Join Early Retirement Today
Reply
 
Thread Tools Display Modes
FPA Journal Article - Emphasizing Low-Correlated Assets: The Volatility of Corr...
Old 09-16-2007, 05:45 AM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
FPA Journal Article - Emphasizing Low-Correlated Assets: The Volatility of Corr...

Pretty good article. Nice Charts.

FPA Journal - Emphasizing Low-Correlated Assets: The Volatility of Correlation
chinaco is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 09-16-2007, 06:26 AM   #2
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,337
I don't have time to read the article now but I'll get around to it and make more specific comments later.

chinaco, other than your link you didn't say anything.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-16-2007, 07:08 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
Quote:
Originally Posted by 2B View Post
I don't have time to read the article now but I'll get around to it and make more specific comments later.

chinaco, other than your link you didn't say anything.

Not much to say. If you buy into the idea of low correlation. Here is a study with some nice charts! The charts provide a good composite view of some comparisons.
chinaco is offline   Reply With Quote
Old 09-16-2007, 07:15 AM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
The FPA Journal is probably the only one I will read regularly during retirement!
Meadbh is offline   Reply With Quote
Old 09-16-2007, 07:20 AM   #5
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,337
Quote:
Originally Posted by Meadbh View Post
The FPA Journal is probably the only one I will read regularly during retirement!
I like looking over their articles and visit their site frequently. I do see a significant amount of self-promoting that has me discounting some of the articles and recommendations pretty quickly.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-16-2007, 07:35 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
Interesting! My portfolio most closely resembles the lower correlated portfolio in Table 8, the Balanced Investor, except that I am underweight natural resources and have no long-short hedge. According to this article, in the time period studied, over 30 years such a portfolio would have resulted in 58% to 65% more wealth than the other portfolios, and 12-18% less volatility.
Meadbh is offline   Reply With Quote
Old 09-16-2007, 10:17 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2007
Posts: 5,072
Quote:
Originally Posted by 2B View Post
I like looking over their articles and visit their site frequently. I do see a significant amount of self-promoting that has me discounting some of the articles and recommendations pretty quickly.
I suspect the motivation of most of the professionals that publish is for self-promotion whether that be academic or build name recognition amongst peers, companies, and possibly prospects and customers.

IMO - That does not mean what they publish is BS.


But I think it is always a good idea to cross-check and verify information before moving forward with it (for financial purposes). Even with great credential (i.e., highly educated and skilled) people can make mistakes and draw incorrect conclusions.
chinaco is offline   Reply With Quote
Old 09-16-2007, 10:25 AM   #8
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
So, we select poorly correlated asset classes to reduce volatility and risk. Now we read that correlation itself varies greatly -- once correlated classes can become uncorrelated and vice versa. Even the recommended classes in the article can be presumed vulnerable to alterations in their correlation.

I'm sticking with Bogle. Own the markets, stocks and bonds. No place for drama in my investments at this point. Each to his own.
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 09-16-2007, 11:30 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
Quote:
Originally Posted by chinaco View Post
I suspect the motivation of most of the professionals that publish is for self-promotion whether that be academic or build name recognition amongst peers, companies, and possibly prospects and customers.

IMO - That does not mean what they publish is BS.

But I think it is always a good idea to cross-check and verify information before moving forward with it (for financial purposes). Even with great credential (i.e., highly educated and skilled) people can make mistakes and draw incorrect conclusions.
I agree completely. That applies to the medical literature too.
Meadbh is offline   Reply With Quote
Old 09-16-2007, 11:42 AM   #10
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,856
Quote:
Originally Posted by Rich_in_Tampa View Post
Now we read that correlation itself varies greatly -- once correlated classes can become uncorrelated and vice versa. Even the recommended classes in the article can be presumed vulnerable to alterations in their correlation.
I'm sticking with Bogle. Own the markets, stocks and bonds. No place for drama in my investments at this point. Each to his own.
I think it also points out that "set & forget" is even riskier than asset allocation... unless the portfolio is invested in the entire market.

Not to worry-- that changing correlation effect will no doubt be subject to change. Maybe someday slice & dice will be set & forget again.

Hmmmm... we can already trade volatility options. I wonder if there's a market for correlation options?
__________________
*

Co-author (with my daughter) of “Raising Your Money-Savvy Family For Next Generation Financial Independence.”
Author of the book written on E-R.org: "The Military Guide to Financial Independence and Retirement."

I don't spend much time here— please send a PM.
Nords is offline   Reply With Quote
Old 09-16-2007, 11:50 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
Quote:
Originally Posted by Rich_in_Tampa View Post
Own the markets, stocks and bonds
I have always felt uncomfortable with saying that financial instruments alone represent "the markets'. What about the real estate market, for example?

You are absolutely right about "to each his own".
Meadbh is offline   Reply With Quote
Old 09-16-2007, 01:25 PM   #12
Moderator Emeritus
Rich_by_the_Bay's Avatar
 
Join Date: Feb 2006
Location: San Francisco
Posts: 8,827
Quote:
Originally Posted by Meadbh View Post
I have always felt uncomfortable with saying that financial instruments alone represent "the markets'. What about the real estate market, for example?
No sure it matters too much. Several authors (including Bogle) don't think adding real estate has much effect on overall returns if you're a long term investor and own the total market indexes.

