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  #51  
Old 10-26-2007, 06:30 PM
Gigi Gigi is offline
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Default Re: How safe is the stock market?

[ QUOTE ]
and those return #s look low, but they are excess return #s so don't include the 'risk free rate' that you get in addition to it (probably like 3% or so).


[/ QUOTE ]

So this give you around 8%-9% return?

Can you explain how this is better than the suggested portfolio linked below which a lot of people have been posting http://www.fundadvice.com/portfolio.html
Annualized return: 13.1%
Std Dev: 10.9

It is based on portfolio #6 found here:
http://www.fundadvice.com/articles/b...-strategy.html

This portfolio is also unleveraged, has no load fees, and minimum expense ratios.
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  #52  
Old 10-27-2007, 03:56 AM
DcifrThs DcifrThs is offline
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Default Re: How safe is the stock market?

[ QUOTE ]
[ QUOTE ]
and those return #s look low, but they are excess return #s so don't include the 'risk free rate' that you get in addition to it (probably like 3% or so).


[/ QUOTE ]

So this give you around 8%-9% return?

Can you explain how this is better than the suggested portfolio linked below which a lot of people have been posting http://www.fundadvice.com/portfolio.html
Annualized return: 13.1%
Std Dev: 10.9

It is based on portfolio #6 found here:
http://www.fundadvice.com/articles/b...-strategy.html

This portfolio is also unleveraged, has no load fees, and minimum expense ratios.

[/ QUOTE ]

i haven't dug into it yet but there is one MAJOR thing that i did that i'd bet nobody calculating a portfolio did: i assumed that the sharpe ratio of all asset classes are between .2 and .3

to get excess returns, i then multiplied the historical (with logical thought behind it) standard deviation of the excess return * the sharpe ratio for that investment/asset class etc.

i'd be willing to bet what you posted uses historical return figures as if they were fact.

i'd bet if i redid it to standardize it, it would come out with something like a .35 at BEST sharpe ratio.

Barron

EDIT: yup, i justvery quickly glanced over the 2nd link and they a) show total return (i.e. the return that includes the risk free rate) and b) don't come anywhere remotely close to thinking about standard deviation of a portfolio correctly.

for b) they don't take correlations into account.

overall i'd say their analysis is very flawed. how can you talk about portfolio standard deviation without taking into account correlations?

when two things are highly correlated, their risks are almost additive.

when two things are highly negatively correlated, their risks counter act each other.

omg, and don't even get me started about 60% equity 40% bonds. that portfolio is 80% equity 20% bonds because in risk space (not even taking into acct correlations) equity risk dominates the portfolio
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  #53  
Old 10-27-2007, 12:20 PM
edtost edtost is offline
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Default Re: How safe is the stock market?

[ QUOTE ]
omg, and don't even get me started about 60% equity 40% bonds. that portfolio is 80% equity 20% bonds because in risk space (not even taking into acct correlations) equity risk dominates the portfolio

[/ QUOTE ]

barron,

no one outside of the quant world talks about investments in risk space, and you're not going to get any converts, because weight space is a much more intuitive way to talk about portfolios, even if it does give misleading statements.

-ed
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  #54  
Old 10-27-2007, 12:59 PM
DcifrThs DcifrThs is offline
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Default Re: How safe is the stock market?

[ QUOTE ]
[ QUOTE ]
omg, and don't even get me started about 60% equity 40% bonds. that portfolio is 80% equity 20% bonds because in risk space (not even taking into acct correlations) equity risk dominates the portfolio

[/ QUOTE ]

barron,

no one outside of the quant world talks about investments in risk space, and you're not going to get any converts, because weight space is a much more intuitive way to talk about portfolios, even if it does give misleading statements.

-ed

[/ QUOTE ]

i disagree to a point. risk space is fairly intuitive and gives a clear picture of what the portfolio looks like.

here is a slide i just whipped together based off of the initial portfolio i described . it is ugly but gives an idea of why i think risk space can be intuitive.



so you see, a 60% stock 40% bond allocation is really about 77% stocks and 23% bonds. the riskiness of stocks, and their high correlation with each otehr (i gave US stocks 80% correlation and int'l stocks 60% correlation) end up giving stock allocations more weight than less risky, lower correlated bonds (i.e. TIPS are about 25% correlated with US bonds over longer time horizons and high yield bonds are only about 60% correlated with govt bonds due to credit risk....but obv corporate bonds & HY bonds are bout 80% correlated in the example above)

ignore the ugly colors and the non-prettyness of the slide [img]/images/graemlins/frown.gif[/img]

maybe i'm naive but it seems that this would be a perfectly fine way to convey what the portfolio is exposed to.

NOTE: the #s are calculated based of historic & logical assumptions of correlations & volatilities of the exposures listed.

what do you think?
thanks,
Barron
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  #55  
Old 10-27-2007, 04:07 PM
TLC TLC is offline
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Posts: 106
Default Re: How safe is the stock market?

