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Ken F

Backtest Portfolio Asset Class Allocation

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https://www.portfoliovisualizer.com/backtest-asset-class-allocation

In my attempt to help investors through bear markets. Here is another great tool I use to build and analyze investment portfolios .

As I stated in my first post on Bear Markets, the key to survival in these types of markets is having a portfolio focused on correlation of assets ....not diversification. If you have a portfolio of hundreds maybe thousands of stocks (US & International) the market is still eating your lunch today. But a portfolio built with low or non correlated asset classes is holding up quite well today & in past bull/bear markets.

So here is the challenge to the discussion board: Beat the Ray Dalio All Weather/Harry Brown's Permanent portfolio

I will add one rule to the contest.... you have to build a portfolio that beats A.W. from market peak to peak. Meaning bull and bear markets combined. (1965-1982, 2000-2015, 2008-2015 ETC)

 

I ran an analysis of the All Weather Vs Boglehead Four from year 2000-2015. You can do this by clicking on Asset Allocation on the spreadsheet. There are a bunch of pre-built model allocations.

 

The statistics that are most important are:

CAGR Std.Dev. Best Year Worst Year Max. Drawdown Sharpe Ratio US Mkt Correlation

 

The Goal is to Have low Standard Deviations, Drawdowns & Correlation w/ a CAGR of 5-7%

 

I tried to post charts & graphs of the results of All Weather. vs The Boglehead Four but can't seem to find out how to do it? Maybe Steve can educate me on how he posts his portfolio & excel files?

 

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Ken - the key thing today is finding assets that aren't correlated, are cost-effective to own, and can produce a reasonable long-term return. Is that even possible these days?

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Dave,

I realize you didn't ask me, but I say yes to your question. The low correlation is between stocks and bonds and my expected return for a 30% stock/ 70% bond allocation with low cost Vanguard funds is 7.3%.

Steve

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The Goal is to Have low Standard Deviations, Drawdowns & Correlation w/ a CAGR of 5-7%

 

I tried to post charts & graphs of the results of All Weather. vs The Boglehead Four but can't seem to find out how to do it? Maybe Steve can educate me on how he posts his portfolio & excel files?

 

 

Ken,

Use this website to upload your images (http://postimage.org/), and then copy the URL that posts on forums such as this, and then paste the URL here.

Steve

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Vanguard Alternative funds look to be low cost & low correlation. Returns in this rocky market look good as well.

 

One leg of the All-Weather stool is Gold Bullion. Most Gold Bullion ETFs are pretty low in cost (.20-.40%) (Yeah, I know everyone hates gold. It had three bad years & nobody wants it anymore) )

 

http://www.morningstar.com/advisor/alternative-investments.htm

 

https://institutional.vanguard.com/iwe/pdf/FAEGAIB.pdf

 

Here is another category (Managed Futures) that is having a great year. But one has to do a lot more due diligence on these funds & focus more on quality of management teams to produce returns vs low fees . These managers don't come cheap (2-4%) but sometimes when you pay more you get more.

 

Top M.F. funds

 

http://finance.yahoo.com/funds/lists?mod_id=mediaquotesmutualfunds&cat=%24FOCA%2413%24%24

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Ken,

Here come my biases and a little hyperbole thrown in. What the heck it served me well. Gold is not a good investment. All index broadly diversified funds have had bad years too. Its not a matter of high vs. low returns, its a matter of fitting into an broadly defined asset category. I don't like it because of a number of reasons. First, I want to grow with real live companies with people working together, not some shiny thing that goes up or down based on currency rates! No thank you. Harry Browne portfolios are based on catastrophic, Armageddons type scenarios.

 

Ken you statement: "These managers don't come cheap (2-4%) but sometimes when you pay more you get more," is categorically false! Books and articles have provided loads of evidence about manager's and their so called skills. They get lucky, and that's it. As I said before, there is nothing wrong with luck, its green. But don't fall for the idea that I should follow this guy or gal because they had one, two or more years of above average returns. Yikes, I WILL NEVER PAY 4% to manager! Are you serious Ken??????????????? NEVER!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

Have a great day,

Steve

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Steve,

 

My Primary focus is on returns not fees. Clients don't call me and say you lost 25-50% of my money in an index fund but it is OK because it only cost me .09% in fees.

 

I am willing to pay for active management if they add value. I understand majority don't add value. But I have done enough homework to make that choice btw who does & who does not. every manager I added from that list is up 5-10% year to date.

