I don't understand. I've been watching several "test" portfolios (with 200+ total funds) daily for over a year now - and, more often than not, it seems that when U.S. stocks go down, almost everything else also goes down (sometimes even short and long term bond funds, but at least they more predictably follow an opposite pattern to stocks).
It doesn't seem to matter whether it's world, emerging allocations/bonds, real estate - even gold/silver, commodities seem to frequently fall when market falls.
It seems to me that most everthing is too inter-connected to create much diversification at all. So how does one try to diversify anymore?
Do you expect this pattern to continue when inflation/interest rate increases, end gov't aid, etc.? Is it remotely possible that the dollar won't start to depreciate considering our current economic state and incompetent government?
Other than cash/money market, what would be the most protective fund categories (other than cash/mm) to add some extra amounts to for the next year or so that are likely able to hold up well during bad general market conditions? I've been looking at adding to PONDX (Pimco Income D), TGLMX (TCW Total Return), THOPX (Thompson Plumb Short-term) - also checking out possible new RNDLX (Rivernorth Strategic Inc) and JAFLX (Janus-Aspen Flexible Bond).
I would really appreciate any specific advice on the above - or other specific fund recommendations for this.
Cathy
Comments
In terms of safe/defensive assets, really who knows. I continue to believe that the "safe assets" that are commonly known today may not be viewed as safe harbor over the next decade and, as I mentioned in another thread, I don't know what I would call "safer" assets anymore. I own a publicly traded hedge fund on the London market that did exceptionally well in 2008 (NAV up 12%, price-wise down 1%) and in 2009. However, given that it's pound denominated, I have to deal with exposure to that currency and there's simply the fact that as well as it did in 2008, past results are not indicative of future returns (although the fund's risk controls are rather intense.)
I continue to believe that the dollar is - long-term - headed downwards. Not only have the actions of the government indicated their desire for this result, but they've said as much. I continue to position for an inflationary outcome, although not quite as heavily as I was. Still, I'll continue to watch and very well may buy inflation protection on dips.
The Cambria Global Tactical ETF (GTAA) is an interesting way to play the market with a varing degree of risk that can become lower as market conditions change, given the fund's strategy. How well the fund's strategy will stand up to very significant volatility is kinda yet to be seen (I believe their research paper does provide historical examples of how it would perform in past markets), but I like management, whose thoughts on the strategy are available both in a blog and a book on investing ("The Ivy Portfolio", by Mebane Faber and the fund's co-manager Eric Richardson.)
I think the Arbitrage funds (ARBFX, MERFX, although the former is closed) are generally safe harbor, given the strategy. However, you're never going to see big returns, either. The best case scenario is consistent singles in good times and bad. Managed Futures is a strategy that has worked really well in periods (in 2008), but can be tripped up in others (2009.) I'm not sure how well fixed income will do in the coming years. I thought Pimco Unconstrained's "Unconstrainedness" would allow it to navigate the fixed income market well consistently in different markets good and bad, but I would have done better this year in Pimco Total Return (I will say Pimco Unconstrained did well in 2008.)
Pimco also has the Fundamental Advantage Total Return fund, which is long the RAFI 1000 and short the S & P 500.
I have the Rivernorth/Doubleline fund, which has held up pretty well so far and have been reasonably pleased with another allocation fund, AQR's Risk Parity (AQRNX).
I no longer believe the old addage, "when stocks go down, bonds go up etc".
I especially felt it in the 2008 meltdown. My bond funds tanked just as bad as my equity funds. Fortunately for me, all of my bond funds have return and gained. My equity fund has also return close to where it was before the meltdown.
Even though I am retired my strategy may work for you. Split your assets into income and equity. Since you will not be drawing down any monies, your income funds will buy you more shares each month.
Time is a wonderful asset. Over the years, those income funds will grow and grow and even when the market is down, your portfolio will continue to grow.
FWIW Matt
I do link to Lipper Index returns information weekly. If you look at the returns of bond fund categories your will find some that actually did what you expected. If you are holding more corporate especially higher yield, emerging markets bonds, this week were not a good one. If you held everyone's absolute unfavored category of treasury bonds this week you would be happy.