If you are a robust rebalancer with more slices (as many here are with good results), I could see where real estate may be a good addition. I'm a bucketizer more or less, so my stocks will probably sit with minimal rebalancing for 10-15 yrs. But I do have a dollop of REITs for good measure.

Stock-wise, I've got total market 70%, total international 25%, and REIT 5%. Pretty boring, surely not for everyone, but of all the magic formula's I've tried on for size, this seems to suit my temperament the best so far. Gotta agree with Nords that setting-and-forgetting any asset allocation has its risks.

Might change my mind when I'm really retired...
__________________
Rich
San Francisco Area
ESR'd March 2010. FIRE'd January 2011.

As if you didn't know..If the above message contains medical content, it's NOT intended as advice, and may not be accurate, applicable or sufficient. Don't rely on it for any purpose. Consult your own doctor for all medical advice.
Rich_by_the_Bay is offline   Reply With Quote
Old 09-16-2007, 02:02 PM   #13
Recycles dryer sheets
Culture's Avatar
 
Join Date: Apr 2007
Posts: 491
While RE may not have been beneficial in the past in terms of assisting in diversification, it seems hard to believe that not investing in a sector of the worlds wealth that probably equals in value the total value of all stock equities is foolhardy.

Additionally, most FIRE's are most likely underweighted in RE b/c our houses in general represent a lower percentage of our net worth than the average person.
Culture is offline   Reply With Quote
Old 09-16-2007, 02:13 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
My Irish background probably explains my openness to investing in real estate:
"The value of property in Ireland accounted for 72% of the country's average household wealth in 2006, but that proportion should fall over the next few as more Irish people diversify into stocks and bonds."
The Wealth O' The Irish - Forbes.com
Meadbh is offline   Reply With Quote
Old 09-16-2007, 02:16 PM   #15
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,337
Where you live is a dangerous way to "invest in real estate." If you depend on it for emergency money, you might be very disappointed right now if you are living in Stockton, CA (most foreclosures in the nation).

Owning Vanguard Total Stock Market Index gives you some real estate exposure but I agree with RichInTampa that a REIT is a good way to get direct exposure. There is the added difficulty in diversifying into the different types of REITs. They do reflect a number of different business models. I don't personally own the REIT Index because the yield is less than I can get with CDs.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Old 09-16-2007, 02:30 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,401
Quote:
Originally Posted by 2B View Post
Where you live is a dangerous way to "invest in real estate."
Agreed. I don't count my home as an investment. Currently my home accounts for 8% of my NW. Two years ago I inherited a home in Ireland that had appreciated by 13% per annum over 40 years. I didn't need to live in it, so I sold it and invested the proceeds according to my asset allocation. I have since leveraged 5% of that (or 1% of NW) to invest in income producing real estate that is worth 5% of my NW. I may repeat this exercise, but I do not plan to invest more than 10% of my NW in real estate.
Meadbh is offline   Reply With Quote
Old 09-16-2007, 03:08 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
Quote:
Originally Posted by Meadbh View Post
My Irish background probably explains my openness to investing in real estate:
"The value of property in Ireland accounted for 72% of the country's average household wealth in 2006, but that proportion should fall over the next few as more Irish people diversify into stocks and bonds."
The Wealth O' The Irish - Forbes.com
I would say the main reason for this is that Ireland essentially had no wealth- then suddenly it was admitted into the EU, and the native intelligence of the Irish people has a profitable outlet. There was in-migration for the first time in centuries, (much of it young Irish men and women returning to Dublin from elsewhere in the world, and a fairly small real estate market went ballistic. So naturally much of the "wealth" is in rel estate. But unless the Irish are planning to emigrate to Upper Volta, it is kind of a sterile wealth.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 09-16-2007, 03:16 PM   #18
Thinks s/he gets paid by the post
2B's Avatar
 
Join Date: Mar 2006
Location: Houston
Posts: 4,337
Earlier this year we sold my in-laws house. They bought the property in 1962 and it is enough money that they can't outlive. It was fortunate that their property appreciated so well (about 10% per year) but it was all due to a lucky pick of the location of their "country" property. It's now a very fashionable area in Houston. If they had bought 2 miles north or 2 miles south, it would have been worth a very small fraction of what we sold it for. There was no good way to predict in 1962 why their specific piece of dirt would go up and what wouldn't.

They still would have been much better off if they had put the same dollars in whatever simulated the S&P500 back then and forgot about it. DW and I would be looking at a significant inheritance instead of a nice little one.

I finished my asset allocation transition to my conservative pre-retirement portfolio. I'm now 40% cash/CDs, 30% large cap (mostly Vanguard Total Stock Market Index but also IWD and SPY), 20% foreign (60% D&C and 40% VG Emerging Index) and 10% small cap (VG Sm Cap Index). My last "real" stock is BAC which is a leftover in my taxable account with almost all capital gains. It's less than 1% of my NW.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
2B is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Why are so many asset classes correlated and impact on AA? Olav23 FIRE and Money 8 03-29-2007 07:32 PM
DIESEL article in FPA Journal magellan_nh FIRE and Money 5 09-26-2006 09:27 AM
Historically Low DOW Volatility haha FIRE and Money 27 03-22-2006 07:36 PM
VIX - Volatility Index Vincenzo Corleone FIRE and Money 20 07-26-2005 11:29 AM
Volatility in your Portfolio ESRBob FIRE and Money 5 03-03-2005 09:09 AM

» Quick Links

 
All times are GMT -6. The time now is 07:54 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.