Tag Archives: investment

Revisiting Asset Allocation Strategies

Summary Allocation between different classes is one of the most important decisions. 9 asset allocation strategies designed by famous investors provide a good starting point. Whilst returns are volatile, portfolio risk contributions tend to remain stable. One of the most important decisions for investors is their approach towards asset allocation. With a number of different asset classes and subclasses available, this task can easily become overwhelming. In an article published just over two years ago, I analyzed from the risk perspective 9 popular asset allocation strategies designed by famous investors. This time I would like to review the same strategies and compare how they have performed since my previous publication. Portfolio specifications come from Meb Faber’s website and they have been replicated using ETFs that most closely match the defined categories. All the statistics have been obtained from a publicly available analytical tool InvestSpy utilizing historical data for the last 2 years. 60/40 A “classical” portfolio consisting of 60% stocks and 40% bonds. Often considered as a simple benchmark for a balanced asset allocation and tends to be difficult to outperform over long time periods. (click to enlarge) Swensen Portfolio David Swensen has been the Chief Investment Officer at Yale University since 1985, where he is responsible for managing the university’s endowment fund and has a spectacular track record. This portfolio consists of 70% equities and 30% fixed income, split between several sub-classes. (click to enlarge) El-Erian Portfolio This portfolio is modelled on an allocation suggested in El-Erian’s book When Markets Collide and managed to outperform equities only portfolio over the last 40+ years. It is More aggressive than some others, this had 51 per cent in various classes of stocks, 17 per cent in bonds, and the remainder distributed between index-linked bonds, commodities and real estate. This portfolio is 60% invested in various sub-classes of equities, 29% in fixed income and 11% in commodities. (click to enlarge) Arnott Portfolio Rob Arnott is the founder and chairman of Research Affiliates and a portfolio manager at PIMCO. Bg proponent of fundamental indexing and smart beta, he has once suggested that the “ultimate” portfolio should consist of equal parts in a range of sub-asset classes. They add up to 30% equities, 60% fixed income and 10% commodities. (click to enlarge) Permanent Portfolio Created by the late Harry Browne in the 1980s, the Permanent Portfolio divides holdings into four equal pieces of stocks, long-term U.S. treasuries, cash, and gold. Simple as it looks, the Permanent Portfolio had only 3 down years over the last 30 years! (click to enlarge) Andrew Tobias Portfolio Andrew Tobias is a well-known author who proposes a “lazy” portfolio with only three equally sized holdings: US stocks, international stocks and US bonds. (click to enlarge) William Bernstein Portfolio William Bernstein is an investment advisor and best-selling author with a strong focus on efficient asset allocation. The portfolio below tries to replicate his suggestion in the book The Intelligent Asset Allocator . 75% are invested in bonds and the remainder in fixed income. (click to enlarge) Ivy Portfolio The Ivy Portfolio has been proposed by Meb Faber, who is a co-founder and the chief investment officer of Cambria Investment Management as well as a popular author. His proposed portfolio consists of equally weighted 5 components: bonds, US stocks, international stocks, real estate and commodities. This effectively equates to 60% stocks, 20% bonds and 20% commodities. (click to enlarge) Risk Parity Portfolio Risk parity is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital. There are countless versions of implementation and this particular one has 20% invested in equities, 70% in fixed income and 10% in commodities. (click to enlarge) Conclusion Analysing the tables above, there are a few interesting observations: The best performer in terms of absolute returns was the simplest portfolio – 60/40, which gained 15.0% over the last two years. Swensen portfolio was second with a 10.4% return. The superior performance of these two portfolios was largely due to their substantial allocations to US equities as well as limited or non-existent exposures to commodities and emerging markets. The only two portfolios to post a negative return in the specified period were El-Erian (-2.4%) and Ivy (-0.8%). Both of these portfolios suffered badly from underperformance of commodities and turbulence in emerging markets. All 9 portfolios experienced a massive decline in annualized volatility, which in most cases more than halved. This comes as no big surprise though as the reference period covered August 2008 – August 2013 that included the peak of the financial crisis. Finally, and probably most importantly, risk contributions in portfolios remained very close to the levels seen two years ago, with the only exception being the Risk Parity portfolio. This is a great illustration that even though portfolio returns are volatile, the risk sources tend to be stable. And it is a good reason why analysis of risk metrics should always be a part of the investment decision making process.