Diverifying equity states with higher risk bonds have benefits but unfortunately correlation is high and so will up and down movements will be much more in tandem.
Late Peter Bernstein has said, "if you are happy about all assets in your portfolio you are not diversified enough".
I don't think I'm ready for the London market yet. I sold SCPZF quite a while ago - but only because M* wouldn't track continuing gains/losses so threw off my totals. Had only a small amount, but made a nice gain on what I had - thanks!
I'll check out GTAA, MERFX, Pimco Fundamental and AQRNX, as well as the Rivernorth fund. I'm not looking for large gains with this part of my investements - instead just hoping for 4%+ annual IN DOWN markets where I can be pretty sure the fund will go UP when stock markets go down. Hard to tell how my Intermediate term bond funds will do in coming economy - but all made small gains in 2008, which is what I'm looking for in this particular case. I gave up on Hussman HSTRX - he could very well be right at some point, but really missed the boat in the last 6+ months, and it kept annoying me when this would frequently go down when market went down as well as go down when market was up. And, interesting to me, I have been quite surprised at the poor returns of the so-called "Conservative Allocation" funds - almost none that I'm tracking do well in poor markets, which I would have thought they would have some protection from.
If possible, I would just like to add to one of my existing funds mentioned above - I'm trying to narrow down the total funds for this portfolio (Mom's) to 15 or less.
Cathy
Cathy
But my problem is that I don't know how these funds will perform under inflation/interest rate increase, huge gov't debt, dollar devaluation, etc. Have we had that kind of situation in the past where there have been statistics on any of these same types of funds that were around then?
Cathy
I definitely don't recommend jumping into foreign markets. For me, I view it as a learning experience and the opportunity to add asset classes/strategies that aren't accessible in this market, but it opens one up to additional risks (currency swings, for example.)
AQRNX is not going to be particularly conservative, but I do like its ability to vary allocation to different asset classes and, despite bumps in the road over time, do have respect for the financial minds at AQR. GTAA is a better option in terms of having something that has the ability/potential to go from 0 to 60 and 60 to 0 and in-between based upon the current environment. Still, none of these will perform well if the market tanks, although GTAA has the ability to go full stop to cash if market action calls for it (and it can minimally hedge.) You can hedge to some degree with a short or short fund, but that's a pain in this market and understandably not something that a lot of people are going to want to do.
I think it's difficult to know in terms of what will perform best in the next crisis, but I think I'm concerned regarding govt. bonds and I think - over the longer term unless things get disorderly (and I hope things don't get disorderly, but if there's some sort of tipping point, I think if you're not positioned for it, forget about it) I continue to be concerned about the dollar.
Glad you did well with SCPZF! I sold most of it, but kept a few shares around for the longer-term.
1. Short term interest rates are arguably the lowest in history causing money to run towards any/all assets that promise better returns. This has driven the price of all risk assets to possibly unsustainable levels, whether it be bonds, oil, real estate, precious metals or equities.
2. The real trade-off today is not so much among different asset classes as between "risk" and "safety" as market participants continually evaluate the outlook for the economy, dollar, interest rates, crude supplies, etc. Perceptions can change rapidly with dramatic results owing in part to the speed with which data is accessed and trades executed today.
3. One scary thought might be expressed as a syllogism. (A) Diversification entails owning assets that are currently out of favor. (B) The most out of favor asset presently is cash. (C) Cash represents an area for diversification in that it would maintain its value (minus inflation) if all the other asset classes were to fall in unison. It also stands to benefit from rising interest rates more than any other asset class. Like I said, scary.
BTW: Syllogisms are often faulty as this one could well be. (-: (-:
My only suggestion is to gravitate to managers who have proven talent, experience, and plenty of latitude in how they operate their funds and than not to second guess them every few months. Believe it or not many are smarter than we ... Oh, Sacrilege!
