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Low Correlation in Retirement Portfolios
Old 02-17-2008, 03:29 PM   #1
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Low Correlation in Retirement Portfolios

I read an article from Financial Planning on maintaining a low correlation among a portfolio's asset in the distribution phase etc. It was written by Craig Israelsen, PhD, Brigham Young Universtiy. The bottom line is the results of 8 different porfolios and the best being a Seven-Asset Portfolio. Large U.S. Equity, Small U.S. Equity, Non- U.S. Equity, U.S. Int. Term Bonds, Cash, REIT, Commodities, 14.3% each. It was the best in protecting the portfolio against losses.
Since I am now 74 and will retire next year (no more earned income) I found this apprach quite compelling. The space here does not allow me to detail further the results. but perhaps you might get this article from the Jan-2008 issue. The idea of not needing a 50 or 60% bond holding was attractive and equal allocation to 7 asset classes. Perhaps some of the ETF's or Mutual funds would fill all of these classes. Would appreciate your thoughts. Here is a link to Financial Planning Magazine.
Stay Low - Financial Planning
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Old 02-17-2008, 03:59 PM   #2
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This is pretty much the same portfolio as espoused by Bob Clyatt of Work Less, Live More. Here are a couple of links where this was discussed:
Asset allocation tutorial?
and
http://www.early-retirement.org/foru...ood-30741.html
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Old 02-17-2008, 04:45 PM   #3
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It was the best in protecting the portfolio against losses... The idea of not needing a 50 or 60% bond holding was attractive and equal allocation to 7 asset classes.
Investing asset classes in equal proportion is compelling. For a 74-years old retiree, a 50% fixed-income holding is prudent. Splitting assets (including commodity and REIT if desired) in the equity portion is fine. You may want to divide the fixed-income portion into cash, short-term bond, intermediate bond and TIPS.
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Old 02-17-2008, 04:53 PM   #4
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This sounds god, but in the real world asset clsses get much more positively correlated when you least want it to be the case: when everythig plunges at the sametime.
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Old 02-17-2008, 04:57 PM   #5
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thats usually only temporary until a clear trend emerges into one economic scenerio or another. like now, long term bonds and commodities are both at highs. but very soon a trend one way or another will happen and they will diverge again
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Old 02-17-2008, 04:58 PM   #6
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Those are exactly the seven asset classes in my low corrolation portfolio (though a portion of my intermediate term bonds is international). I don't have equal weights for all asset classes though.
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Old 02-17-2008, 06:00 PM   #7
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FIREdreamer, How long have you had the portfolio and what has been your experience?
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Old 02-17-2008, 06:00 PM   #8
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I have the ultimate in low correlation. What I'm getting is not correlated at all to what I'd like to be getting!
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Old 02-17-2008, 06:38 PM   #9
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These investment categories are fairly close to what I try for, but I'm still struggling with the percentage allocation to assign to each. Shoot, I have trouble even figuring out the allocation I have NOW with some of the managed funds in the mix.
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Old 02-17-2008, 07:26 PM   #10
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Have you put your portfolio into Morningstar.com portfolio and checked
x-ray? mabe not perfect but a good start.
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Old 02-17-2008, 11:04 PM   #11
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FIREdreamer, How long have you had the portfolio and what has been your experience?
Well I started mine about two years ago, right after reading "work less, live more". I researched the subject a bit more, found other "low correlation" portfolio models and ended up creating my own version based on all the information I gathered. Before reading the book, my portfolio was tilted heavily towards US large caps (65%) and to avoid a large tax bill I have kept that original piece and I have been adding new asset classes little by little. This explains why my portfolio today is still a bit heavy in US large caps.

I have had a bit of experience with up markets, but lately off course mostly with down markets. So far I am very happy with the results. It has been quite steady in the face of market gyrations. Here is my portfolio's current composition:

Cash 5%, 1 Year return: +5.19
Intermediate Term Bonds (US) 19%, 1 year return: +8.3%
Intermediate Term Bonds (Int'l) 10%, 1 year return: +8.72%
US Large Caps 25%, 1 year return: -1%
US Small Cap 8%, 1 year return: -7.3%
International Equities: 16%, 1 year return: +8.22%
REIT 5%, 1 year return -23%
Commodities 12%, 1 year return +24%

So as you can see, a pretty good example of low correlation over the past year among all these asset classes.
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Old 02-18-2008, 09:04 AM   #12
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Cash 5%, 1 Year return: +5.19
Where are you gettin that 5.19% cash return right now?
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Old 02-18-2008, 09:51 AM   #13
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Where are you gettin that 5.19% cash return right now?
I don't get this return on cash at this very moment. It's the return over the last year. My cash position consists mostly of Vanguard's prime money market account which, until the Fed's started slashing interest rates (around August or september of last year), paid about 5.25% interest. Plus I have a few CDs paying 5.5% in interests. This year for sure I will earn a lot less on cash, since VG prime MMF pays only about 4% right now and that's bound to decrease in the coming months.
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Old 02-18-2008, 09:51 AM   #14
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Have you put your portfolio into Morningstar.com portfolio and checked
x-ray? mabe not perfect but a good start.
Just tried it, but it looks like it's a paid service. I don't really want to pay another fee to someone else if it's not necessary.
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Old 02-18-2008, 10:01 AM   #15
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its free, you just cant save it
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Old 02-18-2008, 10:22 AM   #16
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Just tried it, but it looks like it's a paid service. I don't really want to pay another fee to someone else if it's not necessary.
As mathjak wrote, it's free, but you can also save it if you enter a portfolio and use the "portfolio X-ray". Here's a whole thread on how to access it for free: Asset allocation tutorial?
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Old 02-18-2008, 10:26 AM   #17
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I read an article from Financial Planning on maintaining a low correlation among a portfolio's asset in the distribution phase etc. <Snip> Here is a link to Financial Planning Magazine.
Stay Low - Financial Planning
The article starts with:

"Of the portfolios in this study, the seven-asset portfolio has the best risk/return combination."

Then concludes (kinda):

"The step-by-step results of building increasingly diversified portfolios are shown in "Correlation Scorecard," above. The most dramatic impact occurs when adding commodities as the seventh asset class. This multi-asset portfolio comprised large U.S. equity, small U.S. equity, non-U.S. equity, U.S. Int. term bonds, cash, REITs and commodities-each asset having a portfolio weighting of 14.3%."

What study? Where, exactly, is this "Scorecard"? Were these Index Funds or "Managed"... etc.? Is "portfolio weighting" like "share (portion?) of"? Can someone help me understand what is being discussed here?
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Old 02-18-2008, 02:25 PM   #18
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OK, I finally got AA loaded and run on Morningstar's x-ray. Sadly, it doesn't break it down into the categories we've been talking about. But with a little tweaking I think I can get pretty good AA numbers from the data. It's interesting that of my top ten holdings, eight are down YTD. But two things have kept me up at a reasonable level: the large commodity position and the large cash position. Sometimes it pays to procrastinate.

Too bad that cash position wasn't in treasuries.
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Old 02-18-2008, 09:23 PM   #19
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Try this link for the full article along with diagrams
The Benefits of Low Correlation -

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Old 02-18-2008, 09:26 PM   #20
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I'm brand new here, but very familiar with both the article and the tables that don't appear with the article on their web site. I construct low-correlation, asset class portfolios and I can assure you, oldman, that it makes all the sense in the world, and is the very best way to go.

I don't use those exact proportions, and I use a total of 9 classes altogether, but the results are generally the same... far less volatility and better return.
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