Consider Taking Tax Losses Now – Beat The Year-End Bounce Rush

Recent stock market volatility has resulted in portfolio losers. NOW is the time to consider tax-loss selling to beat the year-end bounce rush. There are several questions to ask when considering taking a stock tax loss. With all the volatility in the stock market this year, many investors probably find themselves holding some stocks in which they have sizable losses. By selling those losers and realizing those losses, you can use the losses to offset taxable gains that you may have realized during the year. Most individual investors think about this strategy in December, which means that this tax-loss selling could push the price of some of these stocks even lower. This means that you probably don’t want to be selling your losers then, and may in fact want to consider buying some of these beaten down stocks to take advantage of this tax-generated downward pressure that goes away on January first. I’ll discuss this in more detail in the December issue of my investment newsletter . Moreover, under the U.S. tax code you can buy a stock back 31 days or more after selling and still recognize the loss. (If you sell in 30 days or less, the IRS will not allow the loss). This way you can take the tax loss and still participate if the stock eventually rebounds. When considering taking a tax loss in a particular stock, there are several questions you need to ask yourself: “Do I really want to own this stock anymore?” If not, you should just sell it and move on to other stocks with better gain potential. If you do want to own the stock for the long haul, there are other considerations: “How likely it is to rebound sharply in the next 30 days?” If you think the likelihood is high, you probably should not take the tax loss. Similarly, if you have a sizable position, you need to consider whether there is enough trading volume in the stock to get out and then back in 31 days later without significantly affecting the stock price. If you are concerned about the volume in the stock, it may be better to look elsewhere for your losses. Read more of my most recent investing advice and turnaround stock picks . Share this article with a colleague

2015 Q3 Value Performance Update And How I Value Markets

Summary Proof that you shouldn’t follow “smart money”, as it’s herd mentality. A list of my 2015 Q3 value strategy performances. A look at how I value the market to know whether it’s expensive. The final quarter. The home stretch. If you took advantage of the small market correction, great job, because the market has “recovered” about 6% already. The last thing you should do is take advice from what you hear on TV or the radio, because that’s where the peak of herd mentality exists. The talking heads don’t provide any deep insight or outside views, as it’s their job to provide simple outer-layer analysis that any average Joe can understand. You actually come out smarter if you ignore everything they say. Here’s a look at what I mean. This is the performance of the top 20 stocks held by hedge funds, according to novus.com . (click to enlarge) How does this look in a chart? (click to enlarge) Not impressive. Especially when people running these funds are supposed to be Ivy League top 0.1% brains. It’s quite easy to avoid these “top 20” names. Ignore news and headlines. Ignore popular stocks. Ignore complicated stocks you don’t understand. Investing doesn’t have to be complicated. Most of the investments above have complicated stories. If you’re looking for a simple business and investment thesis to understand, don’t look at hedge fund holdings. This is GREAT news for people like us. After all, the advantage that small investors and fund managers have is that we don’t have to play by their rules. It’s perfectly within the rules to resist the steady drumbeat of calls to activity. So, how does it look on the value side? Value Investment Strategy Performances 2015 Q3 YTD Even though on I’m on the value side, it’s not easy. It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger At the end of each quarter, I take some time to see what’s working and what isn’t working with a list of predefined value stock screens I follow. Here’s how it looks at the end of Q3. These are YTD performances. A lot can happen in one quarter, as you can see in the following image. The tables are organized so that the best-performing screen is at the top of each quarter. (click to enlarge) Don’t Blindly Follow High-Performance Screeners Last quarter, I mentioned how you should ignore the NCAV (Net Current Asset Value) and NNWC (Net Net Working Capital) performances this year. On paper, the results are mind-blowing, given the conditions this year, but in reality, it’s not so great and shows how difficult net net investing can be in a bull market. What do I mean? NCAV and NNWC produced only 8 and 12 stocks in the results respectively. They both include VLTC, which has done this. The problem is that at the beginning of the year, you wouldn’t have been able to purchase enough of it in your real-world portfolio due to low liquidity. It’s only after a spike that volume increases as traders and momentum seekers join the party. Plus, holding only 8 or 12 net nets in a bull market is not a strategy I want to employ. The 2015 NNWC stocks look like this: Thanks to one stock, the NNWC stock performance is up 30%. You may say that it’s the outcome that’s important, but I call this one more luck than skill. Why Bother Tracking Net Nets Or Underperforming Screeners? So why do I bother tracking this or other underperforming screens? The easy answer is to say that that one year doesn’t signal long-term performance, and then show you this table of results. (click to enlarge) (Source: Old School Value Stock Screener Performances ) But the better answer is that it’s a very simple and effective way for me to track how expensive the market is. I don’t refer to market P/E or Market-to-GDP, as it only looks at the entire market. I’m only interested in finding pockets in the market that provide value – mainly on the value investing side – and this is how I try to track and find those pockets of opportunity. Here are some more observations. When Mr. Market falls, it doesn’t care who you are. In fact, Mr. Market will take quality, growth and value all down with him. Risk management should be at the top of your list day in and day out. Boring value stocks fall less hard, but also don’t rise as quickly. Net Nets Are Awesome Indicators Let me revisit another reason why I like net nets. Using the number of net nets available as an indicator is a great way to expand Graham’s “net net” concept into a market valuation idea. In 2013, I made the claim that Ben Graham was a closet market timer, and drew up the following chart and table. Even without a table or chart like this, it’s obvious when the market is cheap. But it’s also most scary, which is why you need a table or chart like this where the facts smack you in the face. I haven’t updated this table in a while, but 2014 and 2015 are similar to the 2011 levels. Summing Up Investing is hard. “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger Ignore herd mentality. Ignore what the top funds are holding. Don’t play by the same rules as the big boys. Make use of your advantage, like buying smaller stocks, illiquid stocks, out-of-favor stuff. Net nets are awesome indicators. Recommended Reading