Take care, hank
Fundmentals had an awesome portfolio before make more $$ loose less, but his portfolio HIGHLY CORRELATE the 2030s vanguard ETF [short and long term to 3 yrs]. I've pointed this out to him. I think it does not matter much if you have an exotic fund/ETFs, etc... but if your portfolio is diversed you may do well long term [at least this is the history of the market]. I know that with a diversed portfolio I took a hit of 58s% loss instead of 60s+% loss [dows index] from 2008-march/2009. my portfolio goes up quicker compared to Dows. Whether this will hold true long term it's difficult to predict.
I suspect that your doubts about the benefits of market product diversification is clouded by viewing its impact through a somewhat imprecisely focused lens.
Investment diversity will always reduce portfolio volatility if the component mix that constitutes the portfolio are not perfectly correlated.
Although investment risk is a multi-dimensional concept, volatility is one important contributor to that risk. For example, your compound rate of return ( the compound rate determines your end wealth) is reduced below simple average annual returns by the square of the volatility measurement.
The correlation scale between to investment alternatives mathematically ranges from a plus One value to a minus One value. A plus One level means perfect returns correlation; the products are in absolute synchronism. A zero level translates into no meaningful co-movement, complete chaos exits between the two options in terms of returns. A minus One means that the returns are perfectly asynchonistic, as one goes up, the other goes down.
By design, a solid S&P 500 Index fund has a nearly perfect plus One correlation with the S&P benchmark. Gold investment products typically have a near zero correlation with the S&P 500 benchmark. No investment product has ever had a minus One correlation with that same benchmark. There is no complete simple hedge. International equities have a 0.5 to 0.8 correlation with US equities. The US bond products have a 0.2 to 0.5 correlation with US equities.
The correlation coefficients are dynamic and change with time. As the global marketplace has become more interconnected, the complexity and tight coupling of the financial environment has prompted the product correlation coefficients to drift together. However, they are never at the perfect One value.
Therefore, diversification always benefits a portfolio. Perhaps those benefits are more subdued and more difficult to recognize when contrasted against earlier timeframes, but some benefits remain. And the coupling will likely relax with the passage of time as global conditions morph from one problem area to yet another.
When dissecting the benefits of diversification you need a more refined tool then simple ad hoc observations of daily NAV price movements. Resources are available that characterize the wealth advantage offered by diversification.
For example, visit the Paul Merriman website that illustrates how returns can be maintained while reducing portfolio volatility as a function of adding bond components to an all equity portfolio. By diversifying with bonds, return levels can be maintained at the all equity level yet volatility can be reduced by one-half with a 50/50 equity/fixed income portfolio mix.
For example, visit the Risk Grades website and enter any portfolio you wish. Risk Grades will calculate and list the advantage that whatever diversity your entered portfolio offers. Act quickly here because this website will be going out of business at the end of June.
I provide the addresses of the referenced websites immediately below;
http://www.merriman.com/PDFs/FineTuning.pdf
http://riskgrades.com/
I hope this has helped to clarify your understanding of financial diversification and the need to include an array of loosely correlated investment alternatives in your portfolio.
Best Regards,
MJG
However, as is typical of the people in this board most people are using more riskier bonds that go down along with equities in market sellofs. Then, like Cathy they turn around and express their surprise that diversification did not work because their portfolio was not as diversified as they thought they were.
Not all bonds have the same diversification benefit, especially during market declines.
The other problem with going to more cash during certain periods is when portfolios such as mine are almost exclusively in mutual funds. Selling out could cause problems in redemption fees - or, even if not, I think many funds have rules against buying again before a certain period of time. So I agree with you that choosing the best managers I can who know far more than I do can manipulate their investments to do their best under the fund's parameters under whatever market happens.
I put all of Fundmentals portfolios in M*. Hadn't checked them lately, but just rechecked. For those interested,
His "safe" one shows 2.34%-YTD, 8.44%-12 mo, 7.94%-3 yr
His "Make More, Lose Less" one shows 2.48%-YTD, 12.53%-12 mo, 8.11%-3 yr, as opposed to VTHRH with 5.40%-YTD, 16.51%-12 mo, 1.66%-3 yr.
