Low Correlation in Retirement Portfolios

[oldman]

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

 

[LOL!]

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:
http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-3.html
and
http://www.early-retirement.org/for...-his-balanced-portfolio-still-good-30741.html

 

[Spanky]

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.

 

[brewer12345]

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.

 

[mathjak107]

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

 

[FIREd]

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.

 

[oldman]

FIREdreamer, How long have you had the portfolio and what has been your experience?

 

[Marquette]

I have the ultimate in low correlation. What I'm getting is not correlated at all to what I'd like to be getting!

 

[tightasadrum]

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.

 

[oldman]

Have you put your portfolio into Morningstar.com portfolio and checked
x-ray? mabe not perfect but a good start.

 

[FIREd]

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.

 

[cardude]

Cash 5%, 1 Year return: +5.19

Where are you gettin that 5.19% cash return right now?

 

[FIREd]

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.

 

[tightasadrum]

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.

 

[mathjak107]

its free, you just cant save it

 

[LOL!]

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: http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722

 

[RonBoyd]

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?

 

[tightasadrum]

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.

 

[walkinwood]

Try this link for the full article along with diagrams
The Benefits of Low Correlation -

 

[Questcap]

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.

 

[Ed_The_Gypsy]

Scott Burns recently posted a summary of his Couch Potato portfolios here:
Put Sloth to Work for You - Registered Investment Advisor

His 9 and 10 asset class portfolios have done nicely and appear to have less volatility and better returns than the fewer asset class portfolios.

I gall at an asset class that is not strongly correlated but does not have very good long-term results on its own. I prefer good long-term results among uncorrelated asset classes. The trick, of course, is to find them.

 

[oldman]

I do not have an asset allocation that will provide a cash flow from interest and dividends as yet since I am still earning income at almost age 74, but in a year or so I will have to start taking cash from my investments. I am still trying to decide how to best accomplish this. I would like to hold a minimum bond position, not the 50-60% generally recommended. I would like to take my cash from equities in the portfolio and not depend on interest from bonds. Therfore, a portfolio that does not have a drawdown over 10% in one year, does that infrequently, recovers in the shortest period of time is what my goal is.
Questcap, are you currently retired and taking income from your portfolio?
Can you share your 9 asset class allocation.

 

[LOL!]

oldman, some things to read that are related to your post:
https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf
FundAdvice.com - Drawdowns: Losing money is no fun (Table 1)