Kathryn Cicoletti
[Editor's Note: This is a guest post from Kathryn Cicoletti, Founder of Makin'SenseBabe, LLC, where she tries to make learning money topics a more enjoyable experience. Prior to this endeavor, she spent 10 years working with an asset management firm evaluating hedge funds for possible investment.
This post was very different from most of the guest posts I see, and the initial draft came across as a damning indictment of a portfolio and its promoters. I could tell she was pretty fired up, so I figured the portfolio was investing in whole life insurance and loaded mutual funds or something. It wasn't, but the post is still pretty fun, and it will introduce the concept of a “risk parity” portfolio to many readers, so I'm going to run it. Kathryn and I have no financial relationship. ]
The job of a good graphic designer is to fill the gap between information and understanding. I didn’t come up with that myself. I stole that line from a movie I just watched called Design is One. The movie is about Italian designers Lella and Massimo Vignelli, who developed the American Airlines logo and the signage for the New York City subways. In the financial world there’s a huge gap between information and understanding that information. Bridging the gap between financial information and understanding it is not fun because you have to type more words to explain things, which I have just done. But the pain of typing too many words isn’t the real issue with bridging this gap. The real issue is most people who write financial articles are:
- Afraid that if they explain things in “laymans” terms, they look less sophisticated than their high-finance peers, and
- Out of touch with how few people, on their own, can bridge the gap between financial information and understanding because they don’t work in the financial world.
rel=”noopener”>MONEY Master the Game: 7 Simple Steps to Financial Freedom. I first read about this on Meb Faber’s blog back in October. A few days later I listened to Tim Ferriss interview Tony Robbins. Ferris and Robbins talk about Robbins’s in-depth conversations with some of the largest money managers in the world.
“Ray Dalio!” Founder of Bridgewater, “the largest hedge fund on the planet” says Robbins while talking to Ferriss. I knew we were in trouble when he started talking about hedge fund managers and planets in the same sentence. Here we go, I thought. And we went.
The All Weather Portfolio Explained
Robbins explained that the All Weather Portfolio starts with Dalio’s idea that there are really only four things that “move” asset prices: inflation, deflation, rising economic growth, and declining economic growth. Robbins then explains that he learned from Dalio that there are four possible economic “seasons” that will impact asset prices:
- Higher than expected inflation
- Lower than expected inflation (or even deflation)
- Higher than expected economic growth, and
- Lower than expected economic growth
The idea of a “risk parity portfolio” is that you should have 25% of your “risk” spread out between each of these economic environments, or seasons. Per Robbins, the key thing to pay attention to is “risk,” rather than dollar amount. Robbins says that since stocks can be roughly 2X riskier than bonds, his risk-based asset allocation (i.e. The All Weather Portfolio) places roughly twice as much money in bonds as in stocks. [The quantification of this is interesting, since it doesn't define the risk being discussed. For example, if the risk you're discussing is the risk of your portfolio not keeping up with inflation, short term treasury bonds and money market funds have lots of risk. But if your definition of risk is short-term volatility, or dispersion of possible returns, then obviously stocks have a lot more risk than bonds, probably more than 2X! -ed]
So taking into consideration risk, Dalio told Robbins that the All Weather Portfolio looks like this:
- Stocks: 30%
- Bonds: 55%
- Commodities: 7.5%
- Gold: 7.5%
Not The Permanent Portfolio
In some ways, The All Weather Portfolio concept is similar to “The Permanent Portfolio” that started back in the 80s. The Permanent Portfolio suggests 25% allocations split between four different asset classes. Specifically:
- 25% in U.S. stocks
- 25% in long-term U.S. Treasury Bonds
- 25% in cash
- 25% in precious metals (gold)
The two biggest differences between these two portfolios are:
- The original Permanent Portfolio includes a higher allocation to cash and metals like gold (zero and 15% respectively for the All Weather Portfolio).