You have a much higher risk tolerance than I do - a 58% loss would definitely keep me up at nights. I watched one of my Mom's trust portfolios managed by USB (with 90% U.S. stocks) lose similar huge sums. It took them 3 years to get back into the black, with only now a 2.58%-3yr gain, with a 5.47%-10 yr return. My "safest" fund WEFIX shows 2.68%-3 yr and 4.83%-10 years without any sleepless nights. On the other hand, the USB portfolio is up 8.31%-YTD and 22.5%-12 mo, so that (as well as yours I'm sure) will do a lot better than mine in good markets.
I think it all boils down to "how much risk do you HAVE to take" - if you think you will need to withdraw a significant amount of income from your investments after a certain number of years, then you would have to take the extra risk. So I am very fortunate not to be in that position.
And what I don't know is what will happen to the economy during the next 1-5 years. However, I do have enough style and sector diversification to at least know that I will lose a lot less than most under even dire conditions.
A lot of the global issues that I've discussed in the past still concern me. There was an interview with Caterpillar's CEO the other day where he discussed the demand in developing markets and the infrastructure build-out that continues to go on. Meanwhile, in this country we've thrown tons of money at the financial system and not really given much thought to developing the remainder of the country to be competitive in an evolving global market. There's an incredibly critical article (http://www.koreatimes.co.kr/www/news/opinon/2011/05/137_87020.html) about the state of high speed rail in California in the Korean Times (!) this morning, and another article in Reuters regarding rail in Florida.
Despite setbacks, there was this quote: "Transportation Secretary Ray LaHood says he's thrilled to be moving forward the long-term goal of connecting 80 percent of Americans to high-speed rail within 25 years." Um, 25 years? Are we serious? By that time, other countries might look like the Jetsons. Obviously an exaggeration, but we're getting a late start and you're telling me the goal is to have it done in 25 years? It'll take at least five for various aspects of it to be debated at the state/local/federal level (You've already seen a lot of that, with Wisconsin getting mad at their governor for not accepting rail funds.) Beyond that, the country needs upgrades to the power grid, other utilities, airports and roads, among other things (which I'm guessing wil be accomplished in 25-40 years from now.) I'd love to invest in alternative energy, but between volatile energy prices and debates over funding, I continue to question whether it will ever really take off until we reach a point where we have to urgently start looking at alternatives to traditional energy sources.
Other countries absolutely have their flaws, as well, but ambitious plans for development on infrastructure will offer them an advantage, if successful. It's a matter of giving people the option to use tools (whether improved transportation or improved utilities, etc) to improve their daily lives, not to mention business benefits of improved infrastructure. I guess what my question is is what is the vision for moving the country forward. I'm not getting a sense of it, and while the squabbles over budget (and how we can quickly move up the debt ceiling) are currently taking center stage, what about all the current political bickering over other issues would make me think that these people could unite with a vision for moving the country forward? (shrugs)
In terms of emerging markets, you're seeing corporations trying to venture deeper into markets and buying up local companies, with Yum Brands buying an Asian chain (Little Sheep) the other day, and Wal-Mart buying a stake in an Asian e-commerce company the other day. Some US companies have not succeeded - you saw Best Buy close their China stores earlier this year, but the local chain they bought (Five Star) continues to do well.
Riskier bonds may have time periods where they do not correlate to the stock market, but in a 2008 situation, emerging market bonds are definitely not going to hold up. Templeton Global Bond did, although that was because manager Michael Hasenstab did an excellent job with currency hedging.
There's a very good discussion with Jim Rickards on King World News regarding Bill Gross being short treasuries and the thinking/theory behind it; Rickards believes that Gross is not short treasuries because he believes that there's going to be bond market trouble if QE ends this year, but he does believe that there will be trouble over the medium term and there's no way for a Bill Gross to position the fund in that manner right away if a turning point really does happen, it has to occur over time, ahead of time. The short treasuries trade has been so greatly discussed over the last year or so, but - despite a fundamental theory that seems sound - it has not worked. It will, but it won't play out in a way that everyone expects.
