The All Everything Portfolio? No Such Thing
By: Roger Nusbaum, AdvisorShares ETF Strategist
Barry Ritholtz has had some good fun torching Tony Robbin’s All Weather Portfolio for having too much in bonds and commodities as well as being to backward looking and being put forth as a one size fits all. The latest was in his WaPo column dated December 5, 2014.
He proceeded to offer his All Century Portfolio which is a diversified version of a 60/40 equity/fixed income portfolio with some other ideas thrown in for younger or older investors. Ritholtz quoted a friend who wrote a review on Robbins’ book that contains the portfolio as follows
…it’s a tough slog of logical fallacies, inappropriate analogies, self-aggrandizement and exclamation points.
There has long been a fascination with designing these types of better mouse trap portfolios. It is a fun subject and I believe can be constructive not so much in doing something crazy but exploring asset allocation more broadly. I’ve written many blog posts on this over the years and my take continues to be that most people will be better off with something close to a “normal” portfolio but when someone like Zvi Bodie talks about putting most of it into TIPS and being aggressive with the rest it should make you think about how much risk you need to take and maybe think about different ideas on how to concentrate that risk, all of which can occur under the hood of a “normal” portfolio.
During the last decade the Permanent Portfolio designed by Harry Browne became a very popular topic of conversation because domestic equities were doing poorly, gold and bonds were doing well and cash was safe. For anyone new the Permanent Portfolio avers for equal weightings to domestic equities, long bonds, gold and cash.
Having that much in gold during a time when it drops 30-40% is a tough bogie to overcome and even without that decline that much gold will likely increase your volatility profile immensely. I don’t think Barry is a fan a gold although I am insomuch as if you want a small slice in something that does not look like equities and offers the potential benefit of catching a fear bid when something bad happens, gold might work. If you don’t believe in any of that then you probably don’t own any gold.
The building block of understanding here is that an adequate savings rate combined with normal long term investment results offers a very good chance of leading to a successful outcome (a successful financial plan). That sentence has nothing to do with outperforming the market (although probably assumes truly stupid behavior is not repeated) it is simply about doing what your grandmother told you to do, save money and invest wisely (paraphrasing a quote from Nassim Taleb).
With that building block investors can then start to think about whether they want or need to be aggressive or conservative, buy and hold or trade, active or passive and any other choices that going into building a suitable portfolio.
This is not a DFA-esque argument for passive investing, this blog has always been from the view point of an active manager but that does not change the importance of understanding what merely being a participant can do for returns and active does not have to be about beating the market every year because no one does that. Many investors want to manage their volatility, usually dampen it. Managing for a higher dividend yield is also an active objective, not talking about a 7% yield in a 2% world. There are of course other concepts that investors will consider embedding as well.
And so this circles back to the Permanent Portfolio, All Weather, All Century and all others. Whether you undertake portfolio management as a professional or as a do it yourselfer the world and markets evolve and so should your investment process and part of that is exploring the way other folks perform the task.