- While the current allocations to The Permanent Portfolio are slightly different than this 25/25/25/25 split, The Permanent Portfolio does not use a risk based asset allocation strategy. Meaning, they divide up the assets evenly without taking into consideration that gold is much more volatile than bonds and should potentially have a lower allocation [not to mention the likelihood of each of the three scenarios- inflation, deflation and “tight money”- it is designed to address are different.-ed]
Issues with Robbins as a “Graphic Designer”
The most concerning part of this interview was when Robbins tries to be the graphic designer (fill the gap between information and understanding) and help us understand what that portfolio means:
“In laymans terms, you’re protected,” he says.
When I saw these words: “you’re protected,” my heartburn started to flare up. Playing on peoples’ fears and positioning this portfolio as if it’s their saving grace is just wrong. There is not a single strategy, including hiding your money under your mattress, that you can use to tell investors “you’re protected.” This is a broad-brush statement that Robbins uses for The All Weather Portfolio that just isn’t true.
But rather than rant on about all the ridiculous statements Robbins made about this All Weather Strategy, I will walk you through the important points you need to know if you’re thinking of implementing this investment strategy with your money.
Breaking It Down
I listed Robbins’s and Dalio’s key points from their conversation and then, wearing one or more of the following three hats, explain the issue with the point:
- Explainer – I am the Italian graphic designer in this case, building a bridge with the information Robbins gives you so you can understand what he’s saying.
- Endorse – Robbins/Dalio has a good point.
- Kindly calling BS – This part of the strategy doesn’t make sense i.e. be careful.
All of these quotes are from this article and Ferriss’s podcast interview with Robbins.
Claim: The Backtested Portfolio had Fewer Down Years Than the S&P 500
Robbins:
“(Dalio’s) Pure Alpha Fund, according to Barron’s, has lost money only 3 times in 20 years, and in 2010 he produced 40% returns for his key clients.”
Endorse – the S&P has lost money 4 times in the last 20 years through 2013. One point for Dalio/Robbins. Write that down because I think it’s the only one.
Claim: Every Investment Has A Season, so Put 55% of your Money Into Bonds
Dalio: (to Robbins)
“Tony, when looking back through history, there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.”
Explainer – Remember if you own a bond that just means you gave out a loan to, say, to a company or a government. They pay you interest in return. If it’s a 10-year bond, they pay you interest for 10 years, then you get back the money you loaned them. If you own a bond and you’re receiving 5% in interest per year and the company now only pays 3% in interest per year to whoever gives them a loan (buys a new bond), your bond is more valuable because it pays higher interest. This is why when interest rates decline, exisiting bonds increase in value.
Kindly calling BS– This is the most hysterical part of this whole thing. Dalio lets the cat out of the bag but Robbins ignores it. The All Weather Portfolio suggests a 55% allocation to bonds. With interest rates steadily declining, we have been in a bull market for bonds for the last 30+ years. So when Dailio says “every investment has an ideal environment,” we have been in an ideal environment for bonds which is 55% of the portfolio! He serves it up for us, but Robbins missed this. A 55% allocation to bonds AFTER interest rates have been declining for the last 30+ years, giving bonds a huge tailwind, is not an “all weather” allocation. That’s a one-season allocation that needs a new (lower) allocation to reflect where we are in the interest rate cycle.
Claim: You Can Make Up For The Lower Returns of Bonds By Using Long Term Bonds
Robbins:
“I quickly remembered (why there is such a large percentage in bonds) it’s about balancing risk, not the dollar amounts. And by going out to longer-term (duration) bonds this allocation will bring a potential for higher returns.”
Explainer – the longer the time frame you loan out your money (say 30 years instead of 5 years), the higher the interest rate you will receive. This is because you have to be compensated for having your money tied up for a longer period of time. Unfortunately, when interest rates rise, all bonds lose value immediately, but long term bonds lose far more than short term bonds.
