Benchmarks, Diversification & Time Horizons – Part 4 of 4

In this four-part blog series from Merriman Research, we’re offering our thoughts on the following important investment questions:

  • When evaluating your investment returns, what benchmark(s) are relevant?
  • What is the rationale for diversification?
  • How should your investment time horizon be considered?

Investors may overlook the fact that these questions are highly interrelated. To properly consider any one, you must understand the context the other two foster. We’ll just have to jump right in to explain. If you missed Part 1Part 2 or Part 3, start there and come back.

Part 4: Historic returns analysis supports diversification & longer time horizons

In this our fourth and final post of this blog series, we offer an assessment of historic index performance data.  We expect that your better understanding of this history will contribute to your appreciation of the benefits of diversification and longer-term time horizons for your financial planning. (more…)

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A stellar 2012 for DFA

The article “All in the Family” by Barron’s ranks mutual fund families across several asset classes and time periods. A stellar 2012 for the DFA Value Portfolio helped it earn first place for the US equity fund category. Its three year performance was also very respectable. DFA took 16th place overall for 2012 and 33rd for five-year performance. This article substantiates our use of DFA in client portfolios. The funds served clients well in the short term, but more importantly for the long term. Investing is, after all, a marathon, not a sprint.

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Value and blend vs. value and growth – which is better?

You have previously suggested a mix of value and blend funds. However, Burton Malkiel states in his book “A Random Walk Down Wall Street” that value and growth are equal over time. His argument suggests that a mix of value and growth – not blend – with annual re-balancing would be a better strategy. Both you and Malkiel cite historical figures. Can you explain the difference in your point of view?


Great question. I cannot speak to the context of how it was stated but I would argue the premise that value and growth are equal over time.

Consider the following return figures from Dimensional Fund Advisors over the period of 1927-2011:

US Large Cap Value10.03%
US Large Cap Growth9.75%
US Small Cap Value13.50%
US Small Cap Growth8.8

As you can see, value has historically outperformed growth.

The use of value and blend funds enables us to take advantage of the value premium illustrated by the preceding figures. Of course, blend is a combination of the two so the same result could be accomplished with a mixture of roughly 3 parts value to 1 part growth. However you slice it up our recommendation is to tilt to value.

 

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Compound returns have an assumed rate of return, are hypothetical, and are not representative of any specific type of investment. Standard deviation is one method of measuring risk and performance and is presented as an approximation. Past performance is not a guarantee of future results.
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Updates from the Merriman Research Team

Little known by most, behind the scenes at Merriman we manage a small hedge fund for many of our accredited clients. This fund, the Leveraged Global Opportunity Fund L.P., is now in its 17th year. During this time we’ve received various honors, and last week our fund made the finalist list for the 2011 HFMWeek U.S. Performance Awards for the Macro Under $1 Billion category. Winners will be announced at an event in New York on October 13th. More information is available on their website HFMWeek.com.

(more…)

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How risky is your portfolio?

One of the most important things you can do as an investor is keep your risks under control, and this is one of the most powerful lessons we teach at Merriman.

Our work has lots of fans. Allan Roth, a financial planner and author who teaches behavioral finance at the University of Denver, recently drew on some of our work to make the case that many investors are taking more risk than they realize. You can read his blog post on the topic at CBSMoneyWatch.com.

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Evaluating new investment products

“People calculate too much and think too little.”

This is a quote from Charlie Munger, Warren Buffett’s right hand man, and a world-class investor in his own right.

It is one of my favorite quotes and has rung true throughout my investment career. In my experience, many financial professionals accept numbers too easily without fully understanding assumptions, sensitivity to inputs, and general rules of economics and competition.

We are always looking for ways to better design client investment portfolios. Every year, we are bombarded with new investment approaches, new products and new trading strategies to beat the market. Most new products can be tossed aside immediately, but a few require more detailed investigation. (more…)

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We’ll say it again: The choice of assets can make a big difference.

There was an interesting article in the Wall Street Journal from March 8, 2011 called “Why Small-Cap Funds are Lagging.” It cites a study by Credit Suisse showing that “small-cap funds have increasingly been investing in companies larger than their category name would indicate—and the average fund is underperforming its benchmark.”

The article goes on to say “The average market capitalization of a company in a small-cap fund was about $3.1 billion at the end of 2010, compared to the average market cap of the benchmark Russell 2000 index of about $1.3 billion. The $1.8 billion gap between the two is the largest since September 2008.” (more…)

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Performance: Time Weighted Return vs. Internal Rate of Return

If you happen to ask me, “what is my rate of return?”   I’ll probably answer your question with another question, “which return and why?”  This response usually results in a very cross look shot in my direction.  But, actually there are different measures of return and many investors are unaware of their subtle, and some times not so subtle, differences. Understanding what each of these returns is designed to measure and how they differ will help you make better informed financial decisions.

In the financial industry today there are three measures of return that are frequently used; Simple Rate of Return (SRR), Internal Rate of Return (IRR) and Time Weighted Return (TWR). These measures of return may sound interchangeable but they are actually very different in how they calculate performance. (more…)

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