I think one has to prepare (even if it's not what they would prefer to see) for what they see in the future to some degree, and what I see may not be what someone else sees, and that's fine. I'm flexible in my longer-term themes, but will continue to stick with them until I'm convinced otherwise; I'm not going to try and trade in-and-out of them. The rest of the portfolio can be deployed in a more broad/opportunistic fashion.
But for those of us that don't need those kind of returns, the 7.5%-8.2% (10% to 20%Equity) asset allocation (with far less downturns) sounds good enough for me - especially since I'm not likely to be around in 40 years (at least I hope not).
I have been "acclimating" myself with my 11%+ in low, med and higher risk equity funds (YACKX, APPLX, ICMAX, FSCRX), as well as VERY small positions in commodities, precious metals, real estate and natural resources. I wanted to get more used to the much larger ups and downs of these without letting it bother me - so far so good for most.
I am familiar with RiskGrades, and am sorry to see it go. Though their total Risk Grade for the funds I kept track of missed quite a few times, they have some very interesting other rating criteria that I haven't found on any other site.
I do find statistics interesting - and comforting - even though I am fully aware that "past performance.....". I created Excel charts for each fund I was seriously considering using statistics from M*, Yahoo Finance, GoogleFinance, MarketWatch, RiskGrades and MaxFund (another very interesting site). I included columns for each containing lots of data (like 3, 5, 10 yr return, #years up/down, best and worst 3months and 1 year, how performed last bear and bull markets, 5 year after tax, Lipper ratings, expense ratio and 5 yr cost per 10k, yield, risk and return vs categ, ytd to 5 yr rank, MaxFund rate with Best and Worst case, then columns for every year from 1999 and every quarter performance from 2002 (entering was a lot quicker and easier than it sounds). Added at end RiskGrades Win & Lose periods 1 year to Full dates. Way overkill for most people, but I really found it interesting going up and down the columns comparing each fund for specific criteria depending upon what I am looking for.
I think commodities would not do well with interest rate increase/s, although I think that would depend to a degree on the nature of the situation. I don't see interest rates voluntarily going higher anytime soon.
Dollar devaluation would benefit commodity producers, commodities, possibly (depending) commodity currencies. It would benefit stocks, although one would have to be cautious as to which industries/businesses could pass off rising input costs and which may not be able to. I believe the dollar is headed lower over time and the question is whether that will remain orderly. There will be times when too many people are on that side of the boat, but unless things change, one has to continue to hold on to inflation protection and consider (up to a reasonable allocation - that's an important consideration considering the volatility) buying significant dips in various forms of inflaton protection.
You have already elicited a lot of high-quality, quite specific feedback upon which I am unlikely to improve.
I will humbly suggest a return to a "forest view" for a moment. If I understand your comments here correctly, you are mostly talking about positioning of a quite defensive portfolio of investments for your mother. It sounds like you have done quite a thorough job of identifying a somewhat conservative target (5%+) and then creating a mix that you are comfortable with, given the target.
In your last posting you make clear that beyond a numerical target, one of your goals is not losing a lot "under even dire conditions".
I have a perhaps similar management-for-Mom situation I am working with. I find that purely numerical modelling falls short for some of the planning tasks. The reasons lie partly in the fluctuations in the correlation coefficients of the different asset classes, the secular trend toward convergence among global equities and the uncertainties about what the coming years hold -- all discussed eloquently above by you, MJG, Investor, Scott and others. There is just a lot of variability baked in.
In order to get beyond the limitations of that kind of modelling as a tool for decision-making, I find I need to do scenario-based planning based very much on the specifics of our family situation and what the money is needed for.
So I have a rough, uncertain numerical target I hope to hit which is based on trying to generate sufficient returns to pay expenses, given the continuation of other sources. And I am taking various approaches to allocation to try to achieve those returns. (My approach to this includes trying to defend against risk of my own misjudgments and execution risk by setting up different "investment sleeves" each embodying a point of view I consider plausible, most of which require limited intervention on my part. For example: one of those "sleeves" is an AssetBuilder portfolio at Schwab.)
