Articles from Ibbotson on asset allocation & other topic

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peteyperson
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Articles from Ibbotson on asset allocation & other topic

Post by peteyperson » Sat Sep 13, 2003 9:00 am

Does asset allocation policy explain 40, 90 or 100% of performance?
http://www.ibbotson.com/download/resear ... rmance.pdf

List of interesting articles:
http://www.ibbotson.com/content/kc_publ ... 20Research

Petey

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Re: Articles from Ibbotson on asset allocation & other t

Post by raddr » Sat Sep 13, 2003 11:54 am

peteyperson wrote: Does asset allocation policy explain 40, 90 or 100% of performance?

Petey


Maybe none of the above.
The backlash was inevitable, although remarkably tardy. This spring William
Jahnke published an article in the Journal of Financial Planning with the
incendiary title "The Asset Allocation Hoax." He reanalyzed the Brinson data and
came to the conclusion that in fact asset allocation was of minor importance.
More specifically, the range of expected returns based on asset allocation alone
fell within a 1.0% range (9.47% to 10.47%) , whereas there actually was a 7.55%
range (5.85% to 13.4%) of fund performance for the study period. Compare the
two numbers and you get a 14.6% contribution of asset allocation, far less than
Brinson's 93.6%
.


http://www.efficientfrontier.com/ef/997.pdf

peteyperson
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Re: Articles from Ibbotson on asset allocation & other t

Post by peteyperson » Sat Sep 13, 2003 1:24 pm

Raddr,

Would you agree that whilst over decades the performance averages out, a diversified portfolio reduces risk & overall portfolio volatility? This would allow for easier living expense withdrawals with times asset class sales and reduce the worry factor with a more even performance & low down years by percentage and number.

Thoughts?

Petey
raddr wrote:
peteyperson wrote: Does asset allocation policy explain 40, 90 or 100% of performance?

Petey


Maybe none of the above.
The backlash was inevitable, although remarkably tardy. This spring William
Jahnke published an article in the Journal of Financial Planning with the
incendiary title "The Asset Allocation Hoax." He reanalyzed the Brinson data and
came to the conclusion that in fact asset allocation was of minor importance.
More specifically, the range of expected returns based on asset allocation alone
fell within a 1.0% range (9.47% to 10.47%) , whereas there actually was a 7.55%
range (5.85% to 13.4%) of fund performance for the study period. Compare the
two numbers and you get a 14.6% contribution of asset allocation, far less than
Brinson's 93.6%
.


http://www.efficientfrontier.com/ef/997.pdf

raddr
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Re: Articles from Ibbotson on asset allocation & other t

Post by raddr » Sat Sep 13, 2003 1:30 pm

peteyperson wrote: Raddr,

Would you agree that whilst over decades the performance averages out, a diversified portfolio reduces risk & reduces the overall volatility? This would allow for easier living expense withdrawals with timing sales and reduce the worry factor with a more even performance & low down years by percentage and number.

Thoughts?


Petey,

Most assuredly so. The major thing you want to avoid early in the withdrawal years is a big portfolio hit. By owning multiple asset classes you reduce your chances of an early disaster. Just look at what would've happened if you'd retired in 2000 with an all TSM or, for that matter, all foreign large caps (EAFE) equity portfolio. It was ScV, REITS, and gold - the ignored asset classes of the late 90's tulip mania - that saved my rear end when I retired 2 years ago. :D

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Re: Articles from Ibbotson on asset allocation & other t

Post by peteyperson » Sun Sep 14, 2003 12:19 pm

Hi Raddr,

What kind of allocation did you have to gold? We only have 4-5% load and 1.65% annual mgmt fees on gold funds here in the UK.

Thoughts?


Your stated asset allocation from a previous thread was:

ScV 32% (IJS, managed account - First Wilshire Securities Mgmt)
LcV 4% (BRKA, BRKB, IJJ)
Int'l 16% (EFA, OAKEX, VEIEX, ILA, EEM)
PM equity 7% (VGPMX, BGEIX)
Hi yield bonds 3% (JAHYX)
REITS 9% (ICF)
TIPS/Ibonds 9%
Short/Intermediate munis 17%
Cash 2%

Petey
raddr wrote:
peteyperson wrote: Raddr,

Would you agree that whilst over decades the performance averages out, a diversified portfolio reduces risk & reduces the overall volatility? This would allow for easier living expense withdrawals with timing sales and reduce the worry factor with a more even performance & low down years by percentage and number.

Thoughts?


