Replies to post #225 on The "Stock Trading Riches" Investment Sy

[Toofuzzy]

>>> I think non-correlated assets will reduce volatility. Though, in 2008, everything dropped.<<<

The only thing that was not correlated to everything else in 2003 and 2008 was CASH and LONG BONDS ( TLT for instance )

With AIM I see 50% cash as a starting point and I am willing to hold more with the expectation that the next crash will use up most of my cash and take me down to 10% or 20%. I don't want to run out of cash again.

Toofuzzy

[ls7550]

I think non-correlated assets will reduce volatility. Though, in 2008, everything dropped.

 
 Year	LTILG	LTG	BRK	Gold		Best	Rest 
 1987	6.90	15.70	-5.76	-2.14		15.70	-0.33 
 1988	13.70	9.30	51.45	-11.88		51.45	3.71 
 1989	14.50	6.30	93.11	9.46		93.11	10.09 
 1990	4.40	6.10	-30.92	-19.56		6.10	-15.36 
 1991	5.20	17.80	36.14	-5.53		36.14	5.82 
 1992	17.10	17.40	29.83	16.30		29.83	16.93 
 1993	21.10	25.70	56.94	20.36		56.94	22.39 
 1994	-7.90	-9.50	23.00	-7.46		23.00	-8.29 
 1995	12.00	17.90	54.19	1.88		54.19	10.59 
 1996	6.50	8.20	7.51	-12.84		8.20	0.39 
 1997	13.40	18.10	30.02	-19.62		30.02	3.96 
 1998	20.30	23.00	50.97	-0.74		50.97	14.19 
 1999	5.00	-3.10	-17.39	3.57		5.00	-5.64 
 2000	3.10	8.70	33.14	1.79		33.14	4.53 
 2001	-0.90	1.20	12.04	4.34		12.04	1.55 
 2002	8.20	9.20	-7.77	13.46		13.46	3.21 
 2003	6.80	1.50	7.27	8.19		8.19	5.19 
 2004	8.60	7.00	-6.05	-3.08		8.60	-0.71 
 2005	9.10	8.00	1.37	31.06		31.06	6.16 
 2006	2.30	0.10	23.02	8.95		23.02	3.78 
 2007	5.50	5.10	20.74	29.24		29.24	10.45 
 2008	-1.20	11.70	-23.67	42.35		42.35	-4.39 
 2009	5.60	-0.80	20.53	14.77		20.53	6.52 
 2010	10.30	9.40	22.71	32.82		32.82	14.14 
 2011	19.90	21.40	-7.85	12.28		21.40	8.11

For reference, from a UK investors perspective, in 2008 gold performed well (gained 42.35% in terms of GB £).

LTILG = long term index linked gilts (similar to long dated TIPS)
LTG = long term gilts - similar to long term treasury's (TLT)

For US investors over 2008 I believe long dated treasury bonds performed well (TLT), something comparable to stock losses (SPY)

TLT 34
GLD 5
SPY -37

Each of stocks, gold, long dated treasury and long dated TIPS will individually have very high volatility, but as a collective set tend to counterbalance each other and largely neutralise overall total portfolio volatility.

I like to record yearly best asset and the rest average gains for each year as per the above table. The averages for those indicates the average of the best asset each year gained +30% whilst the other three (rest) collectively averaged 4.7%. Having three assets that perhaps broadly rise with inflation and a fourth asset that gains +30% yields a net real (after inflation) gain overall - and does so relatively consistently.

LTT will rise strongly if nominal yields decline (fall if nominal yields rise)
LT TIPS will rise strongly if real yields decline (i.e. perhaps suppressed low nominal yields and inflation spikes sharply) and visa versa if real yields rise.
Gold = hyperinflation hedge and is a bit like undated TIPS.
Stocks do well during prosperity when yields/inflation might be modestly raised.

Providing one of those assets is making reasonable headway, whilst one may also be down, the collective 'rest' might not be too bad as a set, such that profit taking out of the best, combined with the income generated from the portfolio (dividends, interest) can be redeployed into the worst performing asset(s), i.e. profit take [reduce-high] and redistribute to cost-average down the relatively poor performer(s) [add-low].

The combined set tends to have modest yearly total portfolio gains, with relatively low volatility (10.9% yearly gain, 9.9% standard deviation in the above tables case).

Yearly rebalanced (back to 25% equal weights) :



Whilst there's the temptation to 'wait till yields rise' before perhaps buying either LT Treasury bonds or LT TIPS, you just never know and one of those could be next years best performer. If they're not, and do decline in price likely another asset will be profit taken to add more into those and cost average down the average cost. Overall it tends to all wash, as is indicated by the above chart, where 2000 dot com bubble bursting and 2008/9 financial crisis aren't even perceptible from a total portfolio value perspective.

Clive.