My reply to Aaron Pressman

regarding your posts and reply (a copy is also available on my blog ignorancearbitrage.blogspot.com)...

In your original post your methodology was, in fact, singularly idiotic. It still is. To wit, "That beats the S&P 500, but it’s much worse than a simple mix of say 70% U.S. stocks and 30% bonds, which lost only 25%. A 60/40 mix dropped 19%.

And a year-end rebalancing wouldn’t have helped — at least not yet. If you set Swensen’s allocations up at the beginning of 2008 (and lost 23%) and then rebalanced at the beginning of 2009, you’d be down 17% so far this year. But if you let your winners ride, so to speak, and went with the portfolio as it stood, you’d only be down 12%." Your method was entirely short-term and short-sighted. Your follow up doesn't address that or admit responsibility for that.

I am heartened that you indicated the shortfalls of your perspective by broadening your horizon to a whopping 4 and a half years. Especially since the year you chose represents a peak in REITs, one of the diversified asset classes.

Why not provide us with 5, 10, 15 year comparisons of Swensen's approach? Probably because they don't support your arguments (neither does picking out the best performing mutual fund of a category).*

You comment, "Swensen’s seemingly conservative strategy worked fine under “normal” market conditions but failed miserably in the bear market." How you describe failure is by comparing it to a portfolio divorced of equities (or 60/40 portfolio, which it lost to by 7% in the really short term and beat in the mediumish term) in both the mediumish and short term.

Moreover, in your initial comments you dismiss the chief advantage of Swensen's rebalancing by commenting on 3 months of results. Poor, poor, poor. The chief advantage of Swensen's model is that it provides you with a low-impact method of recovering from your down year and also achieving equity like returns without the volatility of equities. Contrary to most investors (poor market timing instincts) rather than running from equities when they've been hammered you are running to them... Picking up LONG-TERM values. (Particularly in REITS which, given that this is a real estate crisis, have been predicably hammered.)

While I appreciate your attempts to "reach out" to your audience and appreciate your point that there is no magic formula (something in my reading of Swensen I never noticed... Indeed, he makes clear that his are suggestions), you seem to skewer Swensen simply for advising less-active investors into equities, when equities took a dump (Your reproach: Swensen in his book doesn't forecast the future. Bad Swensen).

Accordingly, while I agree with your contention that careful analyses of MPT (particularly in light of the growing correlation of previously thought diverse investment classes. Also, as commentators here have noted, why not commodities?) and the average investor are important, I disagree with your point that your earlier post advanced the debate (Indeed, it is a common trick to post schlock and then say you were merely advancing the debate-- the debate advancement was done by those who commented on your poor initial post. No thanks to your post.)

Consequently, I'd also like to thank many of the writers here for elevating Pressman's poor thinking into an interesting exchange.

* I ran a rough check using the (no longer working) Icarra portfolio of Swensen-- which hasn't been updated of late-- over the last 9.5 years vs. the S and P and a 60/40 portfolio... Swensen seems to be winning by with a return of 12,600 on 10,000 invested versus 10,600 for 60/40 and negative returns for the S and P 500. Moreover, his margin was achieved in a ten year secular bear market. If anyone could compare, or, better still, provide me with service that does what icarra does (and still works), I would appreciate it.