FundAlarm Discussion Board - Archive



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Item #6
Posted by: Fundmentals
Date: November/December 2009
Subject line: Model portfolio design
Body of post:

I am sure many of you have come across the situation of a friend or a family member clueless about investing ask you to help them with a stash of money. The real-life requirements are usually "simple":

1. "Want your help to make some money. I can lose money all by myself"

2. "I can put it in the market for 5 years. Can leave it there longer if it is making money but not if it is losing money"

3. "Don't ask me to do anything more than once a year"

The following portfolio is designed specifically for people that are not

(a)expecting to beat the market

(b)don't want the portfolio to go down much (likely to panic and sell at the bottom if they went down 10% or more)

(c) would like some decent gains - more than what they can get with money market funds, CDs or even just bond funds without which they will not take the risk of investing at all and

(d) don't want to fiddle with it more than once a year.

The Portfolio

Domestic Equity:
  5% Forester Value              (FVALX) - Large Value
  5% Amana Trust Growth          (AMAGX) - Large Growth
  5% Queens Road Small Cap Value (QRSVX) - Small Value
International/Global equity:
 10% Forester Discovery          (INTLX) - World Allocation
 10% Matthews Asia Dividend      (MAPIX) - Diversified Asia/Pacific
Alternate investments:
 10% Robeco Long/Short Eq Inv    (BPLEX) - Long/short equity
 10% Arbitrage Fund              (ARBFX) - Merger/arbitrage
 15% Hussman Total Return        (HSTRX) - Conservative allocation
Bonds
7.5% Managers Intermediate Govt  (MGIDX) - Mortgage securities/Govt
7.5% PIMCO Total Return D        (PTTDX) - Intermediate Investment Grade Bond
7.5% Weitz Short-Interm Income   (WEFIX) - Short-Intermediate Term Investment Grade Bond
7.5% PIMCO GNMA D                (PGNDX) - GNMA



Backtested performance


If portfolio invested on 1/1/2008, results as of 11/13/2009:


Total return: +15.05%; 
2008 Performance: -4.79% 
2009 YTD: 20.84% 


Portfolio X-Ray:
Stocks 52.3%; Bonds 38.1%; Cash 9.6% 
Stocks US 56.00%; International 44.00%
US equities
Large cap 27.4%; Mid cap 22.8%; Small Cap 49.8%
US equities
Value 36.9%; Blend 53.0%; Growth 10.1% 
International equities
Europe 24.1%; Pacific 38.5%; Canada 18.9%; Emerging Markets 18.5% 
Bonds
Taxable 78.70%; Uncategorized 21.30%
Credit quality High 78.7%; Uncategorized 21.30%
Duration Medium 20.2% Low 58.5% Uncategorized 21.3% 


Costs:  Portfolio average 1.72%
Portfolio construction notes:

The portfolio is constructed to solve a basic flaw in traditional portfolio construction. Diversification using high volatility equity funds (even index funds with market volatility) results in deep losses during bear markets as most such equities become correlated and go down together.

Just depending on bond allocation to reduce losses requires primarily allocation to Treasuries as it is the only type of asset that can be depended on to show negative correlation with equities in bear markets. But unlike in the past, Treasuries starting with the current situation of low interest rates cannot be expected to provide much gains going forward so the portfolio may turn out to be too conservative or too aggressive based on what happens in the market regardless of how much is allocated to Treasuries.

As a solution, portfolio picks only funds designed with a strategy to reduce/minimize losses during long bear markets and has some capital protection goals in place. The overall volatility is reduced by depending on each fund to reduce its own volatility rather than depend on lack of correlation to reduce the volatility.

Note that this is not the same thing as picking funds with the highest returns in either bear or bull markets or both. Nor are the returns attributable to some fantastic market timing in picking which stocks to buy and when to sell.

In fact, most of these funds will likely not consistently appear in the top 10% of their class except occasionally. But all of them will have shown the ability to limit losses by reacting to long-drawn down market conditions and make decent gains in long-drawn up market conditions.

In other words, the only market timing they will show will be in recognizing long bear markets as in recognizing the difference between 2008 and 2009, not what happens month to month. None of them try to time tops and bottoms.

Methodology

Portfolio Requirements:

1. Capital protection and lack of volatility extremely important. No long periods of losses. No "wait for 10-20 years or more" excuse for losses.

2. Asymmetric behavior - as much of the upside as possible, as little of the downside as possible

3. Simple portfolio with high quality no-load funds widely available in the main brokerages

4. Only annual tune-ups

5. Total return more important than income

6. No assumption of bull/bear markets for the portfolio as a whole, no forecasted assumptions of economy or any other indicators, doom/gloom predictions, etc.

Concrete requirements:

1. Not more than 12 funds.

2. No single fund with less than 5% allocation or more than 15% allocation

3. Portfolio must be diversified but not necessary to cover all asset/fund classes. Only asset classes that have shown consistent returns without long loss periods and small drawdowns. Riskier assets only within risk-managed funds.

4. No assumptions of correlation or lack of correlation between asset classes going forward but no gross overlaps between funds. Some overlap is fine.

Screening criterion for funds:

1. No-load, ER less than or equal to category average, been in existence for at least 5 years.

2. No losses in 3, 5 or 10 yr (if available) rolling periods (amazing how many asset classes or funds drop out here)

3. Manager has been around for at least the category average

4. Minimum initial purchase not more than $3000 (i.e., minimum not more than $60k portfolio)

5. Best 3 month performance must be better than worst 3 month performance over its lifetime (amazing how many funds you lose with this criterion)

6. Best volatility-adjusted performance (3-yr and 5-yr) in class, not necessarily the best returns.

7. Volatility of each fund on its own must not exceed 10% of total stock market index, total bond index or balanced index as appropriate.

