Portfolio Management: Black Swan Tail Insurance vs. Tactical Asset Allocation
09/13/2011 0 comments
A recent article by Geoff Considine on Portfolioist.com discussed how PIMCO's Global Mutli-Asset (PGAIX) fund uses tail insurance (out of money put) to hedge against recent market volatility. Its conclusions are:
Using the past year as the test case, a well-designed and highly-diversified asset allocation has provided a very satisfactory defense in highly volatile markets. It is, as yet, unclear that the additional complexity of ‘tail insurance' has paid off.
Geoff used the following table to compare the fund's performance against several other benchmarks (up to 8/11/2011):
Source: Data from Sungard’s FAME and FolioInvesting.com
We would like to see how such a black swan insurance based fund is compared with our Six Core Asset ETFs benchmarks, up to 9/12/2011:
Portfolio Performance Comparison
| Portfolio/Fund Name | 2011 YTD | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| SPY | -6.36% | 6% | 34% | -0% | -0% | -0% | -6% |
| Six Core Asset ETFs Tactical Asset Allocation Moderate | 1.95% | 7% | 85% | 12% | 94% | 13% | 94% |
| VBINX | -2.43% | 6% | 203% | 3% | 32% | 3% | 28% |
| Six Core Asset ETFs Strategic Asset Allocation Moderate | -1.36% | 5% | 55% | 5% | 24% | 6% | 28% |
| PGAIX | 0.09% | 7% | 97% |
Five Year Chart
See complete portfolio comparison.
The Six Core Asset ETFs consists of the following six ETFs as its candidate funds:
| Asset Class | Ticker | Name |
|---|---|---|
| LARGE BLEND | VTI | Vanguard Total Stock Market ETF |
| Foreign Large Blend | VEU | Vanguard FTSE All-World ex-US ETF |
| DIVERSIFIED EMERGING MKTS | VWO | Vanguard Emerging Markets Stock ETF |
| REAL ESTATE | VNQ | Vanguard REIT Index ETF |
| COMMODITIES BROAD BASKET | DBC | PowerShares DB Commodity Idx Trking Fund |
| Intermediate-Term Bond | BND | Vanguard Total Bond Market ETF |
Our conclusions are that it is essential to have diversification as the first line of defense (which is the same as Geoff's conclusion), regardless of what other hedging techniques you are using. On the other hand, both tactical and tail event (black swan) insurance can add valuable hedge as the second line of defense, as evident in the above comparison.
In retirement investments (such as 401k investments), it is impossible to implement the tail insurance (out of money stock market index put buying), not to mention the complexity of such an insurance. On the other hand, it is relatively easy to implement a dynamic asset allocation strategy such as MyPlanIQ's Tactical Asset Allocation in any 401K, IRA, 403B, 457 or variable annuity account. An asset allocation that is strategic or tactical or both in a retirement investment account is an effective way to navigate through current volatile markets.
Symbols: SPX, SPY, PGAIX, VTI, VEU, VWO, VNQ, DBC, BND, Retirement Investments, 401K Investments, 401K, IRA, Asset Allocation, Tactical Asset Allocation, Strategic Asset Allocation
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
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