GREEN THOUGHTS - The Emerald Asset Advisors Report
Print
GREEN THOUGHT$
The Emerald Asset Advisors Weekly Newsletter
Volume 2, Issue 6
THIS WEEK'S THOUGHT$
DON'T LET THE MARKET BE
YOUR EVIL TWIN
March ,7 2008
DON'T LET THE MARKET BE
YOUR EVIL TWIN
Its hip to understand R-Squared
Quick Links
More About Emerald
More about EAS Strategies
Request Performance
Information
Emerald Asset Advisors, LLC is
a Registered Investment Advisor
(RIA) based in South Florida, and
founded in 1998. We have gained
national recognition for our
flexible and adaptive approach to
portfolio management. We are
the creators and managers of the
Emerald Allocation Strategies
(EAS), which we make available
directly through our firm and to
other investment advisors (as a
sub-advisor) for their clients.
GREEN THOUGHT$ was
created to offer a refreshing,
contemporary approach to
investment insight and
commentary. Our goal is for you
to spend up to two minutes a
week focusing on a topic related
to long-term wealth preservation
In the recent two-part Greenthought$ series,
"Capturing Investment Success," we learned that it is
easy to be fooled by your own portfolio's
performance. What seems like a great investment can
turn out to be a bull market hero and bear market
goat. Rather than continue with the animal analogies,
let's move on to an important, related concept which
will further help you decipher what you own.
Your portfolio may have done well in the good
times. It mimicked the market on the way up. It
fooled you into thinking it is your buddy, like a
twin sibling who will always be there for you. But
it is only now, when the going gets tough (and who
knows for how long?) that your twin turns evil.
Whatever trouble it gets itself into, it drags you
into the mess. To help you understand how your
portfolio can be "influenced" by the market, there
is a simple concept with a funky name: R-Squared.
I tried several internet sources to get a definition of RSquared that I was comfortable with. Since I don't
speak "geek" as well as I used to, it was tough.
http://ui.constantcontact.com/visualeditor/visual_editor_preview.jsp?agent.uid=1102010021503&format=html&print=true (1 of 4)5/9/2008 1:19:52 PM
GREEN THOUGHTS - The Emerald Asset Advisors Report
and growth.
GREEN THOUGHT$ is written
by Rob Isbitts, Emerald Asset
Advisors' Chief Investment
Officer, in consultation with the
investment team at Emerald.
To view the bios for all Emerald
team members, click
Emerald Bios .
Investopedia.com saved me. It defines R-Squared as
"A statistical measure that represents the percentage
of a fund or security's movements that can be
explained by movements in a benchmark index. For
fixed-income securities, the benchmark is the T-bill.
For equities, the benchmark is the S&P 500." So,
this is like asking your portfolio how much it likes to
mimic what the market (benchmark) is doing.
Investopedia goes on to say that "R-squared values
range from 0 to 100. 100 means that all movements
of a security are completely explained by movements
in the index. Between 85 and 100 indicates the fund's
performance patterns have been in line with the
index. A fund with a low R-squared (70 or less)
doesn't act much like the index."
So, R-Squared tells us to what degree the market is
influencing your portfolio in good times and bad.
You may also ask, "if my portfolio's R-Squared is 90,
I know that means that the market is 90% of the
reason my portfolio does what it does. But what is
influencing the other one-tenth of my return?" The
answer is "everything else" - factors other than the
market itself, such as the skill of manager and the
investment style used. Note also that R-Squared
should be evaluated over at least a three year period,
so you have enough data for the number to be reliable.
Finally, if we look at the R-Squared readings over the
last five years (ended 2/28/08) for various mutual
fund category averages, we can see how this concept
plays out in real life. Using Morningstar data, I ran a
report that showed the R-Squared to the S&P 500 of
16 different mutual fund categories, all of which have
heavy equity components, so it was a fair fight.
Guess how many had R-Squared readings below
70%? ONLY THREE! And those were barely below
the "doesn't act much like the index" line of 70% (the
http://ui.constantcontact.com/visualeditor/visual_editor_preview.jsp?agent.uid=1102010021503&format=html&print=true (2 of 4)5/9/2008 1:19:52 PM
GREEN THOUGHTS - The Emerald Asset Advisors Report
three categories were Smallcap Value, Smallcap
Growth and Midcap Growth, with readings of 69, 69
and 67 respectively). In fact, half of the categories
were over 80%. You may ask, since an S&P Index
fund has a 100% R-Squared, are the stock categories
that occupy the typical investor's portfolio really
doing enough to differentiate themselves? Is there
any originality out there? Is simply diversifying
among different types of stocks a real solution for
mixed market conditions? The answer to all of these
questions appears to be NO.
If you agree with us that R-Squared is an important
concept, and you want to learn more about fighting
risk in portfolios, see our website or call us. I
covered this concept in my 2006 book "Wall Street's
Bull and How to Bear It" which is available on
Amazon.com or, as a Greenthought$ reader, by
calling or emailing us to send you a free copy.
* The categories evaluated versus the S&P 500 for the 5 years ended
2/28/08 were:
US Large Growth
US Large Value
US Large Blend
US Midcap Growth
US Midcap Value
US Midcap Blend
US Smallcap Growth
US Smallcap Value
US Smallcap Blend
World Stock
Foreign Large Growth
Foreign Large Value
Foreign Large Blend
Foreign Small/Mid Growth
Foreign Small/Mid Value
Diversified Emerging Markets
http://ui.constantcontact.com/visualeditor/visual_editor_preview.jsp?agent.uid=1102010021503&format=html&print=true (3 of 4)5/9/2008 1:19:52 PM
GREEN THOUGHTS - The Emerald Asset Advisors Report
Forward email
Email Marketing by
This email was sent to sdean@emeraldasset.com, by sdean@emeraldasset.com
Update Profile/Email Address | Instant removal with SafeUnsubscribe™ | Privacy Policy.
Emerald Asset Advisors, LLC | 2843 Executive Park Drive | Weston | FL | 33331
http://ui.constantcontact.com/visualeditor/visual_editor_preview.jsp?agent.uid=1102010021503&format=html&print=true (4 of 4)5/9/2008 1:19:52 PM