8. Lowest volatility to break a tie all else remaining the same.

9. No bias towards active or passive funds as long as the above criterion are satisfied

10. Allocation percentages based entirely on relative volatility-adjusted returns (3-yr and 5-yr), no ad hoc allocation decisions. Individual fund notes:

FVALX, INTLX: These Forester funds have demonstrated the ability to limit losses by going to cash when conditions so indicate and they do so without worrying about whether they will fully participate in the recovery. Hence they fit the goals of this portfolio well. Forester was so successful with this simple strategy that FVALX became the only equity fund to have positive (albeit close to zero) returns in 2008.

Unfortunately, this brings in people who look at the rankings, see this fund at the top in 2008 and invest and get disappointed when the fund lags in a bull market.

This fund is chosen for the very strategy (that was incidentally vindicated in 2008) with the full knowledge that it will not necessarily be anywhere near the top in bull markets or even beat the index.

Alternative to FVALX is Amana Income AMANX which does not provide as much downside protection but has done well using a very conservative approach in value investing and keeping the volatility low but it will be slightly more volatile than FVALX. Another slightly higher volatile alternative is Yacktman fund (YACKX)

Alternative to INTLX is Sextant International SSIFX (coincidentally managed by the manager of AMANX) for similar reasons.

AMAGX: A very well managed Large Cap growth fund with a long history of good performance. The downside protection is also reasonable within its class even though there does not appear to be any capital protection strategies in place.

QRSVX: Not a well known fund but is one of the very few funds that is widely available without a transaction fee, has at least a 5 year history and has managed to limit downside in the bear market in the small cap category. The volatility is also kept low.

A better known substitute is Royce Special Equity (RYSEX) if available without a transaction fee. Newer Intrepid Small Cap (ICMAX) has done very well although its short history may be a concern as well as Pinnacle Value (PVFIX) if available without a transaction fee. Both ICMAX and PVFIX are low volatility funds and have capital protection as a goal of the fund to fit the goals of this portfolio well.

MAPIX: The only selection without a 5 year history but comes with a very strong pedigree from Matthews Asia that specializes in Asian funds. This fund has extremely low volatility, even lower than most domestic equities and has managed to deliver very good total returns with a combination of stocks, convertibles and preferred shares.

Alternatives would be either Matthews Asia Pacific (MPACX) at higher volatility with good downside protection or Matthews Asian Growth and Income (MACSX) at lower volatility but can potentially lose more money in bear markets.

BPLEX: An alternative investment fund that tries to get good returns in both bull and bear markets. A long-short fund that can be mistaken for another performance chasing choice because of its recent performance. But this would be a good choice even if its performance in 2009 was just average or even below average.

Looking under the hood shows this fund to be quite different from other long-short funds that try to use both long and short depending on the stock valuations. This fund seems to switch between a primarily long fund (but with short positions to hedge) with good stock selection or a primarily short fund (with long positions to hedge) depending on the macro market conditions thus minimizing individual stock market timing risks.

This is not different in strategy from Forester's philosophy except that its uses shorting rather than just go to cash and uses small caps rather than large caps.

So it does very well in longer bear or bull market years and lags during transitions but without losing much money. Unfortunately, none of the alternatives for this fund come anywhere close to it in performance as they primarily seem to depend on picking the right stocks to go long or short across all conditions rather than acting like a good long fund or a good hedged fund depending on macro conditions. It is a unique standout.

ARBFX: Another alternative investment fund which depends on arbitraging mergers and acquisitions by buying a company that is being acquired and often shorting the company acquiring. The risks for such funds come only if the M&A does not go through. The earlier you get on as soon as an M&A is announced, the riskier. This fund takes very little risks by waiting to get on and arbitraging just the last few months before an M&A. This keeps the volatility very low and the gains low as well.

An alternative is the similar Merger fund (MERFX) which has a disadvantage because of its size and so may not be able to move quickly in and out.

HSTRX: Hussman's conservative allocation fund is managed in a risk-managed fashion where the portfolio is continually and pro-actively positioned to address the current risk evaluation of the market. Unlike his strategic growth fund, this fund does not take any significant bets on equities and so any incorrect decisions in his strategy does not have as much of a downside impact unlike the other fund. This has allowed HSTRX to show very consistent and impressive performance over a long period of time with very little volatility.

MGIDX: Intermediate duration mortgage securities fund that manages to keep volatility low with good performance and uses shorting/options to achieve this. The ability to short or use options will make this fund able to provide downside protection and manage credit and interest risks, a good idea when mortgage rates are likely to rise in the future.

Alternative is PTMDX - PIMCO Mortgage-Backed Securities D which shorts even more aggressively.

PGNDX: A GNMA fund that manages risk via shorting while preserving the upside of a GNMA fund. Good due to the same reasons as MGIDX above.

Alternatives are non-shorting GNMA funds such as USGNX from USAA, VFIIX from Vanguard or BGNMX from American Century which may have more losses if the mortgage rates were to rise rapidly.

PTTDX: An intermediate investment grade fund that also manages risk via shorting and useful in an expected interest rate rising environment in the future. Low volatility.

Alternatives are non-shorting funds with low volatility THOPX Thompson Plumb Bond or CPTNX American Century Government Bond Inv WEFIX: A fund with the ability to move between short and intermediate durations based on market conditions and hence able to take advantage of the conditions better than a strictly short term fund. Does not use shorting.

Alternatives are USSBX from USAA, WEFIX Weitz Short-Intermediate Income, VFISX Vanguard Short-Term Treasury, PLDDX PIMCO Low Duration D. The last one from PIMCO does use shorting.



