One portfolio to rule them all?

Unfortunately, portfolios are not like a certain type of ring, forged with magical powers to rule over the world, man/hobbit/elf kind, and all other types of investment portfolios. There is no one portfolio to rule them all. There are many different styles and types of portfolios with very different characteristics, asset allocations, and histories. Most importantly, the appropriate type of investment portfolio can and should change for different types of investors. Investors have different risk tolerances, goals, biases, starting points, end points, etc… In this post I want to present a summary of various investment portfolios that I track and discuss a few of their characteristics and the types of investors that they could be suited for. Also, I hope the data and discussion dissuade investors from becoming dogmatic in their portfolio choices or recommendations. All right, let’s get to it.

In May of this year I posted a summary of the portfolios I had been tracking up to that point. Since then I’ve expanded the number of portfolios that I track and added some more statistics as well. I collect all the data from varied array of free sources, e.g. Shiller, MSCI, the Federal Reserve, generous financial professionals, and my own data. I grouped the portfolios into types; equity only, diversified buy and hold, tactical asset allocation, and bond only. The data is from the 1973 to 2013 period. Within each type the portfolios are sorted by compounded annual return (CAGR), the number most investors look to first. Without further ado, here is the data.

Lots of data, I know. In the equity only portfolios there are the basic SP500 index and the MSCI world stock index (ex US). I also added two of the best quant portfolios I’ve discussed on the blog many times before. The diversified buy and hold portfolios show the most common and popular portfolios. The traditional 60/40 or 70/30 US stock US bond portfolios are the most basic and maybe the most common asset allocations for US investors. They are definitely the most talked about allocations, partially because they have the longest historical record. There are several portfolios named after their namesake advocate/creator; Bernstein, El-Erian, Arnott, Swenson, and Tobias. The IVY buy and hold portfolios, and the Permanent Portfolio are also shown on the list.  I also added two diversified buy and hold portfolios created with the quant equity strategies. The tactical asset allocation section shows the various trend following, risk manage IVY portfolios discussed on the blog many times. I then show various bond portfolios and inflation mainly for comparison purposes.

Phew! Now, what to make of all this? First, notice that within a broad swath of the diversified buy and hold portfolios they are all very similar in terms of returns and risk. One thing I see all the time is investors becoming overly zealous and even dogmatic in their portfolio choices. IVY is the best or 60/40 is the best because such and such. Don’t do this. Spend your time and energy somewhere else. There is not that great a difference in returns across the various portfolios and more importantly no guarantee those differences will persist over time. What about the first two portfolios on the diversified list? They show great return and risk characteristics. These are examples of low beta, high tilt portfolios. I chose the allocation among the quant portfolios and bonds specifically to limit risk to a max drawdown of approx 10%. Great returns and low risk. Problem is 90% of investors can’t or won’t implement these. In my opinion, more investors should look into these portfolios but I’ll leave that topic for another post. Overall, 4 of the buy and hold portfolios stand out – the top 2 quant/bond portfolios, the Permanent Portfolio, and the Risk Parity portfolio. They stand out because they have great returns and very low risk (low drawdowns, high sharpe/sortino ratios). The low risk characteristics of these portfolios make them much easier to stick to than the other diversified portfolios that can have very bad years. It also makes them attractive to retirees where bad years can have a huge impact on retirement.

Now for the tactical asset allocation category. These portfolios take the diversified buy and hold portfolios, in particular the IVY portfolios, and apply trend following and momentum to increase returns and reduce risk. Trend following and momentum could also be applied to other asset allocations which would also improve risk adjusted returns. What makes these portfolios appealing is the incredibly strong risk adjusted returns, without sacrificing too much in absolute returns. Again, that makes the portfolios easier to stick with and more suitable for retirees. And there is even more that can be done with these types of portfolios as I’ll explore in future posts. This is an area of active research for me.

There you have it. Enough portfolio data to drive one nuts. Use it as a reference, a starting point for further research, etc… I’ll keep these portfolios updated as best I can in the future and publish updates periodically.