Beyond that, though, I also play "what if" games, to try to determine which scenarios I really want to plan for. This can include what rono has sometimes referred to as EOTWAWKI (end of the world as we know it) scenarios, if your assessments call for that, but what I am talking about is personal scenario planning, based on the immediate facts of greatest importance to you.
Since in my particular planning situation, the current most probable scenario is dependent upon continuing payments from a Long Term Care policy, I find that one of the scenarios I feel I must look at (especially post-AIG bail-out), is what happens if the insurance company making those payments fails. Although a low-probability event (I hope), if such a failure occurred, it would have an immense effect on the burn rate of the maternal resources. Consequently, it has affected my decision-making about how those resources are invested. Under some assumptions, it would make the most sense to stay all in FDIC insured accounts and treasuries, and let inflation and the current expenses eat away at the portfolio. This, I think, is what a lot of people would do. However, I have decided to take on somewhat more investment risk in order to try to preserve more resources in case low-probability but very unpleasant scenarios occur.
I feel that post-meltdown there is even more noise in the financial media than there was in 2007 and before. So I am trying to be somewhat more disciplined than I used to be in my informal assessments of how I am doing, am trying to stay focused on the immediate goals I have to deal with, and am trying to allow for a degree of self-forgiveness if I get some things wrong, even pretty badly wrong. We make our judgments, do the best we can given our limitations, and then see how we do.
I wish you well.
gfb
Also, a year ago when I bought 20 books on Investments (another overkill and, unfortunately, many older giving int'l exposure as low percentage for moderate to conservative portfolios due to much higher risk), there was great excitement about the relatively "new" ETFs becoming the major investments of the future. I do believe that there a lot of advantages (and expense savings) in ETFs - but I still feel much more comfortable having good managers made the much more frequent investment decisions than I would want to, even if I knew how.
Since our situations are so similar, I would be very interested in hearing some specifics about investments (and/or percentages in styles/sectors/world) of your portfolios for your Mom, if it would be ok with you and you wouldn't mind taking the extra time. But, either way, thank you for your input.
I suppose my worst case scenario would be a currency crisis (and I think a tipping point for a larger crisis such as that would be external in nature), although I don't believe there's a strong possibility of that happening. Still, I did pick up "When Money Dies" (a detailed and highly regarded account of the hyperinflation in Weimar Germany) at a book sale the other day. - see: http://www.telegraph.co.uk/finance/recession/7883931/Obscure-book-by-British-adviser-becomes-cult-hit-after-Warren-Buffett-tip.html It was discussed last year that one of the military's war games in their "Unified Quest 2011" was a scenario of dollar/financial system collapse. If that's the case, it may still not be likely, but it was apparently on someone's mind to prepare for the possibility that it may occur down he road. (and discussed a bit in this part of a speech on Economics and National Security:
Again, I don't see a collapse or crisis as highly likely, but it is good to think about those scenarios and how they might play out and play "What if" games, as was noted above (and I think Greg's discussion above is really quite excellent and I agree that there is more noise now than ever.
I don't see a "Mad Max" scenario, either, although I do believe that people should put down their IPads and teach themselves basic outdoor skills, like gardening, skills that are really not being passed down to new generations. People need to reconnect with the planet a bit, and that's not only for the good of the planet, but for the good of the people on it for if there's a situation where your tablet computer isn't there to guide you. That's not even for a financial disaster - what if there's a natural disaster?
I mean, you see it in the average age of farmers, which is something like the upper 50's. Kids don't want to be farmers, but farmers will become increasingly important over the coming years. (The average age of the American farmer is 57, and there has been a 20 percent drop in farmers under 25. - http://www.npr.org/2011/02/27/134103432/Americas-Future-Farmers-Already-Dropping-Away)
Being rather undisciplined, we set target ranges for different areas. Without this, our investment approach would likely resemble a drunk wallowing from side to side down the street. So theres a maximum 25% for cash/investment grade domestic bonds. Thats currently around 19%, an indication we're still going with the flow and not running to cash. Figure doesn't include our balanced funds whose cash & AA holdings add another 10-15%.
