FPA Journal Article - Emphasizing Low-Correlated Assets: The Volatility of Corr...

[chinaco]

Pretty good article. Nice Charts.

FPA Journal - Emphasizing Low-Correlated Assets: The Volatility of Correlation

 

[2B]

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.

 

[chinaco]

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.

 

[Meadbh]

The FPA Journal is probably the only one I will read regularly during retirement!

 

[2B]

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.

 

[Meadbh]

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.

 

[chinaco]

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.

 

[Rich_by_the_Bay]

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.

 

[Meadbh]

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.

 

[Nords]

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?

 

[Meadbh]

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".

 

[Rich_by_the_Bay]

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...

 

[Culture]

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.

 

[Meadbh]

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

 

[2B]

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.

 

[Meadbh]

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.

 

[haha]

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

 

[2B]

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.