In this episode we discuss an investigation and penalties assessed against TIAA for malfeasance in managing client accounts and then we answer emails from Adam, Brian, Andy, and Bennie.  We discuss short-term draw-down strategies, volatility and correlation theory, margin accounts and leverage funds, and automated investing.

RANT subject article:  TIAA to Pay $97M for Pressuring Investors Into Rollovers | ThinkAdvisor

And here is the rest of the text of Brian's email:

"Below is a simple numbers example I created at the time that allowed it to click for me, I share it in case there are others like me that have a hard time allowing the words of others dissuade them from the math that's going on in their head.

It might be helpful because it holds return and volatility constant to isolate the impacts of correlation. Cheers.

The return of Asset A has four observations: -10%, +30%, +15%, +5%

 If we drop this into a spreadsheet it has an average return of +10% and a ~17% standard deviation.

 Asset B and C are exactly the same as Asset A in all ways, with the only difference being the order of their returns.

Asset B = +30%, -10%, +5%, +15%
Asset C = +15%, + 5%, +30%, -10%

If you didn't immediately notice, when you drop these into a spreadsheet you will see that Asset A & B have a -1 correlation, and Asset A & C have a 0 correlation."

Now where it gets interesting is suppose over these four periods you had two portfolios, one that was 50/50 A&B and another that was 50/50 A&C. Calculate the average return and standard deviation for these two portfolios.

 You'll see that both have a +10% average return just like the original assets, however that standard deviation goes to zero for the negatively correlated assets and only drops ~5 points for the zero correlated assets."

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