Portfolio , Retirement , TAA Investing


I often get asked “how do I get started with an investment portfolio?”. The best answer, but not very helpful, is to learn about building and investing in a diversified buy and hold portfolio for the long term. A very true statement but it usually leaves the investor still looking for answers. In this post I plan to be much more helpful in providing guidance for investors either looking to get started or for investors looking for a better approach to building investment portfolios than what they are using now.

For this post I will rely heavily on a new book by Meb Faber, Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies . I highly recommend the book. I’ll refer to the book as the GAA book going forward. Faber covers many diversified portfolios and their characteristics. I am mainly summarizing and adding to his extensive data. For a great review of the book that I think sums it up quite well see here . Their brief summary,

Any investor looking for a long-term solution for portfolio allocation and a good overview of different ways to approach the problem can benefit from a review of these diverse allocation strategies. Faber undoubtedly delivers a comprehensive review of the opportunity set with “Global Asset Allocation.”

Diversification is often called the only free lunch in investing. We diversify as investors because we cannot predict the future and thus to build long term wealth and/or support a long retirement we need to spread our bets among different asset classes. The three major asset class types are stock, bonds, and real assets (e.g. gold, commodities, real estate) with many options beneath each type. The benchmark among diversified portfolios for institutions and investors is the 60% US stock, 40% US bond portfolio (at least for US investors). This portfolio contains 2 of the three major asset class type, i.e. it has no real assets. We’ll use this as the benchmark as well and build from there. Now we take the other diversified portfolios discussed in the GAA book and add a few others I’ve discussed on the blog before. Here is a summary of the all the diversified buy and hold portfolios considered and their allocations to each major asset class and the next level break down into US/Foreign stocks, bond types, and really asset types.

DBH asset allocation percentages mar 2015

The portfolios in the table that are not covered in the GAA book are the IVY B&H13 portfolio and the 70/30 stock bond portfolio, I’ve covered the IVY13 buy and hold portfolio many times on the blog and the 70/30 portfolio is just a different percentage split of a US stock US gov’t bond portfolio. Now we take all of these portfolios and see how they perform going back to 1973. Below are the summary statistic for all of these portfolios sorted by compounded annual return (CAGR).

DBH Summary Stats Mar 2015

First thing to note is that the most common portfolio, the benchmark portfolio comes out at in the bottom half of the list. This despite the US stock market being the best performing stock market in the world during that time. The Permanent Portfolio comes out at the bottom, as in the GAA book. My numbers are slightly different than those in the book. I’m using the return series from Crawling Road (see here ) who wrote a good book on the Permanent Portfolio.  I don’t want to place too much importance on being on the bottom. The differences between many of these portfolios is probably not statistically significant. At the top of the list is the IVY B&H13 portfolio in terms of annual return. This is cheating a bit because the IVY B&H 13 portfolio includes factor allocations to small cap, value, and momentum, the three factors that have been shown to really outperform over time. The only other portfolios that have a factor allocation to small cap (the weakest of the three factors) are the Bernstein and the All Seasons Portfolio. And as the table shows, factors work. Also, real assets work. The portfolios without allocation to real assets in general do worse.

Of course, annual return is not the only metric investors should care about. Measures like risk adjusted performance (sharpe ratio), and worst year, give a good indication as to how easy it would be to stick with these portfolios during bad times. For example, the IVY13 B&H also has quite a high sharpe ratio but had a worst year performance of -28%. In terms of worst years, the RiskP, All Seasons, and the Permanent Portfolio had losses of less than 5%. These three would definitely be easier to stick with during a bad stock market environment. And then there is the case of investors who are withdrawing from portfolios, retirees, financially independent investors, etc…For those investors a metric like 1966 SWRs (see here for an explanation) shows which portfolios have allowed the highest withdrawals and survived a 30 year retirement period. IVY13 B&H wins this metric as well but there are several other portfolios with SWRs over 5%. Anything over 5% SWR is very very good considering that these portfolios were handicapped by my 1966 SWR bootstrapping method which uses the 60/40 portfolio returns for the years 1966 through 1972. For those in the portfolio withdrawal phase it is hard to beat the Permanent Portfolio’s combination of high sharpe ratio, low worst year loss, and high 1966 SWR. This despite the second worst CAGR (or worst as in the GAA book). This is why I often suggest retirees and very risk averse investors consider the Permanent Portfolio. Those high annual returns mean nothing if you can’t stick with a strategy through thick and thin.

That is quite the list of diversified buy and hold portfolios. A few additional things to consider. Fees matter a lot. In the GAA book Faber shows how the best performing portfolio can become the worst performing portfolio due to high fees. Care needs to be taken to choose the best lowest cost index trackers for the asset classes. Vanguard is always a good place to start. And also none of these portfolios is that complex that an individual investor could not implement these themselves and avoid advisor fees. However, many individuals could use an advisor, more so to protect their assets from themselves than anything, and advisor fees now are getting quite cheap as evidenced by Vanguard’s 0.3% fee.

That is the best of the best in the world of diversified buy and hold portfolios. Plenty for an investor to choose from depending on their goals and risk tolerance. In the next post I’ll position this list of buy and hold portfolios against my list of  quant and TAA portfolios. TAA and quant portfolios represent a level up in complexity but do provide quite a few benefits for investors.

Note: past performance may not be indicative of future results. As I’ve stated here before , I do agree that future asset class returns will be lower than the past. But that doesn’t mean we shouldn’t invest. The job now is to compare portfolios and tactics relative to each other. Diversification is still a fundamental principle of portfolios. Holding real asset classes is a good idea. Adding exposure to factors is a good idea, etc…

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10 thoughts on “ Back to basics: diversified buy and hold portfolios

  1. I appreciate Meb’s work but it is no secret that many investors find it difficult to stick with a strategy given that no strategy is always in favour. Every strategy, be it value, momentum, trend following, mean reversion or fixed allocation, will suffer a period of outperformance and during that time one will wonder if the strategy no longer works. The answer is revealed in hind sight only.

    From my observations, it is most important that an investor utilize a strategy that 1. is valid, 2. suits the investor’s personality, 3. is low cost after tax, 4. is low maintenance and 5. is one the investor can stick with.

  2. I noticed your comments about the Permanent portfolio using the buy and hold process. Have you ever tracked the returns and the risk metrics for the Permanent Portfolio using the quant process?

    1. Hey Matt,

      No I haven’t. But Meb Faber did a post a while back where he showed the results of using the 10mo SMAs on the Permanent Portfolio.


  3. Since everyone uses Million $ for example…
    As a Retiree’s facing RMD with Hypothetical $1 Million Portfolio,with 50%/50% in Tax deferred Ira’s / Taxable account each :
    How many numbers of Funds/ETF’s one should hold or Total Max or Min number of funds ?
    What should be Maximum % or $ amount per fund/ETF’s that can be considered safe amount Max $/Fund for a diversified asset allocation ?
    Any unique guideline applies for TAA or Quants ?

    1. Manji, each model has a recommended set of asset classes and ETFs already. You just need to look up the details of the model.


  4. Hi Paul,

    I have a kind of basic question. If, at the end of any given month, my allocations are off by only 1% or so, should I still re-balance, assuming that my transaction costs are little to none? I understand that re-allocation strategies are like dollar-cost averaging, for persons that are not investing new money.

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