Awww...modern portfolio theory...that feel-good construct I teach to all of my graduate-level finance students each year. Simply input 1) a vector of expected returns and 2) a covariance matrix into your computer, and voilà, you [...]
Simple timing rules, focused on absolute and trending asset class performance, seem to be useful in a downside protection context. Our analysis of the downside protection model (DPM), applied on various market indices, indicates there is a possibility of lowering maximum drawdown risk, while also offering a chance to participate in the upside associated with a given asset class. Important to note, applying the DPM to a portfolio will not eliminate volatility and the portfolio will deviate (perhaps wildly) from standard benchmarks. For many investors, these are risky propositions and should be considered when using a DPM construct.
Robust asset allocation solutions should be relatively simple, minimize complexity, and be robust across different market regimes. Simultaneous to these requirements, the solution must be affordable, liquid, simple, tax-efficient, and transparent, otherwise, many of the benefits of the solution will flow to the croupiers and Uncle Sam. We recommend that investors explore our robust asset allocation framework and go for the do-it-yourself solution. You'll be paying yourself 1%+ a year via saved RIA fees. Is this the only solution? No. But any solution must be robust, simple, tax-manageable, and low-cost. This is our best effort to develop a simple model. Developing a complicated model is easy; simple is difficult.
Were in the middle of an academic research project and we ran a simple long-term trend-following model from January 1, 1801 to September 30, 2015. Recently, there has been some research on the performance of trend-following rules [...]
How Should I Tactically Allocate my Assets? A lot of investors ask this question as their wealth grows and the number of financial products grows exponentially. In order to generate a response, investors pay money to [...]
Executive Summary: Dual Momentum, a concept pioneered by Gary Antonacci, intelligently combines elements of two types of momentum investing strategies -- absolute and relative momentum -- into a comprehensive asset allocation system. His paper shows that [...]
We've had a few posts showing that asset allocation systems relying on market valuation indicators (e.g., Shiller CAPE ratios) as a timing signal may end up in disappointment... Can market Valuations Be Effective Market-Timing Signals? Dissecting [...]
As "everyone" seems to know, the US 10-year Treasury bond has a low relative yield and is "inevitably going to rise at some point in the future." We have no strong feelings one way or [...]
Investors have been worrying, at least for the last several years, that the market is overvalued. By some measures this is undoubtedly true. Just yesterday we highlighted that the Shiller CAPE is in the 94th percentile as of [...]
We have discussed market valuations in the past, but the issue of market valuations was recently raised on CNBC, when Robert Shiller suggested he may shift out of the US and buy Europe. When Shiller speaks, we [...]
The holy grail of financial markets is finding strategies that have misaligned risk and reward characteristics. In the traditional view, investors try to do the following: Identify strategies that have high returns, then... find ways [...]
Executive Summary Although it has been very difficult to overcome our initial skepticism, we've finally accepted the notion that simple technical analysis may serve as an effective way to manage risk and to time markets. [...]
Strategies employing risk parity have been favored by mutual funds and other market participants the past few years. The attraction of risk parity strategies are two-fold: 1) the great story associated with the approach and [...]
The Graham-Harvey survey is complete and the expectations of CFOs are available for review. As the figure below highlights, expected returns on the S&P 500 have been gradually decreasing over time. As of Q1 2015, [...]
Last week we had a fairly long post on a valuation based asset allocation strategy that might actually work. This post followed a couple of other research projects on the issue, which showed limited evidence [...]
A recent IMF World Economic Outlook survey projected that in 2015-2016 advanced economies will grow at 2%-2.5% rate, while emerging and developing markets are growing at a more robust 4%-5%, led by India and China, [...]
Ben Carlson splashed onto the blog scene a few years ago with his hit website, aptly named, "A Wealth of Common Sense." My initial reaction was, "Oh great, here we go again. Some kid trying to pretend [...]
Here is one of the figures in a Journal of Finance paper published in 2013 by N. Garleanu and L Pedersen. The figure depicts various portfolio optimizations under different assumptions and then has a visualization [...]
Here is a snapshot of a model portfolio built on the Quantitative Value philosophy. Note: we exclude financials in our analysis, so by construction they have a 0% allocation May 2017 Update on sector allocations Consumer [...]
Peter Hecht, Ph.D., a fellow Chicago Finance PhD, and vice president of Evanston Capital Management, recently posted an article introducing a practical solution for active portfolios return attribution: Finally, a practical solution for decomposing returns into alpha and [...]
