Did any of you guys read this article on asset allocation? A number of investors now believe that asset allocation strategies are fundamentally flawed because of what happened in 2008. I would be interested to get your guys opinion on this article.
^no sh!t?!??! You mean historical correlations don’t mean squat? huh. guess the last 3 years of studying were a waste.
I’d argue that asset allocation strategies are still valid but that in times of economic collapse nothing is truly safe. Sounds kind of basic but I think that when the sky is falling long only strategies aren’t going to hold up.
The article is too long. I am afraid that the time spent reading it will be time wasted that I can never recoup. Once the author mentioned Harry Markowitz - that’s about as far as one needs to go to realize that la-la land academic finance isn’t all that its cracked up to be.
from the article: Last June, the Tactical Fund had nearly 30% invested in commodities, 16% in emerging markets, 19% in other non-U.S. stocks, and 24% in U.S. stocks – investments that historically didn’t move much in tandem. “We got clobbered,” he says. The Tactical Fund lost 44% last year and the overall endowment fell 25%. -------- 30% in commodities!!! WTF did you expect? He thought this was a safe bet because the correlations said so. Are you f*cking kidding me? This moron was in charge of a $1 billion endowment. How the f*ck do these idiots get into these positions???
Didn’t read it but long bonds always are a significant part of any low risk portfolio. Long bonds delivered 35% return in 2008.
those allocations were for only a fund in the entire portfolio, not his overall asset allocation. With that said, he bet wrong and paid for it. It sounds like the Raymond James guy is just now discovering hedge funds (looking at broader go-anywhere managers and ability to short too)…welcome to the party pal. Good points in the article, agree on the globalization having effect on correlations, and also that investors forced to sell anything causes correlations to rise as well. I think people forgot about some assets classes when times were good (ie-Treasuries), and when things fell apart they didnt experience the nice run-up last year or the effects they are designed to have on a portfolio.
Funny! Anybody received the CFA Publication of June 2009, Volume 26, number 2? In that publication, Ben Inker had an article address the exact concern. Good reading!
Taleb says “Anything that relies on correlations is charletonism.” Modern portfolio theory is awful when markets tank - correlations increase and almost everything drops en masse. Basically, correlation based diversification fails you when you need it the most, and drags on your performance during boom times.
jbaldyga Wrote: > 30% in commodities!!! WTF did you expect? He > thought this was a safe bet because the > correlations said so. Are you f*cking kidding me? > This moron was in charge of a $1 billion > endowment. How the f*ck do these idiots get into > these positions??? This is my biggest lesson from all this recent events…don’t ever correlate title with investment ability.
KJH Wrote: ------------------------------------------------------- > Didn’t read it but long bonds always are a > significant part of any low risk portfolio. Long > bonds delivered 35% return in 2008. True. But a heavy LT Investment grade bond allocation is tough for a young investor. Too much drag on return. I’d hate to have 40% of my portfolio averaging a real return of 2-3% over the next 45 years.
^attribution of luck to skill. This manager has been around for a while apparently and has done well. But putting 30% in commodities and being surprised by the result says to me he had a blind faith in historical correlations, which is a recipe for disaster.
Here is the link: http://online.wsj.com/article/SB124718008880220049.html#mod=testMod Have not read it yet, but the title is not encouraging. Anyone who thought asset allocation was a “fail safe” strategy fundamentally misunderstood it. To paraphrase Winston Churchill (again), historical correlations are probably the worst indicator of future correlations, except for all the others.
Buyicide- I agree on the surface of what you’re saying but think about how far ahead the yound investor would be if he/she rebalanced correctly (2x a year?). In that context, the bonds really become an insurance policy that pays 4 or 5% cash yield. They are a precious asset that goes up when everything else goes down. When I play around with mean variance optimizers I’m always amazed at what miracle workers the long bonds are.
KJH-what about now, however, do you have a tactical view on long bonds? With rates so low, and inflation up for debate, do you still find them attractive?
I have NEVER ever ever found them attractive. That’s my gut talking. It’s only in context of a portfolio that I find them attractive.
tv – I’m all over TBT. At some point it will be time for the U.S. to pay the piper for all this spending.
Jbaldyga - the phase we’re in now, “extend & pretend” can last a long time. TBT has 2 cash-draining forces slowly eating away at it… the coupon and the price you pay for the leverage.
True, probably no short term upside and maybe even some downside w/ the fear in the equity market. I’m in at a good basis and looking for another entry point, probably plenty of time. KJH, is there a better place to get the same exposure for a retail investor?
Asset allocation theory is valid even during economic downturn. Imagine if you were holding alot of Chinese real estate stocks and cash instead of C, WM, GM, UYG…