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by maire 2083 days ago
My favorite book on investing is The Intelligent Asset Allocator by William Bernstein. This is what made me aware of issues in correlations.

I still believe in diversification. If an ETF is sufficiently diverse I will buy the ETF. Some ETFs are not - XLE is nearly 50% Chevron and Exxon!

You should also read Taleb if you want to understand the fallacy of unsystematic risk. He is difficult to read because of his overinflated ego but he has some persuasive ideas.
1 comments
atombender 2083 days ago
There are plenty of bad ETFs out there, sure.
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maire 2083 days ago
Here is my correlation between QQQ and major sector ETFs going back to 2005 when Bond ETFs were introduced.

QQQ 1 XLK 0.9952440282 VCR 0.9813656495 SPY 0.9774334512 VHT 0.9749607257 DIA 0.9738966572 XLI 0.944646275 MDY 0.9418372572 XLP 0.9340495871 XLU 0.9322048846 VBK 0.9749569179 TLT 0.8238447288 IEF 0.7459539935 LQD 0.7698459752 VNQ 0.7211819234 SHY 0.5117276512 GLD 0.4880148474 XLF 0.4715141612 EFA 0.2721585482 XLE 0.04648142997

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atombender 2083 days ago
What is your formula? This doesn't match what I'm used to. For example, TLT has an inverse correlation with the US stock market (-0.32 according to PortfolioVisualizer.com), so I would expect it to be inversely correlated with QQQ.
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maire 2083 days ago
Yes - some periods TLT does have negative correlation to QQQ. I was pretty surprised when I saw this since Bernstein did not see this in his analysis.

As I said it had been 15 years since I have been actively managed my investments. When the stock market dropped I was surprised that our investments hadn't actually dropped so I wanted to find out why. So I put together a google sheet and tried to replicate the Intelligent Asset Allocator with just ETFs. This only goes back to 2005.

First I put in all of the ETFs with weekly data going back to 2005 from GoogleFinance. I then added in the dividend yields - which most online analysis does not do. Then I just used the google sheets correlation function. I set up the sheet so I could slice and dice across different time periods. And then I chose my own asset allocation based on what I saw.

I also looked at the optimal rebalancing period. It looks like it is 2 years for this set of data.

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