Item #5
Posted by: Falcon
Date: August 6, 2007
Subject line: A survey of top core-fund holdings recomended by Discussion Board readers
Body of post:


TICKER QUOTE M* Report Barchart Google Smoney Bloom Barrons USATOD Kiplinger Mwatch Mcentral NAME COUNT Fundalarm
  • DODFX
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  • BL
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  • BA
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  • US
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  • MK
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  • DODFX
    		•  DODGE COX INTERN 10 honor
  • PRWCX
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  • BL
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  • BA
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  • PRWCX
    		• T. ROWE PRICE CAP 9 honor
  • OAKBX
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  • BA
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  • OAKBX
    		• OAKMARK EQUITY AN 8 honor
  • FAIRX
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  • BA
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  • FAIRX
    		• FAIRHOLME FUND 6 x
  • DODGX
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  • BL
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  • BA
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  • DODGX
    		• DODGE COX STOCK 6 x
  • FDIVX
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  • FDIVX
    		• FIDELITY DIVERSIF 4 x
  • TAVFX
  • M
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  • BA
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  • TAVFX
    		• THIRD AVENUE VALU 4 x
  • FLPSX
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  • FLPSX
    		• FIDELITY LOW-PRIC 3 honor
  • LSBDX
  • M
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  • BA
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  • LSBDX
    		• LOOMIS SAYLES FDS 3 x
  • BJBIX
  • M
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  • BA
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  • BJBIX
    		• JULIUS BAER INTER 3 honor
  • ACEIX
  • M
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  • BA
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  • ACEIX
    		• VAN KAMPEN EQUITY 2 honor
  • ADVDX
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  • ADVDX
    		• ALPINE DYNAMIC DI 2 x
  • CWGIX
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  • CWGIX
    		• AMERICAN FDS CAPI 2 honor
  • DODBX
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  • DODBX
    		• DODGE COX BALANC 2 honor
  • LAALX
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  • LAALX
    		• LEUTHOLD ASSET AL 2 x
  • LSBRX
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  • LSBRX
    		• LOOMIS SAYLES FDS 2 x
  • MACSX
  • M
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  • MACSX
    		• MATTHEWS ASIAN GR 2 honor
  • MAPTX
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  • MAPTX
    		• MATTHEWS PACIFIC 2 honor
  • MNBAX
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  • MNBAX
    		• MANNING & NAPIER 2 honor
  • PRIDX
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  • PRIDX
    		• T. ROWE PRICE INT 2 honor
  • PRPFX
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  • PRPFX
    		• PERMANENT PT 2 x
  • PSPFX
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  • PSPFX
    		• US GLOBAL INVESTO 3 honor
  • SGENX
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  • SGENX
    		• FIRST EAGLE GLOBA 3 x
  • VGHCX
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  • VGHCX
    		• VANGUARD SPECIALI 2 honor
  • VHGEX
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  • VHGEX
    		• VANGUARD HORIZON 2 honor
  • VWELX
  • M
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  • VWELX
    		• VANGUARD WELLINGT 2 honor
  • WGRNX
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  • WGRNX
    		• WINTERGREEN FUND 2 x
  • AEDRX
  • M
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  • AEDRX
    		•  AIM EUROPEAN GROW 1 x
  • ABIAX
  • M
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  • BA
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  • ABIAX
    		• ALIANCEBERNSTEIN 1 honor
  • ACGIX
  • M
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  • ACGIX
    		• VAN KAMPEN GROWTH 1 honor
  • ACINX
  • M
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  • ACINX
    		• COLUMBIA ACORN IN 1 honor
  • ACRNX
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  • BA
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  • ACRNX
    		• COLUMBIA ACORN FU 1 honor
  • ARTKX
  • M
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  • ARTKX
    		• ARTISAN INTERNATI 1 x
  • ARTLX
  • M
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  • BL
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  • BA
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  • ARTLX
    		• ARTISAN OPPORTUNI 1 x
  • BNUEX
  • M
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  • BNUEX
    		• UBS INTERNATIONAL 1 3alarm
  • BOGLX
  • M
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  • BOGLX
    		• BOGLE INVESTMENT 1 x
  • BRUFX
  • M
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  • BRUFX
    		• BRUCE FUND INC 1 x
  • DFAVX
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  • DFAVX
    		• DFA U.S. SMALL CA 1 x
  • DFCVX
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  • DFCVX
    		• DFA U.S. LARGE CA 1 honor
  • DIVTX
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  • US
    		•
  • K
    		•
  • MK
    		•
  • DIVTX
    		• DFA INTERNATIONAL 1 honor
  • EGLRX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • EGLRX
    		• ALPINE INTERNATIO 1 honor
  • FDGFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FDGFX
    		• FIDELITY DIVIDEND 1 x
  • FICDX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FICDX
    		• FIDELITY CANADA F 1 honor
  • FLATX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FLATX
    		• FIDELITY LATIN AM 1 honor
  • FPACX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FPACX
