Ron Peterson wrote:
- quote -

I discussed a similar question in a 2002 message, which can be found by
searching this newsgroup for "diversification cfa level III". A lower
average pairwise corrrelation of stocks increases the benefits of
diversification.

beliavsky[at]aol.com wrote:

- quote -

The last sentence is a little ambiguous, but I know what your mean.

It would be difficult for an individual investor to match the Wilshire
5000 portfolio in his own stock holdings (without using mutual funds),
but can't an investor come close with about 30 stocks? I have heard
arguments claiming that 10-20 stocks would be good, since the companies
could be well researched.

--
Ron

Poor choice of words on my part.

--
_Bill_

beliavsky[at]aol.com wrote:

- quote -

Bill wrote:
- quote -

Assets returns do not need to be "non-correlated" for diversification
to substantially reduce risk, they just need to have correlations
substantially less than one. Almost all the pairwise correlations of
returns of U.S. stocks are positive, but the Wilshire 5000 portfolio is
much less risky than the average stock in it.

Ron Peterson wrote:

- quote -

I think his results can be applied by individual investors if proper
software (perhaps Web-based) is available. Markowitz is associated with
the GuidedChoice company , which claims at
http://www.guidedchoice.com/methodology.html to deliver

"a level of service and expertise otherwise unaffordable to ordinary
401(k) participants. Using the investment options already in your plan,
it creates asset allocations aligned with Modern Portfolio Theory's
Efficient Frontier. A portfolio managed in this way has the potential
for yielding greater returns over the long run than a portfolio
featuring a similar degree of risk, but which is not aligned along the
Efficient Frontier."

I don't know how well the system works, but I'd guess that individual
investors using it will make better portfolio allocations than unaided
investors, who often make poor choices, such as investing in company
stock or putting retirement money in a money-market account.

Financial Engines http://www.financialengines.com/ , founded by William
Sharpe, appears to provide similar services.

FWIW, the 1990 Nobel Prize in Economics was shared by Harry Markowitz,
William Sharpe and Merton Miller. William Sharpe won for the capital asset
pricing model. Harry Markowitz won for his work on reducing portfolio risk
by constructing a portfolio of non-correlated asstes.

--
_Bill_

beliavsky[at]aol.com wrote:

- quote -

beliavsky[at]aol.com wrote:
- quote -

Not all of our goals are financial. You seemed to be splitting up the
financial goals and I was trying to point out that it suffices to have
the one goal of increasing one's effective equity.

- quote -

That makes sense to me now. Do you think that Markowitz's results can
be applied to the individual investor? Or do you think that the
individual investor should invest in a mutual fund that applies his
principles? Are there any mutual funds that apply his principles?

--
Ron


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beliavsky[at]aol.com wrote:
- quote -

B-
Would you agree that the Fama-French work suggests that size & value
factors are significant - not just beta?

-Tad

beliavsky[at]aol.com wrote:

- quote -

Sharpe is quoted in Frank Armstrong's 2002 article, "Capital Pricing
Model" that can be found at:

http://www.investorsolutions.com/lc-...&artcategory=1

-Will

Will Trice wrote:
- quote -

Thanks -- that's what I meant to say.

- quote -

Could you please provide a link or reference?

An interesting paper, cited below and available at
http://papers.ssrn.com/sol3/papers.c...ract_id=241484 , says that
actively managed mutual funds are responsible for the "death of beta".
Maybe investors should overweight low-beta stocks if there is no
risk-premium for high-beta ones.

Returns-Chasing Behavior, Mutual Funds and Beta's Death
JASON J. KARCESKI
University of Florida - Department of Finance, Insurance and Real
Estate
February 24, 2000
AFA 2001 New Orleans; EFA 0412; University of Florida Working Paper
Abstract:
I develop an agency model where returns-chasing behavior by mutual fund
investors causes beta not to be priced to the degree predicted by the
standard CAPM. Mutual fund investors chase returns through time,
precipitating unusually large aggregate cash inflows into mutual funds
just after dramatic market runups. Mutual fund investors also chase
returns cross-sectionally across funds. Each period, mutual funds
compete in tournaments where the highest-performing funds capture the
largest fraction of the aggregate inflows into the mutual fund sector.
The interaction between these two flow-performance relationships
induces an asymmetry in payoffs to mutual funds such that equity fund
managers care most about outperforming peers during bull markets. Since
high-beta stocks tend to outperform low-beta stocks in up markets,
active fund managers tilt their portfolios toward high-beta stocks,
reducing the expected return to these securities in equilibrium. Thus,
the presence of actively-managed mutual funds causes beta risk to be
priced to a lesser degree than otherwise. Interestingly, the literature
suggests that beta died in the early 1980s, coinciding with the
spectacular growth of the mutual fund industry in the U.S. To support
the model's time-series flow-performance assumption, I show empirically
that market returns have a large economic impact on subsequent
aggregate mutual fund flows. In addition, data on mutual fund holdings
support the model's prediction that the aggregate stock portfolio held
by equity mutual funds is over-weighted in high-beta stocks relative to
the overall market.
JEL Classifications: G11, G12

beliavsky[at]aol.com wrote:

- quote -

William Sharpe was also a co-recipient of the Nobel Prize with Markowitz
that year. Sharpe has since expressed relief that the Prize cannot be
rescinded as the CAPM has largely been discredited.

