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Roundtable continued from page 39 cast. In economic terms, that means, if inflation is currently 3 percent, you project 3 percent. In other words, they were no better than monkeys throwing darts. He found that even the forecasts from the people who impact the outcome—the Congressional Budget Office, the Council of Economic Advisers and the Federal Reserve—and therefore have some degree of controlling it, were not more accurate. However, a recently published paper found that taking a consensus forecast—while it’s not a good forecast—is better than most. The Philly Fed Survey forecasts inflation of roughly 2.5 percent. And, by the way, there is a swap market for inflation; it was also at about 2.5 percent not too long ago. JOI: Have you adjusted your investment philosophy during the last two years? Swedroe: [We have adjusted] nothing. For 15 years we had exactly the same investment philosophy because our advice is based upon what I would call the science of investing and evidence-based investing. The evidence today is—if anything— stronger that passive management is the strategy most likely to allow you to achieve your financial goals. The only thing that we’ve done in the last 15 years is added recommendations that investors consider adding a small allocation to commodities. With the advent of TIPS, we began to strongly recommend that people use TIPS as the dominant portion of their fixedincome portfolio in tax-advantaged accounts. Another minor thing is that we have adjusted our international allocation over time. Fifteen years ago, I think we were recommending 30 percent U.S. Now we are recommending 40 percent. If we were pure market-cap weighters, we would be at 60 percent international. But we think there are logical arguments for having some home-country bias. JOI: What’s the biggest danger/opportunity that you see ahead for investors during the next five years? Swedroe: I think the biggest danger for investors is what they see when they look in the mirror. The second [biggest danger] is ignorance, because they don’t know the science of investing. They are tempted by the wolves of Wall Street and their advice. The third thing I would say is, if they can’t resist watching CNBC, they should do it with the mute button on. Because what they are likely to hear could only cause damage by stirring the emotions of fear and envy in bear markets, and greed and envy in bull markets. The best strategy is what Warren Buffett advises: “Invest in index funds and stay the course.” Moran continued from page 14 return was improved by 3.5 percentage points and the portfolio standard deviation was cut by one-third. If there were a 3 percent allocation to 25 percent-out-of-the-money long VIX calls during that time period, the portfolio’s annualized returns were increased by 10.4 percentage points. 2 VIX and the S&P 500 often have had a negative correlation of returns, and investors have been intrigued by the possibility that VIX could provide value because there often has been high volatility of volatility in difficult investing environments (the historic volatility of VIX daily returns in 2008 was 127 percent). Investors who are bullish on VIX and bearish on stocks might consider: (1) long VIX call options, (2) long VIX call spreads, (3) short VIX put credit spreads, or (4) long VIX futures. Investors who are bearish on VIX and bullish on stocks might consider: (1) long VIX put options, (2) long VIX put spreads, (3) short VIX call credit spreads, and (4) short VIX futures. One cautionary note is that sometimes VIX and stock prices move in the same direction. Conclusion A triple whammy of record-high correlations, very high volatility and huge losses for dozens of indexes made the year 2008 a very challenging one for most investors. In the past two years, investors were disappointed to see that correlations for the S&P GSCI and the MSCI EAFE vs. the S&P 500 reached 40-year highs, and all these indexes experienced drawdowns of more than 50 percent. Indexes for gold, managed futures, volatility and Treasury bonds actually rose in 2008, and investors could explore the possibility of whether limited allocations to these indexes might be effective for diversification and risk management purposes in the event of a future financial crisis. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options; this publication and supporting documentation for any claims, comparisons, recommendations, statistics or other technical data in this paper are available by calling 1-888-OPTIONS, or contacting CBOE at www.cboe. com/Contact. Past performance does not guarantee future results. The views expressed in this article are the views of the author and do not necessarily represent the views of Chicago Board Options Exchange, Incorporated (CBOE). CBOE ® , Chicago Board Options Exchange ® , CBOE Volatility Index ® and VIX ® are registered trademarks and BXM, PUT and SPX are servicemarks of CBOE. All other trademarks and servicemarks are the property of their respective owners. Endnotes 1 Harry M. Markowitz, “Crisis Mode: Modern Portfolio Theory under Pressure,” The Investment Professional (spring 2009). 2 Edward Szado, “VIX Futures and Options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis,” The Journal of Alternative Investments (fall 2009), vol. 12, no. 2, pp. 68-85. 62 January/February 2010
Thoroughbreds perform better with blinders on. Investors don’t. In today’s economy, many people feel like they’re investing in the dark. So it’s time someone shed a little light on the matter. With State Street, you can choose from a stable of over 80 SPDR ® ETFs. Which means it’s easy to precisely match your investments to your investment strategy. Interested in Fixed Income? Gold? High-dividend stocks? Whatever the market segment, you get exactly what’s on the label. Nothing more, nothing less. For a different breed of ETF, visit spdrs.com. And see why wild horses couldn’t drag our customers away. Precise in a world that isn’t ṬM Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus, which contains this and other important information, call 1.866.787.2257. Read it carefully. ETFs, such as SPDR ® S&P 500, ® MidCap SPDR, ® and Diamonds ® trade like stocks, are subject to investment risk and will fluctuate in market value. There is no assurance or guarantee an ETF will meet its objective. SPDR S&P 500, MidCap SPDR, and Diamonds are issued by SPDR Trust, MidCap SPDR Trust, and Diamonds Trust respectively. The “SPDR ® ” trademark is used under license from The McGraw-Hill Companies, Inc. (“McGraw-Hill”). No financial product offered by State Street Global Advisors, a division of State Street Bank and Trust Company, or its affiliates is sponsored, endorsed, sold or promoted by McGraw-Hill. Bond funds contain interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; and inflation risk. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and countries. Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., a registered broker-dealer, is distributor for SPDR S&P 500, MidCap SPDR and Dow Diamonds, all unit investment trusts and Select Sector SPDRs. IBG-0311
Page 1 and 2: Documenting The Collapse Of The Cor
Page 3 and 4: Contributors Rob Arnott Rob Arnott
Page 5 and 6: FREE subscRiption oFFER! The Journa
Page 7 and 8: David Smith Publisher dsmith@fa-mag
Page 9 and 10: Editor’s Note Was 2008 A Last Gas
Page 11 and 12: Record-High Correlations Pose Chall
Page 13 and 14: Figure 4 Correlations Of Weekly Ret
Page 15: Diversification And Risk Management
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Page 21 and 22: One-Stop Shopping for Global Commod
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Page 43 and 44: Actively Passive? When a little act
Page 45 and 46: Figure 1 Passive-Passive: Buy-And-H
Page 47 and 48: Figure 2 Active-Passive: Active Por
Page 49 and 50: Apparent Value Added By Fund Manage
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Page 55 and 56: INSIDE ETFs EUROPE CONFERENCE Lead
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