Tuesday, July 24, 2012

The Failure of Asset Allocation - Bonds Are An Imperfect Hedge

US investors were spoiled by US Treasuries which acted as a near perfect hedge to stocks during the 2008-2009 crisis.  However, in real crisis, bonds rarely offer any comfort, and asset allocation fails (see post Death Spiral of a Country and IMF paper Systemic Banking Crises Database: An Update; by Luc Laeven ... – IMF).  As a very timely example, we can examine Spain, which is not even to crisis level yet.

From TimelyPortfolio

In Spain, there is nowhere to hide, and allocation offers no comfort.

R code in Gist (click raw to copy/paste):

2 comments:

  1. Surely you could build a system based on the principle of "nowhere to hide" like

    IF gold(LOCALCURRENCY) < 10MA THEN
    switch 60% to bonds
    switch 40% to stocks

    IF stocks/LOCALCURRENCY < 10MA THEN
    switch 60% to X
    IF bonds < 10MA THEN
    switch 40% to X

    WHERE
    IF gold(LOCALCURRENCY) < 10MA
    X IS 3-month LOCALCURRENCY
    IF gold(LOCALCURRENCY > 10MA
    X IS gold

    ReplyDelete
  2. Wow that came out a lot more jumbled up than I intended, hope you get the idea.

    ReplyDelete