    		• FPA FDS TRUST FPA 1 honor
  • FPPTX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FPPTX
    		• FPA CAPITAL FUND 1 x
  • FSDPX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FSDPX
    		• FIDELITY SELECT M 1 x
  • FSEAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FSEAX
    		• FIDELITY SOUTHEAS 1 honor
  • FSESX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • FSESX
    		• FIDELITY SELECT E 1 honor
  • HOVLX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • HOVLX
    		• HOMESTEAD FUNDS I 1 honor
  • HSGFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • HSGFX
    		• HUSSMAN STRATEGIC 1 3alarm
  • IMSIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • IMSIX
    		• IMS STRATEGIC INC 1 x
  • JAGIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • JAGIX
    		• JANUS GROWTH AND 1 x
  • JETAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • JETAX
    		• JULIUS BAER INTE 1 x
  • JMCVX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • JMCVX
    		• JANUS MID CAP VAL 1 honor
  • JSVAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • JSVAX
    		• JANUS CONTRARIAN 1 honor
  • LCORX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • LCORX
    		• LEUTHHOLD CORE IN 1 honor
  • LSEQX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • LSEQX
    		• LEUTHOLD SELECT E 1 x
  • MDDVX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • MDDVX
    		• BLACKROCK EQ DIVI 1 honor
  • MDISX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • MDISX
    		• MUTUAL DISCOVERY 1 honor
  • MDLOX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • MDLOX
    		• BLACKROCK GLOBAL 1 3alarm
  • MXXIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • MXXIX
    		• MARSICO 21ST CENT 1 honor
  • NARFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • NARFX
    		• NAKOMA ABSOLUTE R 1 x
  • OAKGX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • OAKGX
    		• OAKMARK GLOBAL FD 1 x
  • OAKIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • OAKIX
    		• OAKMARK INTERNATI 1 x
  • OARIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • OARIX
    		• OAKMARK INTERNATI 1 x
  • ODMAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • ODMAX
    		• OPPENHEIMER DEVEL 1 honor
  • PALIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PALIX
    		• PALANTIR FUND 1 x
  • PCVAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PCVAX
    		• ALLIANZ NFJ SMAL 1 honor
  • PLMIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PLMIX
    		• PIMCO DEVELOPING 1 x
  • PRASX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PRASX
    		• T. ROWE PRICE NEW 1 honor
  • PRFDX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PRFDX
    		• T. ROWE PRICE EQU 1 honor
  • PRGSX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PRGSX
    		• T. ROWE PRICE GLO 1 honor
  • PRHYX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • PRHYX
    		• T. ROWE PRICE HIG 1 x
  • RIVFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RIVFX
    		•  ROYCE INTERNATION 1 x
  • RIRFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RIRFX
    		• AMERICAN FDS CAPI 1 x
  • RPIBX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RPIBX
    		• T. ROWE PRICE INT 1 x
  • RPMGX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RPMGX
    		• T. ROWE PRICE MID 1 honor
  • RYDVX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RYDVX
    		•  ROYCE DIVIDEND VAL 1 x
  • RYPRX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • RYPRX
    		•  ROYCE PREMIER INV 1 x
  • SCMLX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • SCMLX
    		• THE SCHNEIDER VAL 1 x
  • SGOVX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • SGOVX
    		• FIRST EAGLE OVER 1 x
  • SLADX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • SLADX
    		• SELECTED AMERICAN 1 x
  • SPY
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • SPY
    		• S&P DEP RECEIPTS 1 x
  • TAVIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TAVIX
    		•  THIRD AVE INT 1 x
  • TBGVX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TBGVX
    		•  TWEEDY BROWNE GLO 1 x
  • TEDMX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TEDMX
    		• TEMPLETON DEVELOP 1 honor
  • TEQUX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TEQUX
    		• TRANSAMERICA PREM 1 x
  • TRIGX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TRIGX
    		• T ROWE PRICE INTE 1 honor
  • TRMCX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • TRMCX
    		• T. ROWE PRICE MID 1 honor
  • UMBIX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • UMBIX
    		• EXCELSIOR VALUE A 1 honor
  • UNASX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • UNASX
    		• WADDELL & REED AD 1 x
  • UNWPX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • UNWPX
    		• US GLOBAL INVESTO 1 honor
  • UTGRX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • UTGRX
    		• UTOPIA GROWTH FUN 1 x
  • VBMFX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VBMFX
    		• VANGUARD BOND IND 1 x
  • VEU
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VEU
    		• VG FTSE ALLWD US 1 x
  • VGSTX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VGSTX
    		• VANGUARD STAR FD 1 honor
  • VGTSX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VGTSX
    		• VANGUARD TOTAL IN 1 honor
  • VPCCX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VPCCX
    		• VANGUARD PRIMECAP 1 x
  • VPMAX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VPMAX
    		• VANGUARD PRIMECAP 1 x
  • VSEQX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VSEQX
    		• VANGUARD STRATEGI 1 honor
  • VTMSX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VTMSX
    		•  VANGUARD TOT ST I 1 x
  • VTI
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VTI
    		• VANGUARD TTL ETF 1 x
  • VWAHX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • VWAHX
    		• VANGUARD HIGH YIE 1 x
  • WASYX
  • M
  • B
    		•
  • G
    		•
  • S
    		•
  • BL
    		•
  • BA
    		•
  • US
    		•
  • K
    		•
  • MK
    		•
  • WASYX
    		• IVY ASSET STRATEG 1 x



