Archive for September, 2008

29th September
2008
written by simplelight

No one seems to talk about the Iraq war any more. I suppose positions harden over time and discussion becomes increasingly futile. I’ve always thought, though, that most debate in the aftermath draws a comparison between the Iraq of today and the Iraq of 2002. Maybe because it’s difficult to imagine an alternative course of history. 

I read a book this weekend called ‘A Long Way Gone: Memoirs of a Boy Soldier’ . I highly recommend it although it is a harrowing read and I felt drained by the end. It’s the story of a 12-year old boy who gets swept up in the brutal bush war in Sierra Leone in the 1990′s.

In one sense, it’s about the debate we never have: the cost of inaction and the other path that history could take.

23rd September
2008
written by simplelight

Others have weighed in on whether volatility should be considered an asset class. From the point of view of a long term investor it clearly doesn’t make sense to buy and hold volatility. (In that sense, it is the ultimate cyclical asset class and we should be glad we don’t live in a world of ever increasing volatility!). However, in terms of the diversification benefit for a portfolio, the VIX does exhibit low (and negative) correlation with many of the major asset classes. The table below shows the correlation matrix for major asset classes over the past 750 days, a period during which the VIX had negative correlation with US stocks and real estate and no correlation with European stocks. Notice, though, that a similar diversification benefit could probably have been achieved with a combination of treasuries and bonds.

    TIP AGG GSG VNQ EEM EFA VB VV
Ishares Lehman Ti TIP                
Ishares Leh Agg F AGG 0.95              
Ishares Gsci Cmdt GSG 0.90 0.78            
Vanguard Sf Reit VNQ -0.78 -0.69 -0.69          
Ishares Msci E.M. EEM 0.56 0.68 0.52 -0.37        
Ishares Msci Eafe EFA -0.14 0.05 -0.14 0.25 0.70      
Vanguard Sm Cap E VB -0.54 -0.38 -0.47 0.63 0.25 0.75    
Vanguard Lg Cap E VV -0.32 -0.12 -0.32 0.39 0.56 0.94 0.89  
Cboe Volatility I ^VIX 0.78 0.81 0.60 -0.80 0.55 0.00 -0.39 -0.14

Note: this chart was generated on the AssetCorrelation website which is an excellent resource for monitoring the diversification of your own portfolio.