Petey,

Most assuredly so. The major thing you want to avoid early in the withdrawal years is a big portfolio hit. By owning multiple asset classes you reduce your chances of an early disaster. Just look at what would've happened if you'd retired in 2000 with an all TSM or, for that matter, all foreign large caps (EAFE) equity portfolio. It was ScV, REITS, and gold - the ignored asset classes of the late 90's tulip mania - that saved my rear end when I retired 2 years ago. :D

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Post by wanderer » Sun Sep 14, 2003 1:33 pm

What kind of allocation did you have to gold? We only have 4-5% load and 1.65% annual mgmt fees on gold funds here in the UK.

wow. :shock:that's gotta be a record or somethin'. In that case, I would allocate 40% of my portfolio to the manufacturers of petroleum jelly. I see increasing demand for such products being a mere formality. :wink:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear

raddr
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Re: Articles from Ibbotson on asset allocation & other t

Post by raddr » Sun Sep 14, 2003 3:10 pm

peteyperson wrote: Hi Raddr,

What kind of allocation did you have to gold? We only have 4-5% load and 1.65% annual mgmt fees on gold funds here in the UK.

Thoughts?


Your stated asset allocation from a previous thread was:

ScV 32% (IJS, managed account - First Wilshire Securities Mgmt)
LcV 4% (BRKA, BRKB, IJJ)
Int'l 16% (EFA, OAKEX, VEIEX, ILA, EEM)
PM equity 7% (VGPMX, BGEIX)
Hi yield bonds 3% (JAHYX)
REITS 9% (ICF)
TIPS/Ibonds 9%
Short/Intermediate munis 17%
Cash 2%

Petey


Petey,

My allocation has grown from the 7% cited above to nearly 10% due to the recent run up in gold stocks. I'll probably be selling some soon if my exposure gets up to more than 10%.

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Post by BenSolar » Mon Sep 15, 2003 4:24 am

wanderer wrote: What kind of allocation did you have to gold? We only have 4-5% load and 1.65% annual mgmt fees on gold funds here in the UK.

wow. :shock:that's gotta be a record or somethin'. In that case, I would allocate 40% of my portfolio to the manufacturers of petroleum jelly. I see increasing demand for such products being a mere formality. :wink:

:shock::lol::lol:

That was a good laugh. :D
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus

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Post by peteyperson » Mon Sep 15, 2003 5:30 pm

Well that is the reality here. Gold and property funds (been looking at those tonight) are the usual mutual fund type loads and fees). The UK gov I've discovered is in talks with various property companies to convert to a REIT style setup. This isn't thought to be likely though.

In the course of my travels tonight I have also found the first UK available Emerging Market funds, Emerging Europe and Latin America. All actively managed as there are no index funds available for these sectors. Pacific Rim there is an index fund for, but not anything more exotic. Fortunately it is likely that an allocation to Gold, Property and Emerging Markets is likely to be a small part of the portfolio overall so it shouldn't push up the average fees too much.

Petey
BenSolar wrote:
wanderer wrote: What kind of allocation did you have to gold? We only have 4-5% load and 1.65% annual mgmt fees on gold funds here in the UK.

wow. :shock:that's gotta be a record or somethin'. In that case, I would allocate 40% of my portfolio to the manufacturers of petroleum jelly. I see increasing demand for such products being a mere formality. :wink:

:shock::lol::lol:

That was a good laugh. :D

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Post by JWR1945 » Wed Sep 17, 2003 7:14 am

Getting back to the article first referenced on this thread, I draw your attention to Figure 7, which shows the ranges of performance for mutual fund managers and for pension fund managers.

If you look at the range of variation for mutual fund managers in table 7 between the 25% and 75% levels, it is 18. The range between 5% and 95% is 40. Translating that second number into more common statistical terms, this says that about 90% of the variation in performance caused by investor skill is within plus and minus 20% of the standard. The first number is consistent with such an interpretation. For stocks, the long-term (nominal) return is in the neighborhood of 10%. That means that the range among mutual fund managers is from 8% to 12% (roughly), when annualized over a decade.

This supports the idea that an investor should consider beating the market over the long-term by 2% as fantastic, 1% as showing great skill, 0% (matching the market) as doing well and under-performing by worse than 2% as uncommonly bad. Keep in mind that, if someone is an especially bad investor, he is likely to abandon the stock market. A person who is able to match the market is doing well because of this distortion (survivorship bias).

The spread among pension managers was much less (6 and 27 at the 25-75% and 5-95% levels, respectively). Presumably, this is because they have a greater emphasis on meeting expectations as opposed to beating them. It could also be influenced by their choice of policies (e.g., selecting securities that would have a narrow range of likely outcomes).

Have fun.

John R.

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