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December 19 - December 31, 2018
it was generally accepted that small stocks had higher returns than large stocks.
small stocks are more risky than large stocks.
In the present graph, large stock and bond mixes appear to be slightly more efficient than small stock and bond mixes.
when the same graph, was drawn four years ago, the small-stock curve was slightly more efficient than the large-stock curve.
a little small stock goes ...
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But the basic principle remains that you get more bang for the buck in terms of both risk and return from small stocks.
It depends upon how much “tracking error” you can tolerate.
getting either the most return for a given degree of risk or being exposed to the least risk for a given return.
efficient frontier.
The concept of the efficient frontier is central to ...
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over very short periods your precise stock allocation matters a great deal, but this becomes less important over very long time periods.
The efficient frontier portfolios for the 1992–1996 period were heavy with S&P 500 and European stocks, while the efficient frontier portfolios for the longer period are heavy with Japanese, U.S. small, and precious metals stocks.
don’t show is what happens when you radically alter your allocation over time.
assume a constant allocation over the time period studied.
shifting your allocation over time is a recipe for disaster.
Because the markets have already impounded this information into the current price.
Strategic asset allocation為什麼是白忙一場的理由所在
The key point about the efficient frontier is this: it’s a chimera, the image of your Aunt Tillie in a cloud scudding overhead a few minutes ago. And again, if somebody tells you he or she knows where it is, turn and run the other way, as fast as you can.
The Importance of Rebalancing
that at the end of each year the investor rebalances the portfolio back to the target compositions.
This target composition is often referred to as the “policy allocation.”
But be forewarned: investing during market bottoms has the distinct feel of throwing money down a rat hole.
most successful asset allocation strategies will underperform the DJIA and S&P 500 about four years out of 10.
I would go one step further and state that if your asset allocation never significantly underperforms the S&P 500 then you are probably doing something wrong.
The object is to develop a long-term strategy, so that you become the casino owner, not the mark.
Optimal Asset Allocations
前面的重點摘要可參考
You cannot know future optimal portfolio composition
Hypothetical optimal allocation refers to the process of postulating a set of returns, SDs, and correlations and then calculating the optimal allocations for these inputs.
it is a very poor way to determine future allocations.
mean-variance analysis,
A software application which uses this method is called a mean-variance optimizer (MVO).
Asset returns have a tendency to “mean revert” over long time periods;
Markets that have experienced abnormally high returns have usually undergone a substantial increase in price as a multiple of earnings, and this is almost always the result of increasing optimism surrounding that asset.
A well-diversified portfolio is not a free lunch. It does not come anywhere near eliminating risk; economic catastrophes do not respect national borders.
Worse, the correlation coefficients calculated between assets somewhat overstate the diversification benefit because the correlation of below-average returns turns out to be higher than for above-average returns.
“negative semicorrelations” are greater than the “positive semicorrelations.
the actual correlation of asset returns in severe bear markets is higher than the “raw” correlati...
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This is why simple portfolio backtesting is a valuable supplement to MVO; one can actually see how well a proposed portfolio responded in an actual bear market.
A major argument against international diversification is that of sovereign risk—the possibility that one’s assets will be expropriated by a foreign government or be lost in a war.
The perils of long-term international investing should not be understated, but it is important to understand the mathematical nature of long-term risk.
Others argue that because of the globalization of our economy, international diversification has lost its value.
This argument is so prevalent that it has acquired an aura of fact. Fortunately for the investor, the data indicate otherwise.
Similarly, it is possible to follow correlations for many individual national market returns for the 1969–1998 period. In general, there is no pattern of increasing correlation. The one exception is the increasing correlations among European markets over the past two decades.
Probably of greater importance than the risk reduction derived from diversification is the “rebalancing bonus,” the extra return produced by rigorous rebalancing.
More importantly, your low exposure may make you eager to rebalance, thus “buying cheap.”
in each case the correlation for small stocks is less than for large stocks.
In spite of the fact that small stock indexes of individual nations are considerably more volatile than their larger cousins, a portfolio of global small stocks is only marginally more volatile than a similar portfolio of foreign and domestic large stocks.
The real risk of small stocks is their tracking error—the propensity to have returns which can be considerably lower, as well as considerably higher, than large stocks.
First and foremost, guard against recency—do not be overly impressed with the last decade’s triumph of domestic over foreign, and of large over small. If anything, these phenomena make it more likely that the opposite will occur in the next decade. Second, hedge your bets with large and small stocks in the same way that Uncle Fred showed you for foreign and domestic stocks.
Allocating Assets: The Three-Step Approach We are finally ready to allocate your assets. You must ask three questions in sequence: 1. How many different asset classes do I want to own? 2. How “conventional” a portfolio do I want? 3. How much risk do I want to take?
About all one can say is “more than three.”
