4 Diversify Risk
November: Best and Worst Asset Classes
Nov/15/08 11:41 PM
What asset classes are winning in 2008 as of
Saturday, November 15th?
1) +7.07% - Domestic Intermediate Treasuries (ITE)
2) -1.78% - Tax Free Municipal Bonds (MUB)
3) -5.00% - Domestic Treasury Inflation Protect Securities (TIPS)
What asset classes are losing in 2008 as of Saturday, November 15th?
1) -54.66% Emerging Market Equity (EEM)
2) -59.82% International Listed Private Equity (PFP)
3) -64.95% Domestic Listed Private Equity (PSP)
How are the broad markets as of Wednesday, November 15th?
Domestic: Stocks (SPY): -39.21% and Bonds (AGG): +.50%
International: Stocks (EFA): -46.64% and Bonds (BWX): -5.00%
Emerging Market: Stocks (EEM): -54.66% and Bonds (EMB): -14.82%
Our Comments: The US stock market continues to be one of the best performing markets around the globe. It’s sad to say, but down 39% is actually good compared to the global equity markets. The big surprise in the last few months is how correlated all asset classes have become. To be up this year you really had to be in cash, treasuries or short the market. Despite all the infomercials on TV even gold is not up this year. Stay invested and stay diversified.
1) +7.07% - Domestic Intermediate Treasuries (ITE)
2) -1.78% - Tax Free Municipal Bonds (MUB)
3) -5.00% - Domestic Treasury Inflation Protect Securities (TIPS)
What asset classes are losing in 2008 as of Saturday, November 15th?
1) -54.66% Emerging Market Equity (EEM)
2) -59.82% International Listed Private Equity (PFP)
3) -64.95% Domestic Listed Private Equity (PSP)
How are the broad markets as of Wednesday, November 15th?
Domestic: Stocks (SPY): -39.21% and Bonds (AGG): +.50%
International: Stocks (EFA): -46.64% and Bonds (BWX): -5.00%
Emerging Market: Stocks (EEM): -54.66% and Bonds (EMB): -14.82%
Our Comments: The US stock market continues to be one of the best performing markets around the globe. It’s sad to say, but down 39% is actually good compared to the global equity markets. The big surprise in the last few months is how correlated all asset classes have become. To be up this year you really had to be in cash, treasuries or short the market. Despite all the infomercials on TV even gold is not up this year. Stay invested and stay diversified.
Important lecture by head of Yale's Endowment
Nov/07/08 07:34 AM
David Swensen has been the investment manager of Yale's Endowment since 1985 and is known as one of the best investors of our time. He recently was a guest lecturer at one of Yale's economics classes and the lecture is posted online.
Our investment process is largely based on the "Yale Model" of investing and I believe you will find his thoughts reassuring and educational.
Click here to watch Swensen's lecture at Yale.
How retirees can protect their income needs.
Oct/28/08 11:43 PM
How can
retirees meet their income needs and manage current
market risks?
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
- First, the government bonds were able fund the income distributions.
- Second, the small cap stock exposure provides a high level of market risk. Fortunately small cap investors have historically been rewarded for this risk.
Shedding light on downturns and recoveries.
Oct/15/08 09:24 AM
I wanted to reach out given today's extraordinary
events. Let me reassure you that although we saw
almost all asset classes fall today, we feel this
panic will not last for long.
There have been many U.S. equity market downturns over time with varying levels of severity. The most severe downturn marked the start of the Great Depression, where stocks lost over 80% of their value. However, a diversified portfolio of 60% US stocks and 40% US bonds would have declined much less (about 50%).
In the 70's we witnessed another violent market environment. Again, diversification provided important downside protection that you can see in the graph below.
Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Thankfully we now have easy access to invest in global markets and this provides additional diversification benefits. When stocks lost 44.7% of their value during the 2000 bear market, even a basic globally diversified portfolio of 10% Real Estate, 50% Global Equities and 40% Global Fixed income would have only lost about 15%.
As an investor, remember this: in moments of panic asset classes can become correlated and the benefits of diversification tend to be minimized. The two key words in this environment are moment and panic, because we are in a moment of panic. Panic does not last forever. As the panic subsides, the benefits of diversification will reappear. In the past, diversified investors who have stayed invested have been the first to benefit. Inevitably, the least expected asset class leads the charge out of the bottom and rewards those who chose to broadly allocate.
Let me leave you with a bit of hope. CLICK HERE TO DOWNLOAD a series of charts that shows US market declines and recoveries. You can also CLICK HERE TO DOWNLOAD a chart that shows how the US markets have behaved after previous financial crises. While the financial system is facing challenges never seen before, we feel strongly that the outcome will be the same as it has been in the past. A market recovery is inevitable and it will come sooner then we all think.
There have been many U.S. equity market downturns over time with varying levels of severity. The most severe downturn marked the start of the Great Depression, where stocks lost over 80% of their value. However, a diversified portfolio of 60% US stocks and 40% US bonds would have declined much less (about 50%).
In the 70's we witnessed another violent market environment. Again, diversification provided important downside protection that you can see in the graph below.
Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Thankfully we now have easy access to invest in global markets and this provides additional diversification benefits. When stocks lost 44.7% of their value during the 2000 bear market, even a basic globally diversified portfolio of 10% Real Estate, 50% Global Equities and 40% Global Fixed income would have only lost about 15%.
As an investor, remember this: in moments of panic asset classes can become correlated and the benefits of diversification tend to be minimized. The two key words in this environment are moment and panic, because we are in a moment of panic. Panic does not last forever. As the panic subsides, the benefits of diversification will reappear. In the past, diversified investors who have stayed invested have been the first to benefit. Inevitably, the least expected asset class leads the charge out of the bottom and rewards those who chose to broadly allocate.
Let me leave you with a bit of hope. CLICK HERE TO DOWNLOAD a series of charts that shows US market declines and recoveries. You can also CLICK HERE TO DOWNLOAD a chart that shows how the US markets have behaved after previous financial crises. While the financial system is facing challenges never seen before, we feel strongly that the outcome will be the same as it has been in the past. A market recovery is inevitable and it will come sooner then we all think.