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Index funds

Discussion in 'Business, Careers & Education' started by Connemara, Feb 16, 2011.

  1. ginlimetonic

    ginlimetonic Well-Known Member

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    This paper might give you some food for thought. It uses an asset allocation portfolio combined with a bit of market timing to control risk. It is unlikely to give returns that will make you the talk of the town. However, it should lead to fairly safe long term returns with modest drawdowns. Note that it is not an attempt at optimization on the timing models. The original idea came from trying to replicate the returns of the Harvard and Yale investment portfolios. An individual with a moderate account (millions, not billions) could slice up the asset classes a bit and use some more active timing models.
    "A Quantitative Approach To Tactical Asset Allocation"

    World Beta Blog

    I worked up a fairly simple spreadsheet that has a few tweaks and a few more links for reading. If anyone has an interest in looking at it, send a PM and I can foreward it to you. All it requires is a simple chart check every two weeks. The general strategy is to compare the average price this week with the average of the last six months and ten months. If higher then be long. If lower then be in cash. The thing would probably need at least $10K to be efficient from a trading cost standpoint.


    The Price> MA(x) strategy works in trending markets. doesn't work in non-trending markets.
     
  2. The Thin Man

    The Thin Man Well-Known Member

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    There isn't much in that article about the actual allocation (which makes sense...Yale's risk profile is probably constant over time while a 25 year old will want something different at 40) but the key is rebalancing.

    Well, while there isn't an explanation of the percentages, they are on the graph on the lower left. In a later article, Swensen recommended 15% REIT and 10% developing markets, to go with 30% US, 15% Treasury bonds, 15% TIPS and 15% developed markets.

    He doesn't focus too much on changing the allocation for age, although he suggests more money in cash and TIPS when you're close to retirement.
     
  3. Charley

    Charley Well-Known Member

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    The Price> MA(x) strategy works in trending markets. doesn't work in non-trending markets.

    Non trending markets will show little gains to be made. Effectively you miss nothing by being out. However, there is a great deal to be gained from avoiding losses in declining down trending markets.

    Tha strategy outlined is not particularly intended or protrayed as optimized. It simply gives about the same returns without the hazardous and gut killing drawdowns. Check it every couple of weeks (easy enough) and if the current price is greater than the average of the last ten months continue to hold. Ten months is a pretty long term average and is not very whippy. The number of trades are outlined in the paper. The general outcome is that you would probably be invested during the non trending markets anyway. Describing it in the most basic general terms, it amounts to checking to see if the investment has been profitable (not necessarily the most profitable) and if it is continue to hold it.
     
  4. Charley

    Charley Well-Known Member

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    There isn't much in that article about the actual allocation (which makes sense...Yale's risk profile is probably constant over time while a 25 year old will want something different at 40) but the key is rebalancing.

    Set a reminder in your calendar every quarter (or even just once a year) and do it. It might feel "wrong" to sell funds that have done well in exchange for sectors that have not...but if you don't do this, your asset allocation gets messed up (if you had kept a strict rebalancing regimen during the crash, you would have shifted more money into equities as the market went down which would have paid off when the market came back...if you had not rebalanced, you would have been hit hard by the crash and gotten nothing extra from the recovery).

    If you are doing this retirement funds in an IRA or a 401k, you don't have to worry about the tax implications so you can trade like Yale and rebalance as much as you want (although trading fees will hit you in a self directed IRA...I use a broker with 3 free mutual fund trades each month which allows me to keep a balanced portfolio over time)


    The recommended allocations are noted at the bottom of the article. However I'm not so sure about his daily rebalancing approach and how it might work for the small account investor. Consider that with a $50,000 account you would have $15,000 target allocation to the US equeties. Then 2% out of balance is only $300 for a trade and the trading costs could be $25 or so as it takes a sell and a couple of buys to reallocate. Also remember that Swenson has had a large allocation to "Alternative Investments" which are likely highly leveraged funds in LBO investments or hedge funds. So, while the leverage does not exactly show up in the investment chart, it is in there in a different form.

    As to the rebalancing question, I did find a pretty interesting academic paper that looked at what the frequency should be. The conclusion was that rebalancing should not be based upon any particular time frame. The best approach was found to be waiting until the particular asset class was 20% out of balance from the target weight. At that point bring it back to only 10% out of balance, not to exactly the target weight. Something has caused the class to outperform (or others to underperform) and this method allows you to continue with the trend with a bit of overweight. This method would also give fairly infrequent trades and not increase trading costs that much. If you use the Faber approach and bi-weekly evaluations that that would be pretty easy to keep up with.

    If you are running your own IRA you might look at Foliofn as a possible proker choice for running something like this. $250 a year for several hundred trades a month during the two daily window trade periods or $3 for market orders. There is a feature that will simply rebalance to the target weights and do the dollar amount calculations for you. You can hold partial shares so it gets pretty fine tuned on hitting the weights.
     
  5. thinman

    thinman Well-Known Member

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    If you know you want to invest in index funds, the execution is easy. The differences between any two funds set up to track the same index are (1) how well-constructed are they, i.e. how closely do their returns [without considering fees] actually track the index and (2) how high are the fees. Find a publication that reports fund returns including fees, compare the various funds and compare them to the index. Pick the one that gives the highest return. Vanguard has traditionally had the lowest fees and their S&P 500 fund tracks the index very closely. Recognize that by investing in an index fund, you are betting that the segment of the market tracked by the index is going up.

    IMO, it is silly to pay a brokerage fee to invest in an index fund because you are paying a fee for zero expertise (you can get the same result without paying a brokerage fee by investing in a no-load index fund). For similar reasons, I'm skeptical of ETFs designed to track an index (are there such beasts?) because their share value should be easily discernible, but their fees will be higher than a no-load index fund.
     
  6. maverick

    maverick Well-Known Member

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    I don't understand the last sentence. I am pretty sure ETF index funds have among the lowest fees out there.
     
  7. otc

    otc Well-Known Member

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    I don't understand the last sentence. I am pretty sure ETF index funds have among the lowest fees out there.

    Maybe he meant to include trading fees. If you are making monthly contributions to a mutual fund, you can usually figure out how to do that for free...monthly ETF trades are going to hit you up for a commission every time.
     
  8. Sixers_610

    Sixers_610 Well-Known Member

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    Go with the lowest fees. Vanguard usually can't be beat.
     
  9. thinman

    thinman Well-Known Member

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    Maybe he meant to include trading fees. If you are making monthly contributions to a mutual fund, you can usually figure out how to do that for free...monthly ETF trades are going to hit you up for a commission every time.

    Thank you. I did mean trading fees for ETFs.
     
  10. Valproate

    Valproate Well-Known Member

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    Go with the lowest fees. Vanguard usually can't be beat.

    I second this. Vanguard.
     
  11. Catalyst

    Catalyst Well-Known Member

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    China and Canada index funds. Anyone?
     
  12. mkarim

    mkarim Well-Known Member

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    Yes, I am. These are funds I already have in the market but they are not exactly diversified...the entirety of that sum is in Wells Fargo stock.


    You are not diversified but that's probably the single best stock for long-term returns. Warren Buffett said that if he could put ALL his money into one stock it would be Wells Fargo. He recently added to his Wells Fargo holdings.
     
  13. mkarim

    mkarim Well-Known Member

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    I just gave WFC a good look-over at Morningstar and you seem to be right...maybe I'll hang on to it for a few years and just save up for an index fund.

    You don't know how much I regret not buying WFC in the teens (and/or American Express at $10) during the Sale of the Century crash!
     

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