Canadian newbie investor here hoping to have a friendly discussion to see whether my logic is correct When I moved to ETFs earlier this year, I followed a general guideline for young investors: 80% equities and 20% bonds (10% long term, 10% intermediate-term).
What I bought: * VEE - Emerging Markets * VIU - Developed Markets * XUU - USA * XLB - Long-term Provincial Bonds * ZLC - Long-term Corporate Bonds * ZMP - Inter-term Provincial Bonds * ZCM - Inter-term Corporate Bonds
Canada has provinces instead of states
Recently I came across an youtube video about correlation and diversification. For those who are not familiar, correlation is an area of math where it tests for relationship between two things. It is a value that is somewhere between -1 to 1. If the value is negative, then two assets move in the opposite direction. If it's positive, they move in the same direction. A value of 0 would mean the two assets have no relationship with each other. With this mind, investors should aim for assets that negatively correlated to each other. When you rebalance, one or more of your asset will be bound to be underperforming, and you get sell high and buy low.
I pulled the prices for each of my holdings (Dec 8 2015 to Dec 8 2017, only 2 years because VIU is that new) and used Excel to test for correlation, here are the results.
On the equities side, Developed and Emerging Markets are highly correlated to the health of the American market (not really a surprise here as people often say when America sneezes, the world catches the cold.)
On the bonds side, only my government bonds have a negative correlation to equities. Inter-term corp bonds are doing their thing, not much relationship with the equity market. Long-term corp bonds surprisingly have a high correlation.
Out of curiousity, I tested a short-term government bond (BXF) and a blend bond etf (ZAG). BXF achieved the lowest correlation value of -0.72. ZAG has -0.56.
I am now thinking of redoing my portfolio, using only USA, and a short-term government bond ETF. Which is what Warren Buffet's advice to his wife when he passes away, lol, what a coincidence.
Has someone done something similar? Am I misinterpreting/misusing correlation here? Where does returns fit in all of this?
Submitted December 09, 2017 at 10:16AM by BC_noob http://ift.tt/2AoHpZE
