The Weird Portfolio
The IRA that I track on this blog does not represent my full net worth. I designed a buy-and-hold portfolio using low cost ETF’s that is the primary vehicle for my savings.
I wrote a book about this portfolio, which you can read here.
You can also download this book as a pdf below:
I own five key asset classes: (1) US small cap value, (2) international small caps, (3) real estate, (4) long term treasuries, and (5) gold.
I own this via the following ETF’s.
This is my “I don’t know” portfolio. It is designed with built in protections for different economic environments. The objective is to deliver a consistent return through multiple environments with minimal pain.
Historically, this portfolio has achieved a return similar to owning 100% US stocks while providing bond-like levels of volatility.
It accomplishes this by combining volatile asset classes that perform during different economic regimes. Gold performs well in periods of intense fear, inflation, and dollar weakness. Long term treasuries perform well during periods of dollar strength and intense fear/market declines. US Small value and US real estate perform well during periods of US prosperity and dollar strength. International small and international real estate will perform well during periods of global prosperity and dollar weakness. All of these asset classes avoid the bubbles that frequently plague market cap weighted indexes.
On their own, all of these asset classes are highly volatile and painful to own. However, in an equally weighted annually balanced portfolio, they create a result that is greater than the sum of their parts. Because they all deliver their return in different environments, they work well with each other and create a consistent return with short & shallow drawdowns.
This approach creates a consistent return on top of inflation, as opposed to the boom and bust cycle of owning 100% stocks.
Additionally, due to the 40% concentration in “defensive” assets, losses during stock crashes are typically contained.
To learn more about this approach, I highly recommend reading my free book about this approach to asset allocation.
Below is a backtest of this portfolio going back 50 years:
This portfolio has generated a 7.7% average rate of return since 1970. This almost matches the return of the US stock market, but the weird portfolio delivers this return in a far safer and more consistent fashion. It is also a higher rate of return than most available asset allocations.
Severity & Length of Drawdowns
The worst drawdown for this portfolio was 19%. The longest drawdown for this portfolio was a little over 3 years.
This compares favorably to both the 60/40 portfolio and owning the total stock market.
The traditional 60/40 portfolio suffered a 34% maximum drawdown that lasted for over 12 years.
100% US stocks suffered a 49% maximum drawdown that lasted over 13 years.
Below is the annual performance of the portfolio from different start dates. As you can see, drawdowns do not last long and the portfolio usually rebounds to its long term rate of return of around 7% after inflation relatively quickly.
This holds up much better in contrast to the sea of pain in owning 100% US stocks.
The 60/40 portfolio is also surprisingly painful in the 1970’s, even though it has worked well since 1980. During the 1970’s, inflation and rising interest rates ravaged stocks & bonds. The excellent performance since 1980 is a result of a 40 year decline in interest rates. This is not something that can occur from present interest rates.
Perpetual Withdrawal Rate
The perpetual withdrawal rate is the amount that can be withdrawn from the portfolio every year without shrinking the principal balance when adjusted for inflation.
I think this is the most important metric for a portfolio. This simple metric is a clear expression of both the raw returns of a portfolio weighted against the consistency of returns and severity of drawdowns.
By this metric, the weird portfolio outperforms all other passive asset allocations.
The perpetual withdrawal rate for this portfolio is 5.4%.
This portfolio also delivers its return with a low amount of stress, as measured by the Ulcer index. Unlike standard deviation, which measures volatility up and down, the Ulcer index focuses on downside volatility. In other words, an investor in this portfolio can invest in their portfolio without chugging Pepto Bismol during a stock market crash.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.