of how attempting to know the unknowable can be an exercise in futility.

To be sure, nobody wants to outlive their money. However, it can be carried to a fault. Yes, you can be too careful and deprive yourself of a happier life in the process. I often imagine some guy spending hours running scads of Monte Carlo simulations, making sure that he never exceeds his maximum withdrawal rate. Then, one day as he's totally absorbed thinking about his asset allocation, withdrawal and total return rates, he walks out in front of a bus. In life, it's the bus you don't see that hits you.

We all crave security from the cradle to the grave. Yet, the natural state of life is insecurity. The unborn and the dead are totally secure and that's how we spend all but the smallest fraction of the eternity of time. We all do things to feel secure, but it's largely an illusion.

Best wishes,
Michael

Originally posted in thread: 26652
Ozark: The Master
04-01-2003, 8:41 PM | Post #1425803
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Hi Taylor:

Thank you for reproducing Ozark's post. I hadn't seen it yet but would have because I go out of my way to read every word he writes. I let my ten-year old son read pretty much anything he wants to--but once a week I have him read one of Ozark's pieces. He doesn't understand much about investing (like his father) but I want him to know what good writing looks like.

Ozark:

"But these things are unknown and unknowable [comma] going forward. Such things are only knowable looking backward."

Kierkegaard:

"Life can only be understood backwards; but it must be lived forwards."

Ozark could have been consciously or unconsciously spinning a variation on the famous philosopher's acute insight. Either way it's brilliant prose. Ozark strikes me--however--as a person who does his own thinking from the ground up. He (unlike me) probably thinks more than he reads. I suspect that his penetrating observation originated in his own mind.

You are always generous--Taylor. Your generosity couldn't be expended on a more deserving recipient--the brightest star on Morningstar.

Cordially

Andrew

Originally posted in thread: 26652