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Investing/Strategies / Retirement Investing
|Subject: Re: Asset Allocation||Date: 2/18/2014 10:02 PM|
|Author: TMFHockeypop||Number: 74294 of 76398|
I believe joelxwil is talking about two concepts:
(1) Momentum investing - "You need to be in those assets that are moving up and out of those that are moving down." - Mebane Faber published a paper in 2006 with a follow-up in 2013 describing how to evaluate different asset classes and invest in the ones that are more likely to outperform going forward based on their recent performance. The 2013 paper (Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461 ) shows how the strategy worked out since it was originally published. This strategy is followed in the Mechanical Investing board under QTAA - http://boards.fool.com/qtaa-013114-31095614.aspx
(2) Deworsification - "The idea that you should be in a little bit of everything is just really stupid." - The concept here is that spreading your funds too thin will not improve returns. A 50% increase in one of your holdings will make more impact if you only have 5 holdings vs 100, for example. This article (Link: http://news.fredericksburg.com/businessbrowser/2010/08/10/th...... ) talks about a study of managed funds. The study found that managers willing to concentrate their holdings and "bet big on their highest-conviction ideas" outperform the stock market. They quoted a few famous investors regarding this concept:
"This brings to mind a famous saying of Warren Buffett: “Diversification is protection against ignorance.” Star manager Peter Lynch has referred to diversification as “deworsification,” and Buffett’s partner Charlie Munger has said that “wide diversification, which necessarily includes investment in mediocre businesses, only guarantees ordinary results.”"
Thanks Zol, and these are important areas for discussion. Most have been discussed by others on this post.
1. I think Faber's work is important and I have reported on it extensively. It is a simplified (IMO) system to what joelxwil contributes to over on the Mechanical Investing board. It's open to discussion and data backtesting how much it can add to a portfolio over time. Even Faber admits that it depends on discipline to follow the system, patience to disregard the "headfakes" or contradictory signals that sometimes arise, and great regard that the system additions aren't negated from additional transaction costs. And even Faber's system uses index funds.
2. Again, a worthy discussion. Others on the thread have discussed the value of "ordinary results." The statistics show that over 10 year time periods index funds beat about 85% their professionally managed competitors. The figures are actually higher. By that 10 year mark a significant number of poorly performing funds have vanished. It may be fun for you to use this link to pick a category (large cap funds) and look at the number that are followed by Morningstar for one year and then ten years. The drop, generally, are those that have vanished.
Of course Bill Miller was the "poster board" of focused funds, until he wasn't, and then he retired. Bruce Berkowitz was, wasn't, and now he is again. It's hard. And always there is the exception that proves the rule in Warren Buffett and his comfounding compatriot Charlie Munger. But even Buffett, when he want to show up the hedge funds, chose the good old low-cost S&P 500 index as his $1 million bet.
Again, long-term and low cost are important.
Joelxwil is a good contributor and provides good advice on this and other boards. No disrespect was intended. Thank you for your thoughtful post as well.
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