Trev H wrote:Now here is the cool part...
Notice how similar the Summary Stats are for the two components...
The most significant difference is the higher volatility of international.
ILB (Smmary Stats)
9.79 = CAGR
22.92 = StDev
0.30 = Sharpe
0.67 = Correlation to US Market
55.56 = Growth of 1.00
TSM (Summary Stats)
9.75 = CAGR
17.86 = StDev
0.34 = Sharpe
0.67 = Correlation to Intl Market
54.58 = Growth of 1.00
If you invested in the two components 50/50 and rebalanced annually..
50% ILB, 50% TSM (annaul rebalancing)
10.05 = CAGR
18.68 = StDev
0.35 = Sharpe
61.47 = Growth of 1.00
Trev, that is quite sweet, to invest in two funds and (potentially) get a higher
return than either fund, and a markedly lower
StDev than the fund with the higher StDev (ILB), and a "blended" StDev just a bit higher than the fund (TSM) with the lower StDev. What's not to like about that? Sweetness without empty calories or tooth decay.
I'm still learning the theory, but is this sweetness because the two funds are negatively correlated? Is this the core part of modern portfolio theory?
BTW, I just discovered the amazing backtesting spreadsheet of Simba, which I understand grew out of contributions from you. I don't know how well this spreadsheet can predict future my future returns, but I can predict quite confidently that it will cause me much insomnia
Anyway, I've been playing around with the spreadsheet and what's fascinating is that I can take my current 3-Fund portfolio, and exchange 25% of the TSM for SCV, and then lower my overall equities by 5 or 10 percent and put that into more bonds, and find that the return stays the same but the StDev goes down a couple of percentage points. I know this is for entertainment purposes as it looks backwards and not forwards, but it's quite fascinating. Thank you the post here and for your role in launching the backtesting spreadsheet.
BTW, in my version of the spreadsheet, I exchanged 10% of the synthesized "Total_Intl - EAFE85/EM15" fund for Vanguard International Small ("VG Intl Small") to try to replicate better what Vanguard Total International Stock Market Index Fund is today. I didn't have a chance to check the before/after (I doubt it's very dramatic) but I thought this might make sense to reflect the current composition of the Fund.