The Newlywed’s Dilemma

April 25, 2012



  1. We have written extensively about the rising threat of soaring debts and deficits and worsening demographics for developed markets. For example, see Fundamentals from November 2009, August 2010, and October 2011. This is correctly seen as the other side of the coin described in PIMCO’s “New Normal.”
  2. See “A Complete Toolkit for Fighting Inflation,” Fundamentals, June 2009.
  3. The “Typical Plan” was defined using a study of public funds published for the California State Association of County Retirement Systems (SACRS).
  4. We list a toolkit of liquid asset classes and deliberately excluded hedge funds, owing to the difficulty of forecasting a return for the asset class.
  5. See Tzee-man Chow, Jason Hsu, Vitali Kalesnik, and Bryce Little, 2011, “A Survey of Alternative Equity Index Strategies,” Financial Analysts Journal, vol. 67, no. 5 (September/October):37–57. The article was selected by The FAJ Advisory Council and Editorial Board as a Graham and Dodd Scroll Award winner. The article also won the FAJ’s Readers’ Choice Award.
  6. Skeptics should try this themselves with the classic 60/40 portfolio. A passive portfolio invested 60% in the S&P 500 and 40% in the Barclays Aggregate has a correlation of about 99%, when compared with the S&P 500 over the past 10, 20, 30, and 40 years. The bonds mostly offer risk reduction, with precious little diversification.
  7. See S&P Low Volatility Index Methodology.
  8. Brennan and Li (2008) posited that the low-volatility outperformance anomaly will be hard to arbitrage away because many institutional investors have benchmarking constraints to minimize tracking error and so must own higher-beta, lower-returning stocks.
  9. Note, we believe this is a conservative estimate; 1% is at the low end of the empirical results range and is also below the live results of popular non-price weighting methods such as the Fundamental Index methodology and equal weighting.
  10. For more on building a portfolio with a better chance of achieving expected return assumptions, please see our October and November 2010 Fundamentals, “Hope is Not a Strategy” and “The Glad Game.”
  11. Former finance professor and head of Haugen Custom Financial Systems.

©2012 Research Affiliates, LLC. The material contained in this document is for general information purposes only. This material is not intended as an offer or a solicitation for the purchase and/or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. Nothing contained in this material is intended to constitute legal, tax, securities, financial or investment advice, nor an opinion regarding the appropriateness of any investment. Research Affiliates, LLC, is an investment adviser registered under the Investment Advisers Act of 1940 with the U.S. Securities and Exchange Commission (SEC).

JOHN WEST, CFA, Director, Product Specialist of Research Affiliates, LLC.


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