Israelsen Reviews Inflation, Returns, And Portfolio Management Since 1970s -- 4.7 Stars Hot

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Dr. Craig Israelsen's presentation, "Inflation, Returns, And Portfolio Management," received 4.7-stars from attendees of the live session and A4A members can skim it or replay the entire for CE credit on demand 24/7.

Dr. Israelsen answers questions from attendees below:        

Slide 33-35 Craig said that the specific annualized return of any one of the 7 portfolio components were different when taken in isolation than when they are part of an asset allocation. Huh?

Evaluating the performance of any asset class by itself (in isolation) is not helpful.  The only way to evaluate the value of any asset class is in the context of an entire portfolio.  For example, commodities by itself had the second lowest return among the 7 asset classes and the highest standard deviation.  But, when commodities was taken out of the mix, the standard deviation of a remaining 6-asset portfolio actually increased and the performance dropped slightly. Thus, commodities is helpful to an overall portfolio in spite of its relatively poor “isolated” performance and high risk.

Do you think growth of the economy going forward will have an impact on inflation?

It likely will.

If so, given the penchant of the gov't to get in the way of the economy will keep inflation low?

That certainly is a variable (government intervention) that presents a wild card.  However, if oil increases there isn’t much the govt can do about that

In high inflation, bonds underperform, what effect is there if you substituted TIPS for US Bonds?

TIPS can respond to inflation by the adjustment of the coupon and the price of the bond.  But, the price of a TIPS fund is still subject to the headwind of rising interest rates.

For commodity exposure, does Craig believe an index tracking the S&P GSCI is most ideal (which owns future contracts tracking physical commodities)?

My preference is a commodities fund that has a broader exposure to a wide variety of commodities, such as PDBC or GCC.

Since the index tracks oil/energy, and stock indices own energy names (particularly large-caps), can this provide too much exposure to energy overall?

You are correct, there is a distinct energy focus in the 7Twelve approach.  This is intentional and will provide significant inflation protection when inflation becomes a problem.

Does Craig have any opinion on incorporating gold bullion within the commodities bucket?

Gold is a component in a broad basket commodities fund such as PDBC or GCC.  However, it is a small portion.  Gold, by itself, is very streaky.  Periods of rapid rise, then long periods of stagnation. 

Why does inflation *have* to go up?

Think of it from the perspective of a lender.  If inflation increases, the lender needs to raise the interest rate to protect against the erosion of buying power when being paid back later with less valuable dollars.

What if the 70's were taken out?

Here is the performance of the 7-asset portfolio over various time frames:

47 Years from 1970-2016   9.75%
40 Years from 1977-2016   9.77%
35 Years from 1982-2016   9.11%
30 Years from 1987-2016   7.76%
25 Years from 1992-2016   7.09%

What if the rest of the time is the "norm" and the 70's were the outlier?

See data above

Is there a theoretical basis for the equal weighting of each asset class in the multi-asset portfolio?

Equal weighting acknowledges that we do not know which asset class will out-perform over the upcoming year.  Any weighting other than equal weighting suggests that we have a reason to overweight that particular asset.  That “reason” is either based in a hunch, a hope, or a forecast--none of which have impressive track records and are certainly not based in theory.  Whereas the overall allocation of the model (approx. 65% allocation to the portfolio “engines” and 35% allocation to the portfolio “brakes”) indicates that we believe the engines will outperform the brakes over the long run.

Craig, on page 24, why did you add cash to the last portfolio in the 4-asset portfolio rather than just keeping bonds?

Cash represents liquidity that should be present in any genuinely diversified portfolio.  It was also included to demonstrate that maintaining a 10% liquidity position does not result in a significant performance drag. 

What impact does that specifically have (do you think)?

The impact is that the portfolio has protection, particularly if it is the portfolio of a retiree.  In a year like 2008, the retiree would make their annual withdrawal from the cash position and leave the other positions alone until they can recover.

Does the 7-asset class portfolio allocation percentage change as client ages or relies more on income?

Yes, the 7Twelve model has progressively higher cash allocations at various age stages (50-60, 60-70, and 70+). 

Does Craig have info that shows the performance of value stocks vs. growth stocks in both rising inflation/interest rates and falling?

Yes, contact me directly and I can send you those articles.  This email address is being protected from spambots. You need JavaScript enabled to view it.

Conceptually, why would small do better than big in high inflation? I would think they would have less, not more, pricing power.

Small stock has better performance than large stock over time, and that naturally carries through during periods of high inflation as well.

Attendee comments:

  • very good.  I think I will order the slides
  • Thought provoking
  • I thought it was informative and well presented.
  • excellent as always
  • Very good
  • Thank you for another excellent discussion of the 7-12 concept and the need to stay with asset allocation parameters without regard to short-term performance.
  • Craig is a very effective educator.  Communicates financial concepts so that all can understand.
  • Powerful
  • Good information to better understand the value of diversification during different market periods. 
  • Great
  • interesting and clear
  • Excellent but a tad too fast in taking notes and keeping p with slides
  • good
  • Moved to slow and needed to be more advanced
  • Very useful in these rising rates periods
  • great info
  • Dr. Israelsen is an excellent teacher.  Always enjoyable and informative.  Very much agree with his approach.
  • Informative
  • outstanding AS ALWAYS!
  • A good presentation but I'm unconvinced about commodities because I think the data series for commodities isn't long enough.  I realize it's a bit longer than REITs and a lot longer than emerging markets, but my research suggests that to make commodities seem like a useful part of the portfolio so much depends on the 1974-75 time frame that I find it unconvincing.  Also, the GS index is 70% oil, so really commodities as shown here are pretty much an oil bet.  Inflation could go up while oil goes down. 
  • Basic asset allocation, but always a good reminder.
  • very good
  • Have used Craig's material & purchased his 7-12 book

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