14/06: Bounce?
The markets have been down for about five weeks. Perhaps it is time for a fierce "dead-cat" bounce?
OSF
June 14, 2006
OSF
June 14, 2006
09/06: Tortoise and the Hare
Perhaps you remember the famous race between the turtle and the rabbit? I am sure you do.
Benchmark has been advocating that most clients adopt the "slow and steady" approach to asset allocation and portfolio construction. If you have read our earlier posts you can see that we are very concerned about risk and have been for two years or longer.
Our suggestions have paid off for the patient investor. Last year our diversified portfolios did better than US stocks alone with something like one-third of the risk.
The early part of 2006 has been trying as the rabbit (risk taker) has been rewarded. Until May that is. The rabbit got spanked (many agressive portfolios fell 8% or more )in May and early June while our conservatively structured lists gave up about 1%. Benchmark's portfolios have come even with the aggressive portfolios for the year-to-date. The rabbit has come back to us.
What's next?
We do not know.
We do believe that maintaining a "tortoise-like" posture will pay off handsomely in the coming months. Slow and steady wins the race. The rabbit may experience a different outcome.
OSF
June 9, 2006
Benchmark has been advocating that most clients adopt the "slow and steady" approach to asset allocation and portfolio construction. If you have read our earlier posts you can see that we are very concerned about risk and have been for two years or longer.
Our suggestions have paid off for the patient investor. Last year our diversified portfolios did better than US stocks alone with something like one-third of the risk.
The early part of 2006 has been trying as the rabbit (risk taker) has been rewarded. Until May that is. The rabbit got spanked (many agressive portfolios fell 8% or more )in May and early June while our conservatively structured lists gave up about 1%. Benchmark's portfolios have come even with the aggressive portfolios for the year-to-date. The rabbit has come back to us.
What's next?
We do not know.
We do believe that maintaining a "tortoise-like" posture will pay off handsomely in the coming months. Slow and steady wins the race. The rabbit may experience a different outcome.
OSF
June 9, 2006
07/06: Comparing Performance
One of the slickest games on Wall Street is to compare the performance of a portfolio against an index that does not have the same characteristics. Have you ever fallen victim to this?
Imagine that during 2004 you had an investment portfolio managed by your friendly brokerage firm. You understand that the stocks were managed according to a "value" style. Typically this means that the stocks will have lower than market valuations, better than market dividend yields and lower than market price-to-book ratios. Often this is described as buying at a discount to real valuation.
So far so good.
At the end of 2004 you receive an investment update with a report on the broker's stewardship. It shows that you have a total return of 17% for the year (net of all fees). You are very pleased. Reading further in the report you discover that the broker has compared its performance to the Russell 1000 Value Index which had a total return of 16.5%. Using this yardstick you are even more pleased!
Is there anything wrong with this picture?
More questions need to be asked of the broker. The most important question for comparison purposes is this: Does the portfolio reflect the characteristics of the Russell 1000 Index? Alternatively, if the portfolio is invested in a mix of large and mid and small cap value stocks is this the right benchmark to use?
This is important because in 2004 the Russell 1000 Value (large cap) Index returned 16.5% while the Russell 2000 Value (small cap) Index returned over 22%. If the portfolio matches the large cap profile you should be pleased. If, on the other hand, the portfolio is all samll caps then you have under-performed by about 5%!
Investment professionals sometimes use an index that shows their work in the best light even though it may not be the best fit for comparison's sake. Be informed, ask questions and compare apples to apples.
OSF
June 7, 2006
Imagine that during 2004 you had an investment portfolio managed by your friendly brokerage firm. You understand that the stocks were managed according to a "value" style. Typically this means that the stocks will have lower than market valuations, better than market dividend yields and lower than market price-to-book ratios. Often this is described as buying at a discount to real valuation.
So far so good.
At the end of 2004 you receive an investment update with a report on the broker's stewardship. It shows that you have a total return of 17% for the year (net of all fees). You are very pleased. Reading further in the report you discover that the broker has compared its performance to the Russell 1000 Value Index which had a total return of 16.5%. Using this yardstick you are even more pleased!
Is there anything wrong with this picture?
More questions need to be asked of the broker. The most important question for comparison purposes is this: Does the portfolio reflect the characteristics of the Russell 1000 Index? Alternatively, if the portfolio is invested in a mix of large and mid and small cap value stocks is this the right benchmark to use?
This is important because in 2004 the Russell 1000 Value (large cap) Index returned 16.5% while the Russell 2000 Value (small cap) Index returned over 22%. If the portfolio matches the large cap profile you should be pleased. If, on the other hand, the portfolio is all samll caps then you have under-performed by about 5%!
Investment professionals sometimes use an index that shows their work in the best light even though it may not be the best fit for comparison's sake. Be informed, ask questions and compare apples to apples.
OSF
June 7, 2006
In his 2004 book, Fooled by Randomness, (highly recommended), Nassim Nicholas Taleb provided one of the better analogies for market risk that I have encountered. See page 198 and 199 of his book.
Briefly he asks the reader to consider that what matters most is the confidence we have in any forecast. He uses the story of a traveller who has two options for a November trip. The first is a visit to Arizona and the daytime temperature estimate is 60 degrees with an expected variance of plus or minus ten degrees. The second option is a trip to Chicago with the same temperature estimate only with possible variation of 30 degrees!
The traveller can pack simply for the trip to Arizona because she has high confidence that the likely temperature will be between 50 and 70 degrees so light-weight clothing will suffice. The trip to Chicago involves much lower confidence in the temperature and requires planning for winter and summer as it may be 30 degrees or 90 degrees. Much more uncertainty (risk?) in the Chicago option.
Good description of variation, no?
As an investor in the US large-cap stock market you can expect returns over the next ten years of approximately 5.25% each year according to Benchmark estimates. But in any given year the likely range will vary from a low of -30% to a high of +40%. Our confidence level for any given year is quite low. Confidence rises over longer time periods but the consequences of big down years need to be considered. Risk must be managed.
Investing in large cap US satocks is much more like a November trip to Chicago.
OSF
June 2, 2006
Briefly he asks the reader to consider that what matters most is the confidence we have in any forecast. He uses the story of a traveller who has two options for a November trip. The first is a visit to Arizona and the daytime temperature estimate is 60 degrees with an expected variance of plus or minus ten degrees. The second option is a trip to Chicago with the same temperature estimate only with possible variation of 30 degrees!
The traveller can pack simply for the trip to Arizona because she has high confidence that the likely temperature will be between 50 and 70 degrees so light-weight clothing will suffice. The trip to Chicago involves much lower confidence in the temperature and requires planning for winter and summer as it may be 30 degrees or 90 degrees. Much more uncertainty (risk?) in the Chicago option.
Good description of variation, no?
As an investor in the US large-cap stock market you can expect returns over the next ten years of approximately 5.25% each year according to Benchmark estimates. But in any given year the likely range will vary from a low of -30% to a high of +40%. Our confidence level for any given year is quite low. Confidence rises over longer time periods but the consequences of big down years need to be considered. Risk must be managed.
Investing in large cap US satocks is much more like a November trip to Chicago.
OSF
June 2, 2006