    Item #4
    Posted by: MJG
    Date: May 27, 2007
    Subject line: Investment dos and don'ts
    Body of post:

    A few days ago, in preparation for the June release of the Fund Alarm commentary section, Four O Three Bee suggested a summary of investment lessons learned from our investment experiences. I’m sure each of us has assembled a wide ranging set of operational rules, of dos and don’ts based on our individual investment successes and failures. I have such a set of rules. Four O Three Bee, be careful what you wish.

    My rules have been collected over my investment career that started in the mid-1950s with the purchase of a single stock. I anticipated Peter Lynch by several decades since the buy was based on the customer crowds that Chock Full of Nuts was attracting to its sites in New York City. I added to the portfolio infrequently based on tips from fellow students at Columbia University and from sell-side brokerage firms. Later, after studying an early edition of “Technical Analysis of Stock Trends” by Edwards and Magee, I put together an equity portfolio based on technical analysis. During the 1960s and 1970s, I suffered more failures than successes using investment touts and Edwards-Magee as a basis for my investment decisions.

    My investment fortunes improved dramatically when I was introduced to the academic studies that eventually produced The Efficient Market Hypothesis (EMH), Modern Portfolio Theory (MPT), the Separation Theorem (ST), and the Options Pricing (OP) models. At last a cogent pathway to achieving investment success was clearly identified. With some adjustments to reflect my own personal judgments, my risk adversity quotient, my wealth limitations, my retirement goals, and my age, I adopted the findings from these numerous academic research projects.

    So, based on these academic studies and from practical investment experience gained over a 5-decade investment history, here is my list of investment dos and don’ts. They worked for me. I hope you can exploit them to your own investment advantage. First the dos, followed by the don’ts.

    The Dos

    1. Over the long haul, equities are the only commonly available investment vehicle that has yielded excess returns much above inflation. That excess real return is of order 7 to 8 % above inflation rate. Bonds have typically delivered only 0.5 to 1 % above inflation rates. So, do include equities as a major component of your investment portfolio.

    2. The United States Gross Domestic Product (GDP) is 25 % of the world’s GDP. The US marketplace is slightly less than 50 % of the world’s equity market. So, do diversify your equity holdings to incorporate worldwide positions, including emerging markets. This observation implies that an International exposure of from 20 % to 50 % is appropriate, risk tolerance dependent.

    3. Academic studies that support both the EMH and MPT demonstrate that excess returns have been recorded for both small capitalization stocks and value-oriented equity holdings. Less compelling evidence suggests that a momentum effect exists within the marketplace. The momentum is ephemeral in character since it does not typically persist for more than 1 year, 2 years at the most. So, to capture these excess returns, do include small foreign, US small caps and value-oriented holdings in a properly diversified portfolio. Momentum investing demands agile portfolio management. That’s a characteristic I do not possess.

    4. Risk control is as important a component of portfolio construction as return considerations. Compound return, which determines end wealth, is reduced by the square of portfolio volatility (standard deviation). So, do reduce portfolio volatility consistently with your returns requirements by selecting an array of investment holdings with low correlation coefficients to each other.

    5. For the neophyte investor, or for the passive buy-and-hold investor, a short list of index funds can be assembled that delivers market-like returns, at low costs, with reduced volatility. So, as a point of departure, both the neophyte and the more mature active investor, should consider the Lazy-Man portfolios identified by Paul Farrell on a quarterly basis. These portfolios will outperform about 80 % of portfolios designed by active investors. Active investors can modify these baseline portfolios to reflect their specific market insights or preferences.

    6. Equity returns are determined by the sum of corporate profit growth, dividends and price-to-earnings (P/E) ratio expansion. Profits have followed GDP growth rates which have averaged about 7 % per year over the long term. Historically, equity dividends have been just under 4 % per year. P/E ratio expands and contracts based upon speculation factors and public sentiment. Historically, bonds have returned about 1 % above long term inflation rates, say 5 %. So, do control returns expectations to be consistent with these long haul returns. If your portfolio has a 50/50 mix of equities and bonds, than your realistic projected returns are approximately 8 % per year. If you require returns north of 15 % you will need to leverage your portfolio, a very risky strategy.

    7. Macroeconomic factors govern market performance. Low or negative national or world GDP growth rates, high tax rates, high inflation rates all operate to reduce corporate profits and attenuate market returns. So, do be aware of the overall state of the US and the world economy. If economies are stagnant, your portfolio equity returns will be depressed. So, consider shifting portfolio asset allocation incrementally (unless you are absolutely convinced of market direction) towards more conservative holdings.

    8. Long term (200 day) index simple moving averages have been useful guides to gage equity market direction. So, do maintain your nominal equity exposure when the index price is above its moving average, and consider selling a portion of your equity position when the index falls below its moving average.

    9. Calendar-driven tactics have survived the historical stress test of time. On a daily basis, equity markets are up only 53 % of the time. On a yearly basis, equity returns are positive about 71 % of the time. From a mutual fund ownership perspective, do buy at Monday closings, sell on Friday closings. To take advantage of end-of-month (EOM) effects, do buy 2 trading days before the EOM, sell 4 trading days after the EOM. Statistically, do sell in May and buy in November on a yearly timeframe. Statistically, the third year in the Presidential cycle is the most profitable, so do be fully invested in that year constrained, of course, by your pre-determined asset allocation.

    10. Equity markets can be in a non-equilibrium state for rather extended periods. Behavioral finance studies confirm that investment decisions are not always rationale. On average, mutual fund investors do not achieve the returns that mutual funds deliver. We are not good market timers. The academics emphasize that “frequent trading is hazardous to your wealth”. So, do be patient with your investments. Benefit from the smoothing process of equity exposure over an extended time horizon. Under normal circumstances (no management change, no policy changes, no recession), a 3-year fund holding period is proper to test its investment worthiness.

    11. Costs matter. Mutual fund returns are diminished by the aggregate of fund expenses and trading costs. Low cost mutual funds and low turnover mutual funds outperform their opposites. So, do construct a portfolio with cost economy as a target.

    12. Some fund managers deliver excess market returns on a more or less regular basis. Equity market sector performance changes with the economy and with investor sentiment. Active investors seek these investment opportunities that generate excess returns or so called positive Alphas. These opportunities exist from about 20 % of the mutual fund management cohort. It is not necessary to be either a fully passive or a fully active mutual fund investor. A mixed style that represents your particular risk profile is entirely reasonable. So, do consider a mix of passively and actively managed funds that permits you to sleep at night.

