Speaking of Crahses

The Nasdaq Composite since 1972 has had two declines over - 50% (- 58% from 1972-1974, - 75% from 2000-2002). The chart doesn't look so bad because it is logarithmic. . .What about the other major asset classes? Below is a table of 5 major asset classes: US Equities, Foreign Equities, US Government Bonds, REITs, and Commodities. Since...

Stock Market Crashes

“The first rule is not to lose. The second rule is not to forget the first rule.”- Warren BuffettHow many investors remember the stock market decline of 2000-2002? If you had your portfolio invested in the DJIA, you sat through a ~ -38% decline. Preferred the Nasdaq? You experienced a - 75% decline (sorry to bring up those painful...

Harvard + Yale II

According to the latest updates from the two largest university endowments, Harvard and Yale, the percentages they allocate to various asset classes are located in table below. While the average retail investor does not have access to private equity and hedge funds, he can invest in the remaining five asset classes through publicly traded vehicles like ETF’s and mutual...

Harvard and Yale Endowments

Harvard University sits atop the academic world with a staggering $25.9 billion endowment fund, nearly twice the size of the next biggest endowment at Yale University. This war chest has accumulated over the years on the basis of donations and the stellar returns recorded by the investment management arm of the endowment, Harvard Management Company (HMC). From 1983 through...

Evidence of the benefits of diversification

Modern portfolio theory. Lets look at the risk and return figures for 3 asset allocations since 1972. 1. 100% S&P 500 2. 60% S&P500 & 40% 10 Year US Govt Bonds 3. 20% S&P500, 20% Foreign Stocks (MSCI EAFE), 20% 10-Yr US Govt Bonds, 20% REITs, & 20% Commodities (GSCI) (AA is #3, the asset allocation portfolio). All figures are total return data,...

Sample Portfolios Beginning 12/31/2006

These portfolios by no means attempt to find the ideal asset allocation for everyone. Depending on your financial situation, the weightings of the assets could be very different. I am simply using these as a standard in order to compare the alternative portfolios.World Beta 5 Asset Class Portfolio25% US Stocks (VTI)25% Foreign Stocks (EFA)30% US Bonds (AGG)10% Real Estate...

Improvements to Standard Asset Allocation

The academic literature has found a number of adjustments an investor can make to improve upon the typical standard US Stocks & US Bonds allocation. In no particular order they are:1. Tilt the portfolio to value. (And tilt toward fundamental weightings)2. Tilt the portfolio to smaller companies.3. Add foreign and emerging equities.4. Add various types of bonds, ie TIPS,...

Diversification & Tracking Portfolios Beginning 12/31/2006

True diversification means moving outside of the typical US Equities and US Bonds to other asset classes. A simple 5 asset class portfolio could consist of :US Stocks (VTI)Foreign Stocks (EFA)US Bonds (AGG)REITs (IYR)Commodities (GSP)An investor looking to add more asset classes could easily approach 15-20 worldwide betas. In this blog, starting Dec 31, 2006 I will track a...

Risk Parity

Let's take a look at a way to practically implement risk-parity in a portfolio. A traditional 60/40 mix of stocks and bonds can be leveraged one of three ways. First, through a traditional margin account with the investor being charged the broker call rate + or - an amount relative to their account size. Currently the rate at Fidelity...

Intro Reading

Three white papers by Bridgewater and PanAgora to introduce the blog and the topics of post modern portfolio theory and risk-parity... "Engineering Targeted Returns and Risks" - Bwater "The Biggest Mistake In Investing" - Bwater "Risk Parity Portfolios" - PanAgora