Kindly calling BS – Where are my Tums? Again, they are completely disregarding interest rate risk because this has not shown up over the last thirty-years. These allocations are looking at what has worked over the last thirty-years, i.e. driving while looking in the rear view mirror. Call me at 1-800- KathrynsBackTestRUs and I can put together a great historical track record allocating 55% of my money to an asset class that was a shoe-in over the last thirty years. [To be fair, while bonds have had a heck of a run over the last 30 years, despite the falling interest rate “tailwind,” they were outperformed by stocks and real estate over that time period.-ed]
Claim: Commodities and Gold Protect Against Inflation
Robbins:
“He rounded out the portfolio with 7.5% in gold and 7.5% in commodities. You need to have a piece of that portfolio that will do well with accelerated inflation so you would want a percentage in gold and commodities. “These have high volatility. Because there are environments where rapid inflation can hurt both stocks and bonds.”
Explainer – Robbins is trying to say that gold and commodities have a low correlation to stocks and bonds in an inflationary environment.
Endorse but Still Kindly calling BS – two points:
1) They’re suggesting you put 15% of your portfolio in an asset class that is going to make money in an environment that we’re nowhere close to experiencing. The Fed is targeting inflation near 2.5%. Meaning, they would like prices to be rising 2.5% year-over-year. This is their sweet spot for where they think inflation needs to be in order to feel “ok” about the economy and unemployment. If prices are going down (deflation), that’s bad because it means demand is low, and that’s not good for the economy. 
Look at that chart. We are nowhere near an inflationary environment.
2). His last sentence doesn’t even make sense: “These have high volatility. Because there are environments where rapid inflation can hurt both stocks and bonds.”
Commodities have high volatility because they have huge swings in performance (up or down) at any given moment regardless of if we’re in an inflationary environment or not. If there are concerns over liquidity in the market and you just want your cash back fast, gold can sell-off when stocks sell-off, regardless of anything to do with inflation.
Commodities having large swings in performance (aka “volatility) is not dependent on rapid inflation. What is he talking about. [My best guess is he meant to say this: “[Gold and commodities] do have high volatility…[But]… there are environments where rapid inflation can hurt both stocks and bonds.”-ed] Ok I will end with this because this is already too long….. Claim: You Should Use Back-tested Data to Design Your Portfolio Robbins:
“When my own investment team showed me the “back-tested” performance numbers of this All Seasons portfolio I was astonished. I will never forget it.”
Kindly calling BS: I think you should. I am very familiar with back-tested performance. In fact, I raised a lot of money using back-tested performance. Most institutional investors understand the meaning of back-testing, and that past performance is no indicator of future performance. I know because I was raked over the coals in many board meetings by trustees for using a back-tested track record. Institutional and other sophisticated investors understand the limitations of back-testing and will murder you for it in the boardroom when you’re pitching to them. If they do decide to invest in a strategy that doesn’t have a current track record and all they have to go on is back-tested numbers, they know it. However, retail investors, such as those who will buy Tony Robbins’s book, typically do not understand the limitations of back-tested track-records. Why would you? You don’t have a board, you don’t have an investment staff, you don’t have a CIO, you don’t have an investment consult telling you this. [Although most doctors get this intuitively, due to their courses in evidence-based medicine where retrospective studies are readily shown to be inferior to prospective studies. -ed] Sure you have a financial advisor but most of the time they just want you to buy this fund or that fund and could care less if there is no “real” track record. [I hope you don't have an “advisor” like this. Please fire him if you do.-ed] Ray Dalio deals with large institutional investors. Those are the biggest clients. They will ask the above questions. The retail community is going to get slammed if they rely only on this back-tested track record to make their investment decisions.
While this post might look like I have a thing against Tony Robbins, I don’t at all. The guy has a gift for making people feel better and he happens to make a ton of money doing it. Good for him. I have watched a lot of his videos and could be convinced to slit my feet and then go run a marathon if he told me too. But that is why we need to be so careful with this new book of his. Robbins is a force. And he is very convincing. So just do your research, bridge the gap with all this information and be your own designer to make sure you understand all of it before blindly buying into this all weather strategy.
