Asset Allocation and ETFs: Pimco's EL Arian in 2008
By Gary Gordon | October 10, 2008 | 2:07 PM | 0 Comments
It seems that the CBOE Volatility Index ($VIX) breaks historical records on a daily basis. A long-standing rule of buying fear when the VIX spikes above 30 has fallen by the wayside, as its climb has been as epic as oil's run at $150 per barrel.
Nevertheless, oil has nearly dropped 50% in 3 months, from $150 per barrel to sub $80. At some point, the VIX will settle down into a normal range in the mid-20s. When it does settle back down, global asset allocation models like that of Pimco's El-Arian should come back into vogue.
Still, what about for 2008? How did El-Arian's proposed model for investors fare YTD (through 10/9/08).
| Pimco's El Arian Global Asset Allocation Model | |||||
| Allocation | YTD (Through 10/9) | ||||
| US Stocks (NYSE: VTI) | 15% | -36% | |||
| International Stocks (NYSE: EFA) | 15% | -44% | |||
| Emerging Stocks (NYSE: EEM) | 10% | -52% | |||
| Private Equity (NYSE: PSP) | 10% | -52% | |||
| Commodities (NYSE: DJP) | 10% | -19% | |||
| International Bond (NYSE: BWX) (NYSE: PCY) | 10% | -16% | |||
| Inflation Protected (NYSE: TIP) | 5% | -4% | |||
| Infrastructure (NYSE: IGF) | 5% | -42% | |||
| U.S. Corporate Bonds (NYSE: LQD) | 5% | -16% | |||
| REITs (NYSE: VNQ) | 5% | -28% | |||
| Special Opportunities | 10% | N/A | |||
| Approximated Total Return | -32% | ||||
There isn't a ready-made ETF for "Special Opportunities." It follows that this is simply left out of the examination.
Regardless, the data tells us that the brightest minds in the business can lose substantial sums of money. It may also tell us that... diversification doesn't keep a bear's claws out of your wallet.
El-Arian is a tremendous talent. I listen intently to his commentary, even if I do not believe that diversification alone is the only tool in the investor's shed. Bear markets require action... they always have. And while you can't predict with success, you can use stop-losses to avoid losing your shirt.
Using stop-losses, rotation, and... ultimately... cash as the ultimate safe haven... moderate ETF investors might be down closer to 20%. Some conservative investors could be down only 12%-15%.
Did I predict the stock market crash of 2008? No.
Could I have imagined that oil would go from $85 per barrel to $150 and back to $85 again? No.
Was I able to forecast the worldwide collapse of the financial system? No, I wasn’t able to do that either.
By the same token, I was able to mitigate the damage with rotation and stop-losses. While the "Golden Rule" may be to buy low and sell high, the "Platinum Rule" is to avoid the big loss. (Read more about the "Wisdom of Avoiding the Big Loss.")
Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
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