Kenilworth Portfolio Update: 24 January 2013

The following Dashboard looks a little different than it did last month as I closed out the mid- and small-cap blend asset classes.  Both VO and VB were highly correlated with VTI and we have exposure to growth stocks through VOT and VBK.  Three percent (3%) is allocated to both mid-cap growth and small-cap growth.   Large-Cap Growth is covered by VTI our Large-Cap Blend ETF.

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The Case of Equity Correlations

Readers following the various portfolios may have reservations about eliminating particular asset classes, particularly mid- and small-cap blend as represented by VO and VB.  Why sell off these asset classes?  The reason is the high correlation between the asset classes as you can see from the following screenshot.  The first nine ETFs cover the “Big Nine” U.S. Equity asset classes, and they are all highly correlated.  Even VEU and VEA are highly correlated when given equal weight to VTI and the other equity ETFs.  It is possible to hold all stocks in the mid-cap area by using VOE and VOT.  VO is not needed so I am simplifying the portfolios by gradually selling off VO and VB.  They are not going fast in this up market, even with TSLOs of 1%.

The following correlation data is from the last five years.  Adding another year does not significantly change the results.  Readers can see why one might hold precious metals (SLV, GLD, and I should have added GTU) in a portfolio to hold down risk and increase diversification.

Equity Correlations

Don’t pay attention to VSS as it has a short-history of data.  That 25% correlation is not accurate.