[Editor's Note: Wasn't that fun? I've written before about dozens and dozens of reasonable portfolios. There is no such thing as Portfolio Nirvana. Couple any reasonable portfolio with an adequate savings rate and sufficient discipline to stick with it and you are likely to reach your goals. My big beef with very conservative portfolios such as The All Weather Portfolio are that the expected returns are so low. Commodities and precious metals have long-term expected returns close to the rate of inflation (minus expenses.) At current interest rates, bonds have expected real returns of -1.5 to + 1.5. Having 70% of the portfolio in assets that aren't provided any significant growth after inflation means that you will have to compose nearly the entire portfolio of brute savings, a feat that is out of reach for all but the most frugal savers.
However, if you've already got all the money you need and/or can't stand to lose money in more volatile investments like stocks and real estate, then this type of portfolio might be for you. Some of Kathryn's criticisms could be interpreted as advocating timing the market (i.e. interest rates must go up so you shouldn't invest so much in bonds.) Unlike Kathryn, and I suppose a bit like Robbins, I actually like the idea of a static asset allocation that doesn't change based on market predictions, interest rates, or valuations, even if I'm not a huge fan of this particular static allocation, at least for an investor in the accumulation phase.]
What do you think? Do you read or listen to Robbins? What do you think? Do you invest in the All Weather Portfolio? Why or why not? Comment below!
Great post. Robbins should have spoken to John Bogle instead, IMO. Keep costs low and stick to your well thought out long term plan. Thanks for the analysis!
I thought he did.
He did for this book. Extensively. He is mentioned at least as much as Dalio.
Great article, this is sage advice. The truth is, most people can’t handle the volatility inherent in equities which is a product of natural human behavior. We are inherently risk averse. If you have 30+ year investing horizon, it’s hard to beat sticking your money in an indexed stock ETF and letting time work it’s magic. Portfolios like the All Seasons and others are good for those who might need to withdraw sooner, and can’t risk losing 40% in a year.
I think the All Seasons portfolio misses out on some notable asset classes however.
Check out my sample portfolio at buildingthebank.com
Great review of Robbins’ popular book. I’ve always believed that allocating to assets that aren’t in their “ideal environment” just for the sake of “All Weather” diversification is waaay too much drag on performance. I wonder if Dr. Dahle or Kathryn have read the other popular book of the year that one of my friends helped put together called “Dual Momentum Investing” where they discuss how to be 100% in stocks during bull markets (either S&P500 ETF or All World ex US ETF depending on which is doing better) and 100% in bonds during recessions. 17%+ CAGR with 22% worst drawdown over last 40 years using only one parameter and 3 ETFs. Problem is it’s simple, non-predictive, passive, low-cost, and super boring, so most won’t bother with the strategy…but it’s what I’ve been doing for years in my retirement accounts. That, blended with my commodity/futures trading strategy (0.0001 correlation), is my “All Sunny” portfolio!
Donald, please let me borrow that crystal ball once you’re super rich using your strategy and don’t need it anymore. how can you possibly know when to get in and get out of bull/bear markets?
It’s not much of a crystal ball. No one knows, or can predict, when or how long bull or bear markets last. But what is possible is to recognize them while they are occurring and be positioned according. Systems like these are reactionary, not predictive. It’s really not that complicated. I was just saying that the Dual Momentum Investing book does a nice job of explaining how to do it. But you don’t have to take my word for it if you don’t want; maybe just read the reviews of it on amazon, or better yet, read the book and see if you still think the same way.
Perhaps you can’t see this, but to say you are “in a bull market” by its very nature predicts what is going to happen tomorrow. It’s easy to say what has happened in the past, but to define the current investing environment requires not only a knowledge of the recent past, but also the near future. Very difficult to do. My crystal ball always seems to be very cloudy with regards to the near future. If yours is not, it might be fun to start publishing your near future predictions here and see how good they are. We could start with something simple, like whether the US stock market is going to be up or down a month from now.
“Reactionary not predictive” means trend following, and the issue with trend following is that you are in for the beginning of the bear and out for the beginning of the bull, plus you may be incurring lots of investment expenses and transaction costs with each change. Not to mention the value of your time while following all these trends. It’s hardly new and hardly the long searched for Holy Grail of investing.