 

If I could get Stanley Drunkenmiller or Ray Dalio to manage my accounts I'd pay them ANYTHING they wanted. The rule of thumb for this type of talent is 2% annual fee & 20% of the profits they generate. Stan the man did 30% a year for over 30 years without a down year. Think about this: If you gave Stan $10,000 in 1986 he turned it into 26 million in 30 years. Was he worth 2 & 20 ?

 

https://en.wikipedia.org/wiki/Stanley_Druckenmiller

 

No you or I can't give Drunkenmiller or Dalio any money now but you can learn from them to become a better investor. So what did "the greatest investor in history" just do with his 30% of his personal wealth?

 

http://www.businessinsider.com/druckenmiller-buys-gld-shares-2015-8

 

Maybe he knew something others did not about the value of a shiny rock? (since he just made 15-20% on that 300 million)

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Ken,

We have a big difference of opinion. 4% fees are clearly out of line and I am sorry you feel so strongly that "you get what you pay for."
We are taking speculative g ambling and the associated high cost risks, not the managers.

You can report all of that past data you want, all we have right now is going forward and what worked in the past is not guarantee that it will work in the future.

I feel like our debate is going in circles now. You are an active manager and I am not. I am just a plain old and boring DIYer.

Steve

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My brother called me yesterday. He has a 401k at work and a limited number of free free consultations with an certified advisor. The advisor recently advised him to move 40% of his all index fund portfolio into gold. I almost fainted.

 

Ken

 

Could you explain to me how/which Vanguard Alternative Funds would fit in a 60/40 all index fund portfolio? I don't plan on adding one because I don't understand them plus I don't like the currently high fees. Are these funds even available to average investors?

 

Steve

 

Its amazing to me that you are able to get 7% with such a conservative portfolio. Thats not bad for a low risk portfolio.

 

Gosh, how did we go from talking about Bogle, Ferri etc. to talking about Stanley Drunkenmiller or Ray Dalio on this site?????

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Tony,

Doesn't surprise me about unethical advisers making horrible decisions while we have to take the risk. It a great thing that you brother was smart enough to run this by you first before he actually did this. Your brother absolutely needs to fire this so-called "adviser" on the spot!

 

7% is about right when the market is up 15% or more. I am very happy with 7%. You and I learned about greed in the last couple of crashes.

 

You have to ask Ken about Stanley Drunkenmiller and Ray Dalio. I don't think anybody reading this site for a long time will follow them, thank goodness.

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Well yes at least my brother did call me about it first. I originally convinced him to move to the index funds in his 401k years ago. Yes, I am glad he called me. I told him I would not make any changes into The precious metals fund. . I just told him that asset class is too risky for my taste even though it seems to be The flavor of the month right now because of all the market turbulence. I don't like recommending things I don't understand fully.

 

He can't fire the advisor. The advisor is paid by his company to help employees make 401k decisions. I don't think he/she is compensated by making sales as far as I know but I am not exactly sure how it all works there.

 

I want to keep things simple. Don't want to be overly involved in changing my portfolio everytime the market hiccups. I am sure what Ken says has merit but I just want to keep things boring. I am thinking of adding even more bonds but haven't done so yet.

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Tony,

Below are the returns of Vanguard's precious metals mutual fund. We know two unrelated advisers that are literally recommending the same thing, gold or precious metals, its the same thing. Ken and your brother's adviser.

I think these numbers speak for themselves. It is hard enough to get our colleagues out of an TSA annuity and into a boring diversified portfolio with low costs (which is the primary purpose of this website and forum), but to even have a discussion on this hideous recommendation is outrageous.

 

1YR: -24.83%
5YR: -10.99%
10YR: -0.04%

2005: 43.79%
2006: 34.30
2007: 36.13%
2008: -56.02
2009: 76.46%
2010: 37.45%
2011: -21.70
2012: -12.98
2013: -35.13
2014: -11.41
2015: -19.66% (YTD) From last July.

 

Readers:

Because the last five years have been a disaster for precious metals and the feeling that interest rates are finally going up, I guess the professionals thinking is investing in this now is a hedge against both inflation and a recession. This strategy is best described by Harry Brown and his portfolio which includes 25% gold! I call it his Armageddon portfolio. Guess what folks, there will not be an Armageddon in the financial markets. People will continue working as usual, civilization will not collapse. Absolutely, a major recession or crash could happen soon, but what happens after wards is that the markets will recover. They always have even after the Great Depression.

 

That's the last thing anybody wants to make a major decision on some poppy co ck predictions. Nobody knows what is going to happen. For the past 3 years the talking heads has been predicting a recession or inflation. It hasn't happened. In the meantime, my portfolio has returned what I expected it to return.

