The Weird portfolio

The Weird Portfolio

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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:

The Weird Portfolio

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.

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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.

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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:

Average Returns

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.

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Severity & Length of Drawdowns

The worst drawdown for this portfolio was 19%. The longest drawdown for this portfolio was a little over 3 years.

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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.

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100% US stocks suffered a 49% maximum drawdown that lasted over 13 years.

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Annual Returns

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.

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This holds up much better in contrast to the sea of pain in owning 100% US stocks.

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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.

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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%.

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Stress

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.

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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.

14 thoughts on “The Weird portfolio”

  1. nice post, any idea how this portfolio can perform so well without fang stocks, while fang has produced nearly all stock market returns over the last two decades….?

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    1. The portfolio did well this decade even though the relative performance of international and small value was poor. Absolute returns were still ok. Small value has done 8% or so over the last decade, with no exposure to FANG. Big growth tends to go through cycles of euphoria and fear. Does great some decades (the 90s, 2010s) and then melts down. Small value just chugs along and delivers a satisfactory return. That’s why it has never had a lost decade. Another key feature of small value is that it sells stocks. Quant value is really mostly buying stocks at depressed multiples and selling when they’ve improved. That process is happening in every kind of market, which is why small value delivers a consistent return every decade.

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      1. ok, thanks, some other questions….

        the portfolio has us small cap value and international small cap, is there, performance wise, a difference between small cap value and small cap? if yes, why doesn’t the portfolio have international small cap value?

        with bond rates near historical lows after four decades of decline and gold near all time highs, imagine starting this approach now,… wouldn’t it make sense to slowly scale into lt bonds and gold instead of starting at a full allocation at all time highs?

        https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart

        https://goldprice.org/gold-price-chart.html

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      2. US small value has a much better track record, but I think diversifying throughout the world is important to contain risk against the dollar declining or the political situation falling apart. You do you, but my goal with this allocation was to not predict the future. That would be making strategic decisions about which allocations will work better. For me I equally weight and rebalance specifically to avoid my forecasts and biases from getting in the way.

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  2. thanks, i get the point about global diversification, my question was: small cap is split between value and growth, for the us portion, the portfolio has smal cap value, but for the international portion the portfolio has small cap (which includes small cap value + small cap growth), so, why take a subset of small cap, i.e. small cap value, for the us portion and take all small cap for international? i hope my question is clear now….

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  3. thanks, that makes sense, vanguard is unbeatable….

    as long as international small cap value outperforms international small cap by at least 0.24%/year, this might make sense….
    https://finance.yahoo.com/quote/AVDV?p=AVDV&.tsrc=fin-srch

    haven’t looked further, there might be others, there seem to be more etfs than individual stocks these days….

    based on these figures, small cap value seems to outperform small cap growth, but only on a very long term (>20 years) basis…..

    https://www.bogleheads.org/wiki/US_small_cap_index_returns

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    1. That is true. Small cap value tends to always under-perform during bull markets, which usually last a long time. The nice thing about small cap value is that it systematically avoids bubbles. It’s economically sensitive and will go down during a recession, but it’s going to avoid those big bubbles like the late ’90s or Japan in the late 1980’s.

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  4. i wonder which small cap value index you used for backtesting, i noticed that vanguard has two, the one you own, vbr, and viov, which is linked to the s&p, i noticed that viov owns considerably smaller companies (top 5 around 2 billion each vs, vbr over 10 billion each) and scores better on value metrics like price to book value/earnings/sales…… i would imagine that viov outperforms vbr long term, does this make sense? and if yes, why do you own vbr?

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    1. I plugged it into Portfolio Visualizer. They look pretty similar and VBR slightly outperforms. VBR has a 7.05% CAGR since 2011 and VIOV is 6.8%. VBR had a 35.27% drawdown and VIOV had a 40.22% drawdown. I’ve also looked at the returns of the Vanguard Small Cap Value mutual fund going back to the late ‘90s and it closely matched the small cap value returns since then, so I’m confident that VBR should capture the return of small value effectively. VBR also has a lower expense ratio of .07% compared to .15% for VIOV.

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  5. Both the strategy and its rationale make a lot of sense to me. Just one question/concern — long-term bonds did indeed do very well in the 2008 crisis, but that may in part be due to their having started that crisis at about a 5% yield, which made them a very tempting shelter when crisis hit. Long-term yields now are barely over 1%. Will they be a safety net in the next stock downturn, or are we in a bond bubble that will burst just when stocks do? If so, is there a different holding that could play a similar role to long bonds but without that risk?

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    1. They won’t deliver the good return they did in the past. With that said, they should still go up during big stock downturns and recessions. VGLT is up 22% YTD, for instance. Long term bonds have also worked in Japan during big stock drawdowns, as well, for the last 20 years when Japanese rates have been near zero. The danger for long term treasuries is inflation, which would cause interest rates to go up. But that’s why I own gold. In that sort of environment, gold should do well.

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      1. Another scenario would be one where the solvency of the US government came into question and they had issues selling bonds with such low yields due to solvency concerns. In that kind of environment, I think gold would also do well.

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I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.

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