Ron Peterson wrote:
- quote -

I don't understand the relevance of the first sentence of your
paragraph to what I wrote, and the rest seems to be largely a
restatement of what I wrote.

- quote -

Every investor ought to be familiar with the ideas of Harry Markowitz,
who won a Nobel Prize in 1990 (together with Harry Markowitz and Merton
Miller) for his work on portfolio selection -- see
http://nobelprize.org/economics/laur...z-autobio.html .
His ideas are briefly described at
http://en.wikipedia.org/wiki/Capital..._pricing_model .

Continuing on the subject of Nobel Prizes relevant to investors, in
2003 Robert Engle shared the Nobel Prize in economics with Clive
Granger for his work on GARCH models, which can be used model
time-varying volatility and correlations of asset returns. His work is
described at
http://nobelprize.org/economics/laur...e-lecture.html .

beliavsky[at]aol.com wrote:
- quote -

There is Maslow's heierarchy of needs, but I think that this group is
concerned about financial needs and that can best be represented by the
amount of assets one has (financial, home, education, etc.) This can be
boiled down to total dollar amount by valuing those things at their
replacement costs. Of course, to be able to compare years, inflation
needs to be factored in.

- quote -

I tried to Google Markowitz, but found so many, I'm not sure which one
you're referring to.

--
Ron

Ron Peterson wrote:
- quote -

Unless you have a long term plan, with a schedule of planned
investments and expenditures (for example $80 K of college tuition in
10 years, $50K/year of income in retirement in 30 years, both in
today's dollars) and realistic expectations about investment returns,
how do you know if you are making progress towards your goals? Your
portfolio may have grown from one year to the next, but the net present
value of your liabilities may have grown even more, especially if long
term interest rates have fallen.

I admit to not having a long term plan myself -- but I ought to. First
I will work on defending Markowitz .

Ron,

I've been a financial planner for 10 years and I think it's much more
critical than save and invest. If you do it properly, you can reduce
risk, taxes, and achieve your goals. If you just save and invest then
you don't really have much of a plan to achieve your goals - kind of
like building a house without laying a good foundation.

I wrote a 44 page ebook on investment management - I put some good tips
in there and wrote it for the common person to help them get a real
world grasp on creating an investment portfolio. If you'd like a copy
I'll send you one for free - just email me at info[at]cfpcafe.com

best wishes!
Ron Peterson wrote:
- quote -


======================================= MODERATOR'S COMMENT:
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Rather than Google I suggest you go to Amazon and find a book that fits
your needs.
Some points to consider: Money you may need in 5 years should not be
in equities; bonds are preferred. If you are a passive invetor,
consider index funds. If you are an active investor, consider
newsletters that have a track record. It is hard to pick winners on a
consistent basis. Maximize defferal via 401k, IRA, etc.

Frank

Portfolio allocation tools (online and free):

http://www.ifa.com/SurveyNET/ (Take the 49-question survey. At then end, it
will spew back at you recommended allocations, using the index funds it
sells. Just ignore the particular funds, and use the general
recommendations.)

http://www.smartmoney.com/oneasset/ (Faster than the above, but more
general, too.)

Email me for a few more suggestions.

"James Ethridge" <jethridge8[at]wireless.net> wrote
- quote -

James Ethridge wrote:
- quote -

I don't think that you need a long term plan. Just save and invest. Add
up your assets and liabilities every year to see if you're making
progress.

- quote -

Education and home ownership should have high priorities, but
eventually as your savings grow, the stock market will be the place to
invest. Having your own business is a good alternative.

--
Ron

I want to formulate a long-term investment plan. One that considers my age,
risk, goals, lifestyle, asset allocation, things I may not see coming, etc..
How did you do this? Is this grasping at the wind, just a concept in your
head?

If you google this (changing the name many times), you will see how
important and 'critical' it is to have and follow one. But I am not able to
find a website that will help devise one. Peter Lynch once said, "If you're
going to need money within the near future to pay for college tuition or put
a down payment on a house - the stock market is not the place to be. You can
flip a coin over where the market is headed over the next year. But if
you're in the market for the long haul - five, ten or twenty years - then
time is on your side and you should stick to your long-term investment
plan." Thank you for any advice on constructing a long-term investment
plan.