    13. Uncertainty and risk are 2 distinct entities. Uncertainty reflects unknowable market returns. Forecasting returns is always clouded by the fog of uncertain returns. Market risk is a measure of our potential real losses. This risk can impact our planned retirement and/or lifestyle. It must be monitored and carefully controlled. Our portfolios can be stress tested using plausible Monte Carlo simulations to estimate its magnitude. Portfolios can be adjusted to select an asset allocation that produces an acceptable risk level. So, do modify your portfolio to achieve an acceptable risk level. Do Monte Carlo simulations to stress test your portfolio against numerous, uncertain investment outcomes.

    14. The more you know about investing, the better will be your investment results and your comfort level. Indeed, knowledge is power, especially in the financial community. You will enhance your investment performance with a commitment to a continuing learning process. Competency in the fields of economics, financial management, probability theory, and statistical analysis enhances the likelihood of investment success. So, do make an effort to understand some elements of these important investment areas. The Teaching Company’s Great Courses series offers excellent study material in these disciplines in both DVD and CD formats. These courses are frequently available for free from your local library. They are painless introductions into areas that might be otherwise forbidding.

    15. Succession considerations are just as important for the individual investor as they are for a complex corporation or any formal institution. For the individual investor this frequently morphs into the problem of making your spouse aware of the investment process in general, and your special objectives and style in particular. This issue should be addressed as early as possible. So, do promote your spouse to a portfolio co- manager position. Continuity demands this action. Let your spouse tabulate your investment results quarterly. Inform her of your decisions and the rationale for the action. Allow her to read your postings on the Internet. Invite her to study selected investment columns or books on the topic. Recently, at the Las Vegas Money Show my wife challenged several presenters with probing questions. She also reported that she understood the merits and shortcomings of various presentations. For the first time I am now confident that my spouse can handle any investment decision with respect to our composite portfolio without my help. This status gives me a very relaxed feeling of security.

    The Don’ts

    1. Market experts, gurus, and newsletters are about right half the time. Their prediction accuracy ranges from 30 % to 70 %. Only a few market newsletters beat market returns on a risk- adjusted basis. Only 20 % of active mutual fund managers generate returns beyond index values, and that group changes frequently (lacks persistence). Individual investors fail to capture market returns when trading individual stocks or when replacing one mutual fund for another. Behavioral finance studies demonstrate that we seem to be hard-wired to make poor investment decisions. Therefore, be very cautious when seeking and accepting investment advice. The advisor is likely to be either uninformed or biased in his assessments. So, don’t accept that advice without challenging it. Require rationale, documentation of results and references. Buyer beware is appropriate here. Be alert to the mentality of the racetrack tout. He is everywhere in the investment world, including this website.

    2. On a day-to-day scale, market returns are not predictable. Serial correlations of daily returns show almost zero correlation. Short term results mostly appear like white noise and seem to behave like a random walk. Therefore, technical analysis, that use short term simple formulations are likely to generate very unreliable predictions and market signals. These formulations have no theoretical basis, are not documented with detailed studies of their performance value, and tend to produce many false signals, thus churning a portfolio. By its nature, short term technical analysis produces tax and trading cost penalties for the trader, and significant profits to the trading agent to support his yacht lifestyle. These trading formulas are all sizzle without the steak. So, don’t deploy short term technical analysis as the cornerstone for an investment decision. Technical analysis computer graphics look great, but its dependability is dubious at best, fraudulent at its worst.

    3. Behavioral finance studies show that we are overconfident about our knowledge and we overemphasize current happenings. We simply do not know as much as we think we do. Women do not fall into this trap as frequently as men do. Consequently women trade less often than men and show better returns on average. We react to business news too suddenly and too completely. Patience is not our long suit. So, don’t listen to the marketplace in real time. Don’t calculate your portfolio value on a daily basis. That continuous monitoring approach moves the investor towards over-reaction. Very proactive involvement is harmful to investment success. I calculate my portfolio performance on a quarterly calendar. I adjust my portfolio only several times per year, never in large increments.

    4. In the distant past I have used investment advisors from numerous financial institutions. Their impressive credentials aside, none provided me with investment insights that I could not obtain myself with just a little commitment of time. In the mutual fund arena, these experts almost always recommended high cost load funds or other costly investment instruments. Be your own council, or aggressively question your advisor if you truly need one. Many advisors churn accounts for their profit, not yours. So, don’t be an investment wimp and passively accept the opinion of a so called expert. Remember, he is likely to be correct only about half the time. If you can somehow identify a truly exceptional market expert, by all means hold on to him and secure his services. He is indeed a rare bird. I never had that pleasant experience.

    5. A bias exists against simply achieving Index-like returns. That almost seems un-American. But par is quite acceptable on the golf course; Index-like returns are equally acceptable in the investment world. It is just as hard to achieve. So, don’t resist passive investment because of peer pressure. After 5 decades of market participation, my modest goal with a passive-active mix of investments is to outperform the index returns by a mere 1 % to 2 %. I succeed sometimes; I fail sometimes. Don’t be too greedy. Patience (and a solid savings program) is the most significant attribute that an investor should practice.

