A.I.M. Users Bulletin Board

[ls7550]

Hi Allen

Its more a case of inducing less balance/stability. Property prices have a degree of correlation with stocks. Japan for instance saw deep declines in both in the 1990's. Tesco more recently have seen a large hit in their valuation due to property/land values.

If you click on the Rolling Returns option on that backtest web site you'll see that the ten-way 10% x 10 had lower 3-year returns than the 8-way. If each of stocks and property prices both decline together then there's less to counter-balance those losses.

As a more general portfolio however there are viable reasons to add in corporate property/rent/land into the portfolio. Likely uplifts the rewards for acceptable levels of additional risk. Otherwise there's already enough indirect exposure to that class via owning a home and the exposure to that class that the other assets comprise.

An alternative to adding more risk/reward through expanding the 8-way is to hold more volatile versions of the volatile assets. If for instance instead of gold you hold a third of that amount in a 3x leveraged gold fund (two thirds in bonds) and rebalance that back to one-thirds/two-thirds once each year then that blend will tend to have higher upside volatility/lower downside volatility due to the daily rebalancing that the fund performs (in effect adding more exposure during up-trends, reducing exposure during down trends).

Plug in 100% UDOW (3x Dow) and compare to DIA (Dow) as the benchmark into http://www.etfreplay.com/combine.aspx and for 2013 whilst DIA gained 29.6% UDOW gained 107.1%. i.e. one third in 3x, two thirds in bonds was higher than 100% in 1x.

There weren't any 3x leveraged ETF's available back in 2008 that etfreplay has data for, but if you look at SSO (2x SPY) and compare that to SPY for 2008 SSO was down -67.9% compared to -36.8% for SPY. i.e. half in 2x, half in bonds was less deep than 100% in 1x.

More generally a third in 3x, two thirds in bonds rebalanced periodically tends to broadly compare to 100% 1x. When however that is the years best asset and i.e. had trended upwards over the year, the gain from the best asset of the 8 tends to be larger i.e. you potentially boost the running average of yearly best asset gains - without having induced additional portfolio risk (if anything having reduced risk due to potential lower declines when the asset was the years worst performing and a third in 3x, two thirds in bonds were being held instead of 100% 1x).

A somewhat similar effect can be achieved by selecting more volatile 1x holdings as the volatile assets. For instance Small Cap Value tends to be more volatile than Total Stock Market, EDV tends to be more volatile than TLT ...etc. 2008 and 2009 EDV gained +54%, lost -36% to more or less compound out to 0% change over those two years, however the average of +54 and -36 = +9% and the nature of the 8-way is such that it tends to capture that arithmetic average gain/benefit.

Clive.