"This is a relatively high-return, medium-risk portfolio. 60% is long risk. For more conservative returns, I would go to 10% RE, drop the stock portion a bit, and boost the treasuries and gold to 25% each, or bring in some cash. "
I agree on REITs. It seems that over the long-term they don't correlate with stocks much so they provide some diversification and should have a higher returns than just owning a house (I believe the real return in housing over the long-term is 0%)
http://www.jpmorganinstitutional.co...goBlobs&blobwhere=1321487763107&ssbinary=true
"If you can add alpha then go to say 30% hand-picked domestic stocks and 30% picked foreign stocks, and add in 20% short positions also, for a 120/20 portfolio - higher return and lower risk. However, personally I hate the idea of 'investment shorts', even as a portfolio diversifier - it is just too hard to come up with 4-5 great shorts per year IMO. I prefer to short only tactically, when true slam dunks come up and have a catalyst to make you confident you won't see a 25%+ rally in your face.
Bear in mind that active stock-picking investment adds considerable risk. You could easily have a value portfolio that goes down 10% while the market as a whole rises 10%, for a 20% underperformance, and lots of psychological pressure to throw in the towel. This happened to a lot of value guys in 1999. Or a 2008 can come along and fuck up active non-index strategies."
I consider stock picking an investment "strategy".
In my view it is inevitable to use a "strategy" no matter what you do. If you buy SPY you are using a "strategy" of loading up on high market cap stocks while having less exposure to smaller market cap stocks. Simply because other people are doing that and using as a reference for their performance it doesn't mean it is a good idea to do that in someone's portfolio (exception: people that are managing OPM and are subject to withdraws)
Why not buy a price weighted index? Or the equal weight S&P500 or a fundamentally weighted index or a basket of safe low beta stocks with great history? Since one will be forced to make a guess as to which strategy will be a better place to put their savings I rather do my homework and make my best guess based on the evidence rather than just follow the crowd and buy SPY or something (again the exception if you are running OPM).
"You have to ask, if you have say 40% in stocks, do you really want to do all the work, and have all the psychological pressure, of trying to ape Buffett, just to make say 5-6% a year instead of 3-4% on the stock portion? A 2-3% advantage that you grind out for 5 years can easily be cancelled out by one bad macro trade, or one missed great macro trade. In my opinion, it is better to accept the lower return, in exchange for only having to spend 3-4 hours per annum on the portfolio, and freeing up your time and focus to seek out the 3-6 macro trades per year that can really juice your returns. It is also more tax efficient and far less paperwork."
"On a similar note, I question the wisdom of taking too much risk in a passive portfolio. Imagine if you have a good year of trading, making 20-30% on your macro bets. But your portfolio runs into a 1973-74, or 2008, or 1937, and it drops 20-30%. Or, even worse, your portfolio gets screwed the same year your trading sucks.
If you are unable to earn alpha, then 20-30% drawdowns every decade or two are the price you have to pay in order to earn respectable investment returns. Over 30 years, 7% per annum makes a lot more dough than 4% per annum - the latter could leave you eating tinned soup in social housing during retirement. But if you can make respectable returns from trading, then you simply don't need to take much risk - your focus should be on (real) capital preservation. The trading part is what will earn your returns, the investment part should just be to beat inflation by a bit each year, whilst minimising taxes, expenses, workload, and risk/stress.
Is it worth taking that big drawdown risk to chase 7-8% per annum, instead of minimising losses and settling for 5%? If you can't make an extra 3%+ per annum by macro trading, you are fucked anyway. So, my advice would be to lower the risky portion of the portfolio, by holding plenty of short/medium-term bonds, or (superior IMO) a mix of cash and long-dated Treasuries. "
I would say that this depends on the individual risk tolerance, age, # of sources of income, total wealth etc. It seems that you would have no problem giving up 2-3% in order to have a smaller drawdown. I would have a problem with that for a number of reasons:
-The 2-3% compounded will add up to a higher high that is significantly higher than in the safe strategy as a result when the 20-30% drawdown comes you might actually still be ok compared to the safe strategy.
-Caring too much about annual returns is a form of 'mental accounting' that you have criticized in the past. I know that in 10 years that riskier portfolio is highly likely to have produced more money than the safe one, why should I care about financial snapshot of returns taken every 31 of December? Because other people do that? I rather have more money and work in my mental game so I decrease my sensitivity to groupthink and concerns about what was my % returned on Dec 31.
That said I can understand when someone is older they should decrease the riskiness of the portfolio because they are not expected to live that much longer and getting hit with a large drawdown might hurt them in ways that the additional 2-3% a year would not compensate (being unable to afford medical costs, having his living standards decreased due a lawsuit and not being able to work to get it back, etc)
I can also understand that if someone is already wealthy they might accept lower returns because the additional utility of that money might not be worth it (I say might because I read some interesting research showing that more money do create happiness even at higher levels, particularly if the person spent the money in charitable activities)
I would agree with your point if we were talking about 60/40 style portfolios. But the whole idea of the All-Weather portfolio is that the drawdowns are already limited
As a trader I already have to deal with losses constantly I rather take that 2-3% a year and work on the mental side so I stop caring about 1 year returns and mental accounting traps
"This conservative approach has two great advantages: it means you are one of the only people who won't get fucked in an economic crash; and it means you are one of the only people who is unfazed when risk assets have been crushed and are dirt cheap, thus allowing you to aggressively step up and invest when periodic bear markets reach their climax. "
"If you look at all the benefits of a conservative passive portfolio, they are considerable: much lower risk; almost zero effort; tax efficiency; psychological & financial staying power in deep bear markets; optimal focus on the trading side. All this in return for earning, at worst, 1-3% less per annum."
Agreed that is has lower risk. As far as the zero effort part I believe that is an illusion simply because the person decided to join the crowd and buy the index strategies that others are doing without research
"So, a cautious portfolio could be something like this:
Real estate 10%
Domestic stocks 15%
Foreign stocks 15%
Long-dated Treasuries 20%
Cash/short-dated Treasuries 20%
Gold 20%
This puts 40% into high return assets, 40% into relatively safe assets, and 20% into a hedge against high inflation/monetary debasement and political collapse. Expected returns over the long-run might be something like 7-8% for the stocks, 5% for RE, 3% for bonds, 1% for cash and zero for gold, plus 0.5-1% for the rebalancing bonus. Total about 4.5% per year with minimal risk of permanent capital loss.
In the depths of major bear markets you can shift to a more aggressive portfolio, something like 20% RE, 50% stocks, 10% bonds 10% cash 10% gold. This could easily raise the long-term return to 10-15% per annum on the index portfolio side.
Anyway, that's how I would play it."