    6. Elliott Wave Theory(EWT) has such a huge group of disciples that it warrants special attention in the technical analysis category of investment tools. The fundamental insight offered by EWT is that nature provides numerous examples of cyclical patterns that feature 5 upward movements followed by 3 downward movements. The EWT crowd extrapolates this observation to the investment world without any substantial theoretical or even compelling practical data. Another issue is that agreement among EWT advocates is rarely experienced because of a bewildering set of complex rules that define wave sets, sub-waves and wavelets differently. Place a dozen EWT forecasters in a room together and you will receive 2 dozen interpretations of the marketplace EWT status. So, don’t make investment decisions based on EWT projections. Many earlier EWT predictions have failed to capture major marketplace shifts. Personally, I suspect EWT is more faux-science based on false premises than a reliable investment forecasting tool. Elliott Wave Theory has ascended to a legendary status among a select group, but its advertised out-sized returns are mostly an investment myth.

    7. Investing is not science. Market uncertainties dominate the landscape and preclude accurate forecasting. Speculation, political events, public sentiment shifts, imperfect investor reaction to market conditions all interact to, at best, reduce investing to an imprecise, pseudo-science. Expected returns, market volatility and correlation coefficients among specific holdings and among investment classes are not stable and are temporally ever-changing. Therefore, exact market solutions do not exist. It is enough to have a portfolio that is close to the illusive ideal Efficient Frontier. That Frontier is transient in nature. So, don’t worry momentary distortions in your portfolio. Under most conditions, market major movements permit deliberate adjustments to a portfolio’s holdings. Remember that markets tend to regress towards the mean over time.

    I’m sure my lists of dos and don’ts is incomplete. I made no attempt to be comprehensive or to organize my response. Rather, I simply opened Microsoft Word and wrote and wrote and wrote. For whoever stayed with me this far, I thank you for your persistence. I’m sure that persistence already makes you a superior investor. With a little more effort on my part I can undoubtedly expand this list. But not just now. With apologies to John Bogle, thank you for staying the course.

    As always I welcome constructive commentary from the board members. Each will be seriously considered. I encourage board members to contribute their own set of investment lessons learned. I’m sure we can all benefit from hard earned lessons from such a distinguished, discriminating and distinctive group. So, please share your accumulated investment wisdom with us.

    Best Regards,

    MJG


    Item #3
    Posted by: rono
    Date: April 4, 2007
    Subject line: Tricks for buying funds that are closed or have steep minimums
    Body of post:

    Howdy,

    We talked about this a while back, but Hawkmountain discovered another trick so it's time to update our bag of tricks.

    CLOSED FUNDS

    Some funds are closed to new investors and some funds have very high minimums (as much as $100,000). Well, what if we really want to buy one of these funds?

    Most closed funds are only closed to new investors, but existing investors can continue to buy more shares. There are a couple of 'backdoors' into these funds. Many times these funds are included in the choices of 401Ks, 457s, 403bs, etc. Dodge & Cox DODGX is on mine. Accordingly, you always want to check your options and those of your spouse.

    Some times you can get into these 'closed' funds via an online discount brokerage or fund supermarket. You might have your taxable account at scottrade and normally wouldn't want to buy DODGX there, but if that's the only place you can get it . . . (I'm not saying DODGX is available via scottrade but just using it as an example). What you need to do in a case like this is TRY TO BUY IT and let them tell you no. Don't assume you can't.

    HIGH MINIMUMS

    Some funds have high minimums. We're not talking about $2500, but more like $10,000, $50,000 or even $100.000 in the case of DFA funds that we talked about below. Even if I could afford the $100K, I probably wouldn't want that much of a single fund - no matter how good it's supposed to be.

    One trick to avoiding the high minimums for some funds is to buy it from an online brokerage or fund supermarket. Very often, the fund family (DFA) will have only one account with the brokerage in order to simplify their books. They let brokerage worry about the bookwork of all the individual investors that own a bit of this fund. If you add up all the individuals buying that one fund via the brokerage, the grand total amount of money exceeds the minimum.

    Another way to avoid steep minimums is to find the fund in a institutional account like a 401, 403, 457.

    Another way is to try to get the fund via a third party custodian to your IRA. IRA's have reduced minimums in many situations.

    Another way that hawkmountain mentioned is to find the fund in or buy it thru some institutional account like a 529. Yeah, I know that's a education saving plan for kids. However, in the grand scheme of your portfolio mgt, it's a back door. Remember, you can always get the principal out without penalty and many states have upper limits well into 6 figures. Ours is $240K If I really wanted this DFA fund and it was available with my 529, I could load this sucker up and let the gain fund the kids education while I took back the principal at some later date. Hell, I might even get a state tax right off. teehehe ;-)

    The bottom line is ALWAYS TRY AND NEVER, EVER GIVE UP. Ever see the drawing of the heron swallowing the frog and the frog has his 'hands' sticking out of the heron's mouth trying to strangle him. The caption reads, "don't ever give up".

    peace,

    rono



    Item #2
    Posted by: [This item was outdated, and has been deleted]




    Item #1
    Posted by: MJG
    Date: March 22, 2007
    Subject line: Academicians Axioms
    Body of post:

    Hi FundAlarmers,

    Several months ago Rono posted some references to Max Gunther’s “Zurich Axioms”. Those postings were my introduction to Gunther’s published investment works. Many of his pertinent axioms addressed generic ways to control risks and uncertainties in the investment universe. The axioms identified functional rules that are actionable for the private investor.

    Many FundAlarmers (well actually just a couple, but their enthusiasm exceeds their numerical strength) have expressed an interest in academic research. I share their curiosity.

    I particularly endorse academic research because of its unbiased nature, its mathematical rigor, and its torturous peer review cycle. Its end produce reflects the usually large commitment of resources and time dedicated to producing it. The honesty of the final report is refreshing in the mostly cynical and self- serving nature of our financial community.

    In the spirit of the Zurich Axioms I have distilled familiar academic research into a similar set of summary investment guidelines. With apologies to Max Gunther I have shamelessly titled my summary “Academicians Axioms for the Individual Investor” (AAII, another shameless non-coincidence).

