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Rescaling The Obvious

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  Source : Shiller Data, JQR Capital Earnings Yield Returns Last week we glanced at the predictive power - as measured by the correlation coefficient - between earnings yield and stock returns. We see from the chart shown below that the predictive power appears to increase almost monotonically as we look further forward in our investment horizon. This again highlights the idea that over the long run, fundamentals (corporate earnings are about as fundamental as things get) matter the most to investment returns. Source : Shiller Data, JQR Capital Rescaling The Obvious  The type of chart we display has an affect on our perception of this data. The previous chart is the bar style with an unscaled horizontal axis. This makes it seem like we want to hold our portfolio positions for 240 months - or 20 years - before hitting the rebalance button. Transaction costs (as measured by trading commissions) have recently dropped to near zero due to digitization and competition. We now change this lov
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Our First Crystal Ball?

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  Source : Shiller Data, JQR Capital Earnings Drive Prices Last week we introduced data from Yale University Professor Robert J. Shiller that went all the way back to 1871 - a whopping 148 years. One of the important ingredients of this data set is the inclusion of corporate earnings to augment the price history. This allows us to begin forming return expectations models using something (anything, please!) other than past performance. The general conclusion from the chart shown below is that corporate earnings may drive future stock prices. Source : Shiller Data, JQR Capital Our First Crystal Ball  We now turn the tables back to the bond side of our asset allocation pie to see if we can have any chance at predicting the future. The bond data from Professor Shiller is the 10-year US Treasury bond. He provides current (from 1871) bond interest rates (yields) and future bond returns. Our expectation is that the former of these two should provide predictive power for the latter of these tw
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Location: 23 Foxridge Rd, West Hartford, CT 06107, USA
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Back To The Future?

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Source : Shiller Data, JQR Capital The Market Portfolio Last week we compared the venerable 60/40 stock/bond portfolio to the historical performance of a calculated market portfolio (MP) over the past 40 years. This was our first comparison between a strategic asset allocation approach (60/40) compared to a tactical asset allocation (MP) approach. It turns out that our suspicion proved correct that the tactical approach provided a slight higher risk-adjusted return over the 1983 to 2022 period. The respective Sharpe ratios (0.548 versus 0.564) indicates a slightly smoother “ride” using the tactical approach.  Source : FRED Data, JQR Capital Back To The Future  We now start looking further back than 1982 by including data from Yale University Professor Robert J. Shiller. His data goes all the way back to 1871 and it is the basis of his famed cyclically adjusted price to earnings (CAPE) ratio. The reason for our literal backtrack is that sometimes we need to go backwards before we go for
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Location: 23 Foxridge Rd, West Hartford, CT 06107, USA
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Strategic Versus Tactical Asset Allocation

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  Source : FRED Data, JQR Capital The Market Portfolio A few weeks ago we introduced a cash asset to augment our efficient frontier set of bond plus stock portfolios.The cash asset allowed us to combine cash with the one portfolio along the efficient frontier that had the highest return versus risk (AKA the Sharpe Ratio). This one portfolio can be thought of as the tangency portfolio or - more commonly - the market portfolio (MP). The mix of bonds versus stocks in the MP will change over time with changes in interest rates and changes in expected returns for our bond and stock indices. The chart below is a quick snapshot of how the risk free rate of cash interest (Rf) interacts with the efficient frontier to create the market portfolio (MP) at only one point in time. This snapshot was taken a few weeks ago. Source : FRED Data, JQR Capital Introducing Naive Forecasting  The chart shown above was generated using average return and risk data over the 1973 to 2022 time period. The hardest
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Location: 23 Foxridge Rd, West Hartford, CT 06107, USA
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Asset Allocation Historical Performance

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  Source : FRED Data, JQR Capital Asset Allocation Historical Performance Last time we examined the accuracy of investment “experts” (AKA market gurus) in predicting the future movements of the stock market. Numerous studies have shown that very few of these experts were able to accurately add value when compared to the proverbial coin toss over a long period of time. In this post we are going to simplify our asset allocation back to our two risky asset cases - stocks vs. bonds (and combinations thereof). The chart shown above displays the historical performance for several combinations of stocks and bonds over the last 50 years. It is no surprise that a 100% stock portfolio turned $1 into almost $156 and that a 0% stock (100% bond) portfolio was the least effective in generating wealth over that time period. Introducing the 60/40 Portfolio  One thing you may notice is that every portfolio tracked in the chart shown above gained a significant amount of money over the 50 year time perio
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Location: 23 Foxridge Rd, West Hartford, CT 06107, USA
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Our Real Expectations For This Year

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  If each of us can replace just one interaction filled with hate to one drawn to love and just one reaction fueled by fear to one blessed with hope, then 2024 will be a VERY bright year. The best way to predict the future is to create it. Our future starts today!
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Location: 23 Foxridge Rd, West Hartford, CT 06107, USA
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