Opinion of this long term investment strategy

Discussion in 'Index Futures' started by ProgrammerGuy, Dec 20, 2007.

  1. IF:
    1) The average return for each country's DJIA yields 10% / year.
    2) The average cost of hold an index futures contract is ~5 - 5.25% / year (at least it is for the YM, and ES)

    What about this long term investment idea.

    Buy the index futures for each of the 15 countries that IB offers. Of course you'll be leveraged 25:1, but because you are in many non-correlated (or at least as non-corrleated as you can get) instruments the volatility is significantly reduced.

  2. Wrong! Because of excessive diversification, seemingly unrelated indices tend to all move together in a correlated manner. Instead of buying each of the 15, you're better off buying just the S&P.
  3. BJL


    you're better of diversifying across 15 countries than simply buying the S&P, but a cursory glance at 2001/2002 will show that even being leveraged 5:1 will mean a certain death.

    if you want non-correlated assets, you're better of adding bonds, commodities, currencies and real estate to the mix.
  4. Dude, those "asset classes" are correlated too because of excess liquidity.
  5. BJL


    dude, check out this years performance using etf's:

    equity (SPY) +5%
    bonds (IEF) +10%
    commodities (GSG) +27%
    real estate (IYR) -19%

    they all look the same to you?

    correlations over the last 12 months versus SPY

    GSG -0.02
    IEF -0.59
    IYR 0.74

    right, they all move together due to liquidity...

    SPY -5%
    GSG +8%
    IEF +2%
    IYR -18%

    SPY -5%
    GSG +2%
    IEF +4%
    IYR -13%
  6. Terrible idea. In any type of market turmoil all global equity indexes move in sync. They all become correlated at close to 1.00, blowing out your leveraged account.
  7. Excluding real estate for the past several months and including currencies, each of those "asset classes" has trended higher for atleast the past few years. The magnitude of the movements was different but since each of the the movements was higher, I say the movements are "correlated" in an uptrending manner. The fundamental reason for that correlation is said to be that too much money, "liquidity", is chasing any asset in sight. The recent 5% downturns in the S&P and real estate meltdown might be signaling a disconnection of the correlated movement of those asset classes. Will they splinter apart or could they all downtrend together in a "correlated" manner? If liquidity dries up, I think it'll be the latter. Diversification of positions won't provide any "safety" or volatility reduction in that type of scenario.
  8. BJL


    dude, you shouldn't parrot what you read in the newspapers, but actually look yourself.

    bonds had pretty bad years in 2003-2006.

    commodities had a big down year in 2006. and a big plus in 2002 when stocks dropped.

    real estate had great years in the equity bear market 2001/2002, and a horrible year this year. and pretty bad 1998/1999 when equity returns were good.

    yeah sure, in the long run they all trend up, but that's what you expect from assets with a positive return. that however is not correlation.