    A listing of the “Academician’s Axioms follows immediately. Primary academic research contributors to each axiom are given in parenthesis.

    1. Historically, equities have outperformed bonds and inflation, but with increased risk as measured by return’s volatility (standard deviation). Alternate investment classes (like hard assets) offer acceptable diversification benefits, but mostly with inferior yearly returns. Equity investment products provide superior returns over alternate investments in the long haul. (Ibbotson, J. Siegel)

    2. Application of scientific methodology and rigorous mathematics to financial modeling and returns measurement enforce order and discipline on the investment process. Since uncertainty dominates investment forecasts, probability theory, statistics and Monte Carlo simulation code familiarity are requisite tools needed to prosper in this environment. (Samuelson, Sharpe, Black, Scholes, Melton)

    3. The Efficient Frontier permits an investor to realize maximum investment returns at an acceptable risk (volatility) level. Asset allocation using worldwide investment options to enhance diversification allows the investor to closely approach that optimum market position. (Markowitz, Sharpe)

    4. A mix of short term risk-free government bonds and an Efficient Frontier array of equity investments permits risk (volatility) adjustment while still maintaining the goals of the reward-risk tradeoff. (Sharpe, Tobin, Treynor)

    5. Market returns follow a random walk pattern and therefore are not predictable in the short term, but more reliably projected in the longer term. Therefore, statistical methods must be deployed in assessing market returns prospects. (Samuelson)

    6. Individual specific investment product risk can be diversified away with a broad asset allocation portfolio. The remaining risk is embedded market systemic risk and is not subject to removal by diversification. The beta term from the Capital Asset pricing Model (CAPM) formulation provides one imperfect measure of that risk. (Sharpe)

    7. The original CAPM does not completely capture all the nuances of the marketplace. Markets are not totally efficient, but are defined as weakly, semi-strong or strongly related to the Efficient Market Hypothesis. (Fama, French)

    8. Multiple factors must be introduced to more fully explain individual product or market price movements. Size effects and value/growth effects are 2 such factors. (Fama and French) Modest, transitory momentum effects have been observed (Carhart) A multi-factor Arbitrage Pricing Theory (APT) has been developed, but is data and computer intensive to implement. (Ross) Institutions deploy these complex market models.

    9. Individual and institutional investors do not always act or react in a logical, predictable manner. Their irrational actions are detrimental to their investment success. These reflex reactions are rooted in many false beliefs and prejudices. They are characterized in evolving behavioral finance studies. (Kahneman, Tversky, Thayer)

    10. It is very difficult to better passive investment performance. Active management infrequently delivers excess returns (like 10 % to 20% of the time) that exceed index benchmarks (less than a 2 % incremental increase) . Those excess returns are not persistent over any reasonable timeframe. (Bogle, Malkiel) A few academics disagree and measure positive benefits from active management. (Lakonishok) This debate continues.

    11. Investment gurus succeed about as often as the average investor. As a group they demonstrate no special insights or forecasting ability. Their composite value added advice is marginal at best, and has been catastrophic to wealth in many documented cases. True experts exist, but are rare indeed. (Hulbert, L. Siegel, CXOadvisory.com)

    12. Dollar Cost Averaging (DCA) strategies reduce returns in most instances. Unknowable future return profiles sometimes cause DCA to be the superior tactic, but not usually. All things being equal, invest resources as soon as they become available. (Greenhut)

    13. Calendar events such as end-of-month effects incrementally contribute to portfolio return and have persisted over the market’s long history. (Fosback, Damodaran)

    14. Investment technical analysis (TA) is a fatally flawed pseudo-science. Very little evident exists to support its pattern recognition basis nor its ability to project future returns. It provides an acceptable graphic summary of historical returns. Few wealthy investors who solely adhere to TA methods have been identified. (Malkiel)

    15. Trading frequently is hazardous to an investor’s wealth. Investors typically recover only 1/3 of market returns because of late herd instincts and adaptation of the “hot hands” fallacy. Females generate higher returns than males do because of more conservative investment policies. (Carhart, Odean, Barber)

    16. Costs do indeed matter. Active investor’s returns often fail to compensate for the additional costs incurred by active management. Lower costs generate higher end-wealth for both the individual and institutional investor cohorts. (Sharpe, Bogle)

    17. Mutual Fund excess returns outperformance (seeking positive alpha) is difficult to attain, and more difficult to maintain. The persistence of superior performance falls away rapidly as measurement period expands. Using past performance records to identify funds that will generate excess returns above valid benchmarks is an equally daunting task. (Jensen, Bogle, Israelsen)

    18. The options market as a major investment alternative was made possible by the development of options pricing equations like the Black-Scholes formula. It brought discipline and transparency to an uncontrolled segment of the investment marketplace. The only unknown in the options equation is the volatility estimate. (Black, Scholes, Miller)

    Note that most of these academic axioms are somewhat negative with respect to active investment strategies. In general, the academic researchers conclude that it is improbable to anticipate excess returns above market returns. As a consequence of their studies, academic financial and investment wizards generally hold passive, market representative portfolios. This list of Academician’s axioms is not complete. It is my first attempt at constructing such a list. I am sure some elements of it will be challenged. They should be. Almost all of the offered observations are challenged by some expert controversy. Much depends individual prospective and investment philosophy. As always, I invite, in fact encourage, both favorable and adverse comments. Please recommend additions as required. One constraint that I would enforce for consistency is that these axioms are intended to be “big picture” oriented. Please focus your recommendations accordingly.

    I hope this challenges some and helps others.

    Best Wishes and Good Investing to All

    MJG