Gimme Them Old Time Non-Correlations?
Are historical correlations between asset classes jumbled and jangled? Have the actions of central banks since the so-called Great Recession so damaged traditional correlations between asset classes, that we can no longer construct properly diversified or balanced portfolios? Can we no longer rely on Asset A rising when Asset B declines, providing us with a hedge or cushion from the ravages of B?
For example let's look at last week's violent swings in the stock market - the worst start for stocks ever. The long treasury and gold did provide some cushion. But was that cushion consistent with past performance for these asset classes in the face of stock price destruction? An interesting take on this subject appeared last week in the Wall Street Journal:
All good question seeking answers. And if we had any brilliant answers, we'd tell you. Alas, we don't. Our crystal ball having failed us in 2015 (as we were not 100% in cash), we have bashed it against a brick wall in a fit of angry retribution and now are left simply with our wits to help us. Down crystal ball, up reason and common sense! Not the easiest, smoothest way, for sure. It takes a lot of concentration, thought, consideration, analysis - all characteristics that no longer mark the contemporary mind, filled as we are with gadgets spewing information and various other stimuli at us 24/7. But, really, old school approaches may provide some refuge here. Reason and common sense based on experience, both your own and that of others who prove to be reliable sources. Hey, you could do worse.
For example let's look at last week's violent swings in the stock market - the worst start for stocks ever. The long treasury and gold did provide some cushion. But was that cushion consistent with past performance for these asset classes in the face of stock price destruction? An interesting take on this subject appeared last week in the Wall Street Journal:
A handful of assets such as government bonds, gold and oil previously acted as shock absorbers in investor portfolios, rising in value when others fell through the floor. Now, investors find these hedges are no longer dependable...We've been pondering this for quite a while. One conclusion we reached after analyzing various balancing schemes, including specific hedges, over the last year, was turning to an old friend when in doubt: cash. Apparently Mr. Jonsson from Neuberger Berman has arrived at a similar conclusion:
“We’re in an environment where very few of the classic, liquid, safe assets have provided much protection whatsoever,” said Paul O’Connor, co-head of multiasset investment at Henderson Global Investors, which oversees £82 billion ($120 billion) in assets.
Many blame this breakdown in long-held market relationships on central bank stimulus measures that have flooded economies with money...
“If you’re not comfortable with the position, you should just not have it,” he said, rather than putting in place a hedge that could lose you more money.We've never feared holding cash. Could the fear of cash now be subsiding in the investment management industry? Indeed, being 100% in cash in 2015 would have been the smart move. Will the same apply to 2016?
All good question seeking answers. And if we had any brilliant answers, we'd tell you. Alas, we don't. Our crystal ball having failed us in 2015 (as we were not 100% in cash), we have bashed it against a brick wall in a fit of angry retribution and now are left simply with our wits to help us. Down crystal ball, up reason and common sense! Not the easiest, smoothest way, for sure. It takes a lot of concentration, thought, consideration, analysis - all characteristics that no longer mark the contemporary mind, filled as we are with gadgets spewing information and various other stimuli at us 24/7. But, really, old school approaches may provide some refuge here. Reason and common sense based on experience, both your own and that of others who prove to be reliable sources. Hey, you could do worse.
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