Brexit's (Short Term) Impact on Your NYC 457 Investments

The Brexit vote has provided investors with an opportunity to evaluate how truly diversified their portfolios are during a crisis event.  This short paper doesn’t attempt to explore Brexit in detail.  Rather, we are more concerned with how portfolio diversification reduced volatility during this period.  For this analysis we will look at the three day performance of a popular Target Date Fund that is available in the NYC Deferred Compensation Plan.  We caution that three days of performance is not a long enough time frame to evaluate a long term investment portfolio.  However, given that crisis events can unfold quickly, we think it is a least an interesting exercise to evaluate how volatile a portfolio can be in the short run.  Short term volatility can cause investors to abandon their long term plans.

From the close on Thursday, 06/23/2016 through the close on Tuesday, 06/28/2016 the 2025 Fund was down -3.43%.  As per the last published Pre Arranged Portfolio Profile (12/31/2015), the 2025 Fund asset allocation is as follows:

Equity Funds:
Equity Index 36.80%
Mid Cap Index 5.90%
Small Cap Fund 5.90%
International Fund 24.40%
Total Equity 73.00%
Fixed Income Funds:
Stable Income 5.20%
TIPS 8.00%
Bond Fund 13.80%
Total Fixed Income 27.00%
 Total Portfolio 100.00%


Portfolio theory tells us that if we add asset classes (that are not perfectly correlated) to a portfolio we can improve the expected risk/return characteristics of the portfolio.  A quick glance at the allocation of the 2025 Fund illustrates that there is not a separate allocation to Real Estate.  Please note that Real Estate (REITS) is a small constituent of the benchmarks of all the Equity Funds listed above, however, there are sound arguments that Real Estate is under-represented in those benchmarks.  Given that, lets create a hypothetical portfolio with a 20% allocation to Real Estate.  To do so we simply reduce all of the other holdings of the 2025 Fund by 20%.  The asset allocation of our hypothetical portfolio is as follows:

Equity Funds:
Equity Index 29.44%
Mid Cap Index 4.72%
Small Cap Fund 4.72%
International Fund 19.52%
Total Equity 58.4%
Fixed Income Funds:
Stable Income 4.16%
TIPS 6.4%
Bond Fund 11.04%
Total Fixed Income 21.6%
Real Estate (REITS):
Vanguard REIT ETF 20.0%
 Total Portfolio 100.00%


Individual Fund Performance for the three day period was as follows:

Stable Value Fund 0.03%
Bond Fund 1.08%
Equity Index -3.65%
Mid Cap Index -4.91%
Small Cap Fund -5.62%
International Equity Fund -6.98%
Vanguard REIT ETF 1.27%


The performance of our hypothetical Fund would have been:

Allocation Weighted Return
Equity Funds:
Equity Index 29.44% -1.07%
Mid Cap Index 4.72% -0.23%
Small Cap Fund 4.72% -0.27%
International Fund 19.52% -1.36%
 Total Equity 58.40% -2.93%
Fixed Income Funds:
Stable Income 4.16% 0.00%
TIPS 6.40% 0.08%
Bond Fund 11.04% 0.12%
 Total Fixed Income 21.60% 0.20%
 Total Core 80.00%
Real Estate (REITS)
Vanguard REIT ETF 20.00% 0.25%
Portfolio Performance   -2.48%


Our hypothetical portfolio still lost money, but it lost less.  Almost a full percent less at 0.95%.  Our hypothetical portfolio would have benefited from reduced exposure to US and Global Equities, and exposure to a diversified index (ETF) of US Real Estate.  Please do not infer that you will always do better with an allocation to Real Estate.  This same exercise applied to calendar year 2008 would have turned out differently.

Stocks and Bonds are the traditional core building blocks of investor portfolios.  Brave Eagle Wealth Management believes that better portfolios can be built using additional asset classes with proper portfolio construction.  Real Estate is one of the many alternative asset classes that can be used to diversify your investment portfolio.

This educational paper is not advice to add Real Estate to your portfolio.  Investors that need help with their long term investment planning should engage a Registered Investment Advisor (RIA) Firm.

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