The 90% Solution

An interesting concept came up on the Consuelo Mack Show over the weekend from Nassim Taleb who wrote the book The Black Swan. Based on the interview he is very risk adverse and said he doesn’t really understand the stock market. I don’t know enough about him to know if he is simply being modest. He said that diversification used to work before people knew about diversification but now it doesn’t work because people now know. He is certainly right when it comes to brief declines like we had last week. His idea for portfolio construction is to put 90% into t-bills from various countries and then with the other 10%, the amount you can stand to lose, you should just let ‘er rip. Just go hog wild. I first heard about this concept, with a different twist, quite a few years ago. The idea as I heard it then while that market was falling was 98% t-bills and 2% short Nikkie futures. The idea is interesting from an academic standpoint, or I should say was interesting as the Nikkei is not quite the one trade it used to be. I view Taleb’s idea as being in that ballpark. The t-bill portfolio might average a 5% yield, which on $90,000 would be $4500 and obviously 4.5% to the entire portfolio. If, and I am conceding this is a big if, the $10,000 which is invested very aggressively could return 50% that would be $5000 which is obviously 5% to the overall pie and the total return in my example would be 9.5% which is almost what the stock market...

The 90% Solution

An interesting concept came up on the Consuelo Mack Show over the weekend from Nassim Taleb who wrote the book The Black Swan. Based on the interview he is very risk adverse and said he doesn’t really understand the stock market. I don’t know enough about him to know if he is simply being modest. He said that diversification used to work before people knew about diversification but now it doesn’t work because people now know. He is certainly right when it comes to brief declines like we had last week. His idea for portfolio construction is to put 90% into t-bills from various countries and then with the other 10%, the amount you can stand to lose, you should just let ‘er rip. Just go hog wild. I first heard about this concept, with a different twist, quite a few years ago. The idea as I heard it then while that market was falling was 98% t-bills and 2% short Nikkie futures. The idea is interesting from an academic standpoint, or I should say was interesting as the Nikkei is not quite the one trade it used to be. I view Taleb’s idea as being in that ballpark. The t-bill portfolio might average a 5% yield, which on $90,000 would be $4500 and obviously 4.5% to the entire portfolio. If, and I am conceding this is a big if, the $10,000 which is invested very aggressively could return 50% that would be $5000 which is obviously 5% to the overall pie and the total return in my example would be 9.5% which is almost what the stock market...

Emerging Market ETFs

Over the weekend I remembered that WisdomTree just listed a dividend weighted emerging market fund, ticker DEM. This chart compares DEM with the other broad-based emerging market funds, at least the ones I could think of. WisdomTree says that the dividend weighting should hold up better during declines and while I have not checked all of their funds DEM seems to be passing its first little stress test. Granted the fund is only ten minutes old and this may not mean anything for the future but the fund is making a good impression out of the blocks which is all a new fund can do. Barron’s had an article over the weekend that opined that after years of great returns some sort of serious correction or reversion to the mean would be coming. I am a huge believer in emerging markets investing but people need to realize that when things do turn there is usually pain involved. A little over a year ago I trimmed an overweight position closer to an equal weight (equalweight being high single digits) and more recently cut back on China to get back to equalweight again. After a great run I have a tough time thinking overweight is the right allocation but zero weight is a bad idea too as they obviously could keep this run going for years. Clearly though there is no blood in the...