[ QUOTE ]
the 2x target is obtained through futures, options, the physical security, and swaps.

i know it is dependable b/c of the list of massive purchasers of this fund. this is how the best get leverage (my old employer uses this i just found out so that makes me extremely confident in its validity).

[/ QUOTE ]
Why doesn't RYTTX produce 2x the TR of VFINX?

2005 3.4 vs. 4.8
2006 23.8 vs. 15.6
2007 11.94 vs. 9.74
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  #56  
Old 10-27-2007, 05:00 PM
Gigi Gigi is offline
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Default Re: How safe is the stock market?

You don't. It appears to be a common misconception that you get double the annual returns. The fund tries to get double the daily returns, but also lags in this because of the high internal transaction costs.

I just started reading up on these leveraged funds. The leverage is not free, you will pay at least the risk free rate. Other costs include taxes on the dividends (much greater than a vanilla etf), high expense ratio, front end load fee.

Take a look at these articles:
http://seekingalpha.com/article/3119...struction-trap
http://seekingalpha.com/article/3578...leveraged-etfs
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  #57  
Old 10-28-2007, 02:52 PM
DcifrThs DcifrThs is offline
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Default Re: How safe is the stock market?

[ QUOTE ]
You don't. It appears to be a common misconception that you get double the annual returns. The fund tries to get double the daily returns, but also lags in this because of the high internal transaction costs.

I just started reading up on these leveraged funds. The leverage is not free, you will pay at least the risk free rate. Other costs include taxes on the dividends (much greater than a vanilla etf), high expense ratio, front end load fee.

Take a look at these articles:
http://seekingalpha.com/article/3119...struction-trap
http://seekingalpha.com/article/3578...leveraged-etfs

[/ QUOTE ]

thats what i get for blind faith in my old employer lol.

i didn't even run the #s as an example.

thanks for the links. the articles are very well done even if they don't deal in excess returns (mostly b/c it isn't necessary to prove the point)

i'm gunna have to say then that it is currently not possible to generate the portfolio i'd like to build with this leverage due to the failures of the leveraged funds to produce double the long term returns not even counting fees.

thanks again for the post.

Barron
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  #58  
Old 10-28-2007, 07:16 PM
Gigi Gigi is offline
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Default Re: How safe is the stock market?

Did quite a bit of reading yesterday. I'm pretty new to all this but have been learning quickly. The problem with the portfolio from fundadvice.com is that is has a high beta. Ray Dalio (CEO of Bridgewater, manages $150 dollars worth of assets) talks about what Barron is suggesting, using leverage to create an optimal portfolio.

[ QUOTE ]
Mr. Dalio proposes to solve this problem using leverage with asset classes that have low correlation between them (think of the correlation matrix), but which have average returns that are too low to be of interest in meeting your 10% targeted average annual return without leverage. His point is that with leverage, you can increase the average rate of return of even low-return asset classes to the point that you can profitably include them in a portfolio with a targeted average return of 10%. The purpose of this is to be able to exploit the diversification benefits of the very low correlations available in some low-return asset classes. This is an important strategy, but it is largely academic to most individual investors.

[/ QUOTE ]

Articles: (Post-Modern Portfolio Theory)
http://seekingalpha.com/article/2180...-for-your-risk
http://seekingalpha.com/article/5011...ur-risk-part-2
http://seekingalpha.com/article/2458...set-allocation
http://soundmoneytips.com/article/25...portable-alpha

[ QUOTE ]

You can have a portfolio that is projected to a close to 1-to-1 ratio between expected return and standard deviation in return.

Any investor should be able to beat the S&P500 on an absolute and risk-adjusted basis by combining low-correlation assets


[/ QUOTE ]

Now I'm been looking into market neutral portfolios. It seems too good to be true? Instead of investing in indexes (that get rid of your unsystematic risk, but create a high beta and R^2) you invest into a few uncorrelated stocks. During 2000 - 2003 a portfolio like this would get 14% return and std dev is 14% as well. See link below:

http://seekingalpha.com/article/23986-th...ower-volatility
http://seekingalpha.com/article/19903-lo...-current-market
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  #59  
Old 10-28-2007, 07:29 PM
Gigi Gigi is offline
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Default Re: How safe is the stock market?

On another note, when should you borrow capital? Let's say you have 50% large cap and 50% emerging markets. I've read that as a young investor, is it appropriate to borrow 1/3 of your capital. Is it better to not borrow and go 100% on emerging markets, or borrow money and keep the proportions 50/50?

In regards to borrowing, with margin rates being high unless you have $1 million is assets, does it make senses to short something such as AGG to borrow capital? Not counting bond price fluctuations, it seems you will just have to pay the ~5% dividend every month for your short, which is much cheaper than margin rates.
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  #60  
Old 11-08-2007, 02:24 PM
Foghatlive Foghatlive is offline
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Default Re: How safe is the stock market?

We're currently seeing an example of the inherents risks of the stock market. Citibank, the largest bank in the world, as blue as a blue chip can get, has lost 40% of its value in the past month.
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