Posts filed under “Asset Allocation”

Spot the Outlier

AA rebal
Source: Capital Spectator

 

A few weeks ago, I spoke at an Financial Advisor conference in Denver. There was some concern about asset allocation returns — it seemed that the more diversified you were, the worse your performance numbers were.

Josh quoted a financial advisor who lamented: “Why bother diversifying at all? It’s just a drag on performance What’s the point of owning any bonds or international stocks?”

Of course, we know how this movie ends: Everyone plows into the big winner — in this case, US equities — just before they mean revert. As we showed earlier this week, no one knows which asset class will be the out-performer each year. So you own all of them, and stop fretting over what is going to be the winner.

A good financial advisor will explain this way in advance — so the first time you think about this isnt when you open your quarterly statement and notice the SPX is kicking your ass this year.

The issue here isn’t the maths — either you understand mean reversion or you don’t — but rather the emotional challenge of sticking with what we know will work.

 

Category: Asset Allocation, Investing, Psychology

Annual Returns by Asset Class

Click for ginormous table
Table
Source: J.P. Morgan

 

I really like the above table — its a terribly instructive reminder as to how little we know about the future. Look how often the sector you least expected to be the winner ended up on top.

Its also instructive to see what ends up near the top of the list on a regular basis.

The breakdown of Fixed Income annual winners is after the jump.

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Category: Asset Allocation

Reducing Energy Weighting

Reducing Energy Weight David R. Kotok Cumberland Advisors, July 29, 2013     Last week we reduced our energy exposure to underweight. It had been overweight for a while, and we successfully participated in the rebound in natural gas prices and the narrowing of the spread between Brent and WTI (West Texas Intermediate) oil. It…Read More

Category: Asset Allocation, Energy, Think Tank

The Purgatory of Low Returns

Click to enlarge GMO 7-Year Asset Class Real Return Forecasts: 2007     Have a look at the charts above and below. They are from James Montier’s GMO Quarterly Letter, July 2013, titled The Purgatory of Low Returns; you can download the full PDF here (registration may be req’d). (Note to Josh: This quarter, Ben…Read More

Category: Asset Allocation, Cycles, Investing

Asset Classes

We have all seen the standard depiction of asset allocations — I thought this version — via UBS — was a more interesting depiction of the usual chart.   Click for ginormous graphic     Source: UBS House View, July 2013 Mike Ryan Monthly Investment Guide CIO Wealth Management Research

Category: Asset Allocation

Missing the big stocks rally: Readers push back Barry Ritholtz, Washington Post June 28 2013     Last time, I talked about what investors should do if they sat out the big market rally in recent years. In brief, I advised making changes of both a behavioral and investing nature. The behavioral issues included admitting…Read More

Category: Apprenticed Investor, Asset Allocation, Investing

Unsexy Finance vs Cat Food Tacos

Yeah, this time it was my fault — in the midst of a long conversation about taking the emotions out of investing and making finance boring, I dropped a line about cat food tacos. So once again I am in the click bait headline machinery.

Actually, the heart of the advice was from the asset allocation articles in the WaPo (here and here) essentially ” Invest Boringly.”

It looks something like this:

Have a plan.
Execute it faithfully.
Be diversified.
Contribute regularly.
Max out tax-deferred accounts.
Be an asset allocator.
Think long-term.

Not exactly radical, but “Cat Food Tacos” will generate a lot more clicks than “invest boringly.”

Here’s the video:

click to start video
cat food tacos

 

Source: Ritholtz: You Can “Eat Cat Food Tacos In Retirement,” Or You Can Do This… (Yahoo Finance)

Category: Asset Allocation, Investing, Media, Video

Pushing Back Against the Big Rally Miss

>   Two weeks ago, I managed to anger quite a few people with a Washington Post column titled: Missed the big market rally? Here’s what to do now. There were a variety of perturbed commenters both here and at WaPo as well as angry emails and assorted bemused tweets. While lots of readers, commenters…Read More

Category: Apprenticed Investor, Asset Allocation, Cognitive Foibles

The Cost of Cash

I am not sure I fully agree with this BlackRock chart — there are times when cash makes sense. However, I cannot disagree with the takeaway that you cannot sit in cash for very long stretches of time (years) and expect any sort of return above inflation.   Click to enlarge Source: BlackRock

Category: Asset Allocation, Investing

Time, Time, Time Is On Your Side (Yes it is)

market-returns_large
Source: Motley Fool

 

Morgan Housel has a very insightful column this morning, driven by one of my favorite topics: Taking yourself out of the minute-to-minute, day-to-day time frame and rethinking your investing parameters in terms of years and decades.

That longer time frame is an enormous luxury, a monstrous advantage amateurs at home have over the pros.

Here’s Housel:

“You’re trying to fund your retirement over the next 20 years. Hedge fund managers have to woo their clients every month. You’re saving for your kids’ education next decade. Mutual fund managers have to fret about the next quarter. You can look years down the road. Traders have to worry about the next ten milliseconds.

Most professional investors can’t focus on the long run even if they want to.”

Or to be even more succinct, Henry Blodget observes that professional managers are “thinking about the next week, possibly the next month or quarter. There isn’t a time horizon; it’s how are you doing now, relative to your competitors. You really only have ninety days to be right, and if you’re wrong within ninety days, your clients begin to fire you.

That is the beauty of the chart above showing (inflation-adjusted) S&P500 returns going back to 1871 relative to various holding periods.

Short term is more or less random; longer term, the odds move in your favor. And very long term approaches 100% positive returns, even after inflation.

“Hold stocks for a year (Wall Street’s territory) and you’re at the mercy of the market’s madness — maybe a huge up year, or maybe a devastating loss. Five years, and you’re doing better. Ten years, and there’s a good chance you’ll be sitting on positive annual returns. Hold them for 20, 30, or 50 years, and there has never been a period in history when stocks produced an average annual loss. In fact, the worst you’ve done over any 30-year period in history is increased your money two-and-a-half fold after inflation. Wall Street would love to think about those numbers. Alas, it’s busy chasing its monthly benchmarks.”

Go read the full piece + see the rest of the charts. Its great stuff . . .

 
 

Source:
Your Last Remaining Edge on Wall Street
Morgan Housel
Motley Fool, June 18, 2013
http://www.fool.com/investing/general/2013/06/18/your-last-remaining-edge-on-wall-street.aspx

 

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Category: Asset Allocation, Investing