Frequently Asked Questions

Certain issues seem to come up repeatedly in readers’ emails. In the interest of saving everyone time, I’ve compiled a few of the most common:

• Why don’t you like midcaps? It’s not that I don’t like them, I just don’t see the sense. Midcaps correlate well with both large-caps and small-caps, so there’s relatively little diversification value. They also add one more layer of unnecessary complexity—you could easily wind up owning all nine style boxes in the domestic arena alone. That said, if you must, there’s no harm. For a fuller discussion, see Of Markets and Barbells from the September 2000 issue.

• I think I have found a simple market-timing tool using calendar/presidential year/technical/sunspots; I’ve backtested it, and it produces significant excess returns. You wish. You say you're looking for a simple timing tool that will beat the market? So are millions of others, and they've been doing it for more than a century. If it were that simple, someone would have found it already. It's like looking for a well-stocked Safeway in the middle of a starving refugee camp. If it were there, it would have been found rather quickly. And it would be looted even more quickly. Further, anyone with a PC and an IQ above room temperature can find indicators that worked in the past. It’s just that none of them work going forward. (My favorite is butter production in Bangladesh, which predicted 75% of the return of the S&P 500 over a long period.) Or, put much more simply, when was the last time you met someone who became very wealthy trading Rydex Funds?

• I own a diversified portfolio, but I’ve gotten discouraged over the performance of foreign stocks/domestic stocks/value stocks/growth stocks/REITs/pork bellies these past few years—I’m starting to lose faith. What do I do? At any one time your portfolio will contain a poorly-performing asset class; that’s the nature of diversified portfolios. If you can’t handle that, find someone else to manage your money. Remember that there have been three periods of 20 years in the past century when the real return of stocks was barely positive. What are you going to do when that happens again, as it surely will?

• How do I get access to all those wonderful DFA Funds you keep talking about? You can't without paying for a DFA-approved advisor that has access to them. Is it worthwhile to engage the services of a financial advisor to gain access to DFA? Probably not. Their tax-managed, foreign small and foreign value funds carry expenses which are 0.2% to 0.6% higher than Vanguard's, and by the time you add in the advisor's expense, the advantage of these funds may be lost. But if you have decided that you need the services of a financial advisor, then you should certainly seek one with access to DFA.

• Where can I get returns data, historical valuations, and correlations?The best place for returns data and historical valuations is Ken French's website. If you can't find it there, it probably doesn't exist. The Barra website also has historical valuation data for their indexes. Correlations are harder. You can calculate your own once you have the data. My advice, though, is to break down and buy Morningstar Principia Pro. Many of you are seeking "the best data" to put into your MVO. Please, please, realize that you're not going to find "the answer" from your MVO and that extending your data out one more year or out one more decimal place is a waste of time. The reason for this is simple: the only way that you can find the future efficient frontier is by being able to predict the Markowitz inputs—returns, SDs, and correlations—with extreme accuracy. And that's not possible. And if it actually were possible, you wouldn't need the MVO, since you'd know ahead of time the best performing assets. MVO is a teaching tool, occasionally useful for answering simple conditional questions. Nothing more, nothing less.

• Why don't you ever write about commodities?Because I don't trust the data, particularly the GCSI index, which reportedly has a real return of 5% and zero correlation with the rest of the market over the past three decades. This makes no sense at all during a period when the underlying commodities have had a negative real return. It's just too good to be true. I've repeatedly been shown results from private managers with even more spectacular returns, but the funny thing is that most of these vehicles are offshore and none seems to be SEC registered. If you really want commodities exposure, you can do a pretty good job with the Vanguard Precious Metals and Energy Funds.

• There is a second annoying blue stripe on the right edge of my screen. How do I get rid of it?That's because you are using a hi-res setting on your monitor of >1080 pixels in width. The edgepaper background I use has a 1067 pixel width. Unfortunately, 95% of systems use a lower resolution than that, so if I make it wider, that will eliminate the problem on your system, but on everyone else's that'll produce an annoying horizontal scroll bar. So it's a compromise. There are three possible solutions at your end. You could decrease the resolution on your screen or turn off the graphics, and hit each individual graph. But it's easier is just to read the pdf (Acrobat) version, which doesn't have the stripe.

• Where can I get the complete "Retirement Calculator from Hell" series? Here they are:
  Part I
  Part II
  Part III
  Part IV
  Part V
  

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