We benchmark to T Rowe Price Retirement Income fund (TRRIX) and than cheat a little by also holding some of it in our portfolio. Some years we best it and some years we dont. Such is life.
However, I also somewhat disagree with MJG that a low correlation coefficient means chaos. A simple phase shift is enough to bring correlation to zero: sin(x) and cos(x) have 0.000 correlation, yet who would claim their relationship is chaotic, random? This is a basic problem in looking at correlation - correlation does not imply (or deny) causation. There is often a common (shared) latent (underlying) cause for both trends.
A "textbook" factor given for both stock and bond movements is the economic cycle. Further, this textbook description suggests a 90 degree phase shift (i.e. little correlation). Stocks tend to be a leading indicator (so that as the economy approaches its nadir, stocks tend to rise in anticipation of improvement, continuing to rise as the economy improves, but begin to fall as the economy approaches its zenith). Interest rates tend to track the economy more closely, or even lag slightly - so that when the economy is just past its low point and is starting to recover, you've still got low (stimulating) interest rates, etc.
There's your 90 degree phase shift, low correlation, but hardly random. As Investor has pointed out, different types of bonds will deviate from the broad generalities above. Mortgage bonds differ because their durations are dynamic, so they are well behaved in periods of slowly changing rates, but can drop quickly in periods of quickly rising rates. Junk bonds' values are closely tied to the survival prospects of their companies, i.e. how well their companies are expected to do, and hence to their stock prices. And so on.
Low correlation doesn't mean that you should expect bonds to go up when stocks drop. It means that they might go up, they might go down; who knows? (But once one looks beyond correlation, one does have a better chance of knowing.)
I agree completely with your assessment that correlations taken be themselves are not sufficient evidence that a causational relationship exists between the two parameters being studied. Accidental correlations exist, particularly when numerous correlation efforts are explored.
Data mining is a real risk whenever completing correlation analyses. Some of the egregious examples include the infamous positive correlation between the Bangladesh butter market and the S&P 500 returns, and between the AFL/NFL football championship outcome and the annual S&P 500 performance. Both of these are faulty conclusions, regardless of their successful correlation coefficients, because there is no commonsense model that couples the two distinct events in any meaningful way. These happenings are totally independent of each other and any perceived correlation is purely accidental; it is a produce of applying a solid statistical method in a faulty manner. It is bad science.
I apologize for the confusion that using the word “chaos” in describing a zero correlation exercise provoked. I did not mean to imply that the economy, or the market sentiment, or the market pricing and valuation methods were chaotic (although sometimes they appear to be so) in character. I simply wanted to paint a picture with a single word that captured the uncorrelated nature off the data set. I wanted to focus the readers attention on an imaginary plot of the two variables being examined.
Perhaps I would have better achieved my goal by stating that a zero correlation plot would appear as a shotgun blast scatter witness plate, whereas a sharp straight line with a positive slope would perfectly capture all the data points plotted in a correlation with a plus One value if a linear relationship exists.. Likewise, again assuming linearity, a downward sloping sharp, straight line would successful represent a correlation with a minus One value.
Sorry for the sloppy selection of the word “chaos “ to summarize the description.
Thank you for your submittal. I enjoyed its precision and the examples that you cited to illustrate your points. Good work that was well reported.
I also thought that Greg from Boston’s comments were carefully crafted, comprehensive, useful, and beautifully expressed.
Best Wishes to All.
MJG
Lets look at a couple funds which might serve someone with a 5+ year horizon or, at least, might serve as a model/benchmark for their investing. This is limited to T Rowe Price funds because thats where I'm most familiar, but Vanguard and others have similar products:
Retirement Income fund TRRIX (40% equity) 5 year annualized performance (including the crash of '08): +5.4%
Spectrum Income fund RPSIX (10-20% equity) 5 year annualized performance (including the crash of '08): +7.0%
I'm afraid if you cant tolerate a couple years of "down" performance there isn't much out there that would work save cash and perhaps short term bonds.
Another avenue which it appears you may be using is to separate your funds into "secure" and "risk" portions and invest the risk portion for some growth tolerating the occasional down years in that portion of your investments. Gook Luck.