 

If you have a plan you are comfortable with, stick with it. Don't be talked into changing your plan because the market is getting shaky. If you have a fully diversified portfolio with low cost funds and have a balance between fixed and equities, you will be fine.

 

Have a great day,

Steve

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Steve,

 

Your just not going to get it. The hardest thing to do is keep and open mind when one has already made theirs up. You have not taken the time to understand what central bankers have done and are still doing to currencies & debt. Adding 60 Trillion in debt the past six years is going to have major ramifications on markets. Bailing out bankers and creating money to drive asset inflation is not what will solve our current economic problems. Hopefully they don't create another depression but if you check the history books, the Fed was the cause of most of the major crisis on record. Why should I think that the greatest monetary experiment in history (QE quantitative easing, NIRP, & now ZIRP) works out well? How does dropping interest rates to zero & doubling the world debt solve a debt problem?

 

NIRP: Negative interest rates are being implemented in Europe and Japan. The Federal reserve has said that this is on the table if markets go into crisis in the future..

 

stare at this clock for a few minutes and ask do you trust your politicians and bankers to do the right thing?

 

http://www.usdebtclock.org/

 

Obviously if you read the US constitution, our forefathers knew that bankers were the enemy & they tried to put a system in place to avoid what is happening today. The power to create money out of thin air should not be given to bankers & politicians. History of this goes back 5000 years. Every paper IOU that had no "hard asset" backing it when to zero. Not one paper currency ever survived........FACT https://en.wikipedia.org/wiki/History_of_money

 

The Vanguard Fund owns Gold miners not gold. This is not an apples to apples comparison. Gold bullion has blown away the return of stocks and bonds the past 20 years even after a 40% decline. The All-weather portfolio blows away any portfolio you can create from stocks and bonds alone. (rebalancing was key) All-Weather does not need Armageddon

 

https://www.bogleheads.org/blog/harry-brownes-permanent-portfolio/

Portfolio composition

The Permanent Portfolio investment strategy is based on the economic cycle, which is composed of four basic categories:

  1. Prosperity
  2. Inflation
  3. Deflation
  4. Recession

 

From 2003-2008 it worked & there was no crisis. In 2008 there was a crisis and it still worked. Today it is working . So why knock something that works?

 

 

One of the smartest money men ever is Alan Greenspan. I liked him more before he ran the federal reserve. Here is his piece on "economic freedom." Isn't that the point of investing financial independence & economic freedom

 

http://www.constitution.org/mon/greenspan_gold.htm

 

There is a reason that some people want you to dislike gold as an investment. But as the saying goes "Those who cannot remember the past are condemned to repeat it"

 

https://en.wikipedia.org/wiki/Executive_Order_6102

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"how did we go from talking about Bogle, Ferri etc. to talking about Stanley Drunkenmiller or Ray Dalio on this site?????"

 

Tony,

 

I thought the point of this blog is financial education and help others become better investors? Why not try to learn from the best investors in history?

 

Another really great investor is David Swensen who runs Yale's endowment fund. His return blows away any index fund since inception. The fund was 80% Stocks and Bonds in the 1980's & 1990's. But since the bubble markets of the late 1990's to today he has went a different direction with the portfolio. Ask yourself why the top endowments have such low exposure to US stocks & bonds and large amounts in alternative investments. Could it be that Stock & Bonds are not valued that same as they were in 1980's & 90's? If the markets are not priced to do 8-12% returns then can investors look to alternate investments with a goal of acheiving higher returns than what stocks and bonds are priced to deliver. This is probably what Vanguard realized when launching their Alt. strategies.

 

Robert Shiller's research tells us that stocks are priced for low future returns. http://www.multpl.com/shiller-pe/

 

Here is another site with future returns from current valuation levels:

 

http://www.researchaffiliates.com/AssetAllocation/Pages/Equities.aspx

 

But it doesn't take a genius to realize that after 7 straight up years in US stocks(+220% off the lows) that the next 7 years aren't going to be that great.

 

 

Take a look at page 2 and you'll see how Yale allocates their investments. Why do they use alternatives?

 

Private equity is buying companies but these companies don't trade on exchanges aka public companies. I think they buy Private equities because they can buy into great businesses at fair valuations. unlike traded public companies that are currently at very high multiples on most valuation scales (Shiller CAPE or Buffetts GDP /Market Cap ratio)

 

http://investments.yale.edu/images/documents/Yale_Endowment_14.pdf

 

http://news.yale.edu/2015/09/24/investment-return-115-brings-yale-endowment-value-256-billion

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