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Ted Johnson  

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  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    Your comment describes just how correlation can work to stabilize the value (standard deviation) of a pair of investments while those investments follow an overall longer term trend. In this case, both SPY and TLT have trended up for two or three years with some ups and downs along the way. Owning them both cancelled out some of the fluctuations (i.e. the result of the negative correlation). Unfortunately, if both investments were in a longer term down trend, the negative correlation would only smooth the way down. That is why I stressed in the article that humans must make the investment decisions and these types of statistical tools can only help make the final portfolio selections, smooth the way, or perhaps increase the level of success.
    Dec 7, 2012. 01:28 PM | 1 Like Like |Link to Comment
  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    I am happy to hear you like it.
    Dec 7, 2012. 12:29 AM | Likes Like |Link to Comment
  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    Good point! The 3rd and 4th sentences of paragraph 10 should read:
    "For example if an investment has a historical average price appreciation of 15% and an annual standard deviation of 20%, then 68% of the time it can be expected to return 15% plus or minus one standard deviation or between -5% and 35%. Also, 95% of the time the investment would be within two standard deviations of its historical average price appreciation."
    I have also updated this on my web site.
    Thank you and best regards,
    Ted
    Dec 7, 2012. 12:27 AM | Likes Like |Link to Comment
  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    No other suggestions now, but perhaps in the future. Best regards.
    Dec 6, 2012. 03:06 AM | 1 Like Like |Link to Comment
  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    Thanks for your comment. The correlation coefficients calculated here were for a period of three years except for BKLN (See Table 1). It would not be proper to use such long term correlations to set expectations for a three day period. A calculation such as correlation uses a large sample to provide a statistically significant indication of a trend over time (yes a trend is not to be confused with a certainty).
    A short term event can be the result of a short term cause such as fear of tax law changes. It is possible that the correlations will return to near the calculated levels over time. However, in the third to last paragraph I said, "humans make the decisions about what may be a good investment" and that means when an investment is not satisfactory over a period of time, it is time to make a change.
    I do correlation calculations for one, two, and three year periods and while the numbers are not identical over time, typically they are reasonably consistent over time.
    Dec 6, 2012. 03:03 AM | 1 Like Like |Link to Comment
  • A High-Yield, Low-Risk Income Portfolio Using Uncorrelated ETFs [View article]
    Thanks for your comment. As shown in Table 1 the correlation coefficients are for three years except for BKLN. (BKLN did not exist before March 2011.) Since the three year period does not include the financial crisis, the analysis here would apply to more normal times.
    The problem with planning for times of volatility and crisis is predicting what kind of crisis may occur. If that is your focus then a very different kind of planning is required. During the 2008-2009 financial crisis most investments correlated in the downward direction except non-high-yield bonds did not suffer as much as stocks. Safe havens would be US treasuries or cash.
    Yet today people continue to put money into CFT, HYD, JNK, PCY, and other bond ETFs. This article should appeal to those that decided to move in that direction.
    One measure of safety would be to use stop loss orders (I do).
    Dec 5, 2012. 10:57 PM | 1 Like Like |Link to Comment
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