Jim, I see the confusion and am frustrated I can’t explain it better. And saying “just read the book” doesn’t offer much help either even though I just know you’d like it since it’s based on the same pillars of low cost, passive, non-predictive, simple, but it does acknowledge the irrefutable evidence that the biggest market anomaly out there in momentum. IOt has existed for millenia and will continue to so long as human nature is present. Antonacci’s Dual Momentum strategy takes one minute per month, on the first of each month, averages 1-2 trades per year, and switches only between 3 ETFs. 17% CAGR for past 40+ years, with less than half the downside of the S&P500. That’s hard data, after transaction costs that anyone could have achieved if they had 20 minutes per year to run it. It’s long stocks in bull markets, and long bonds during bear markets. I’m happy to post the monthly performance of it moving forward and the “prediction” even though it’s more of a trend ride than a prediction. For example, as of Jan 1st 2015, the portfolio would continue to be 100% in the S&P500. Because it’s a bull market. We’ll re-convene on Feb 1st. Here is the last 40+ years of monthly data compared to the US World Stock index: http://www.optimalmomentum.com/trackrecord3.html
Okay. Who was doing this for the last 40+ years? Nobody? “Could have achieved.” Hmmm….smells backtested to me. I’m not sure why this concept is hard for you to get, but backtested data suffers from the fact that the future may not resemble the past. You can backtest all kinds of stuff that works great, but the vast majority of it falls apart going forward. You cannot put 100% reliance in back-tested data.
Doing one prediction a month is going to take too long to demonstrate your crystal ball (even using trends) is just as cloudy as the rest of ours. How about posting what 20 asset classes are going to do on Friday, next week, and next month (both direction and magnitude- or at least relative magnitude)? That’s 120 predictions. We’ll see how many you got right. Not confident enough in your strategy to do that? I’m not surprised. I don’t know anyone who is.
I understand how these systems work. I just don’t believe they’re the best way to invest. If you do, nobody is stopping you.
Here’s a good article explaining the issues with trend-following momentum strategies:
http://www.marketwatch.com/story/why-moving-averages-are-risky-2013-11-08?page=2
I couldn’t agree more with you on past performance doesn’t guarantee future results.What I find interesting, is that everyone and there mom wants to judge and criticize the allocation that was based off the knowledge of one of the greatest investors ever in history of the world.
However, if anyone has actually read the book Ray Dalio and Tony Robbins both clearly state this point, that it isn’t always going to produce gains. It will lose some of the time. It was back tested over the past 75 years
and compared to the performance of the S & P 500 over the past 75 years NOT 30 years as claimed in this article.
It is geared towards the long term…. over 30 years or more, NOT 1, 2 or even 10 years. It is for retirement not a day trading account. Maybe it works or maybe it doesn’t… only time will tell.
Isn’t that why they specifically tell you in the book that you will want to rebalance the portfolio every year? Isn’t that what rebalancing asset allocation is for? So if you lose money hand over fist in one asset you can make up for it in another asset and also take advantage of dollar cost averaging on assets
that go down in price? Anyone disagree on that?
I agree that’s a pretty big claim Donald. The book was published less than eight weeks ago. Let’s evaluate the strategy going forward from there before we declare it is the Holy Grail investors have been searching for for the last few millenia.
I assure you there are plenty of investors who are perfectly okay with simple and boring. A successful market timer should be very rich, very quickly.
Timing markets works but not over long haul. Trust me I know from experience. I had a 92% win rate day trading volatility over a period of 10 months last year. I was winning almost every time I made a trade timing the markets and eventually I lost and when I did lose, I lost big. I Didn’t lose everything because I had an exit strategy and I know something about technical and fundamental analysis but the point is this… even the best traders on earth lose trades timing the markets.
Simple and boring in my humble opinion is a much better way to build wealth without losing a whole lot of your nest egg.
I agree with that last statement.
The issue is most people think they can build wealth in the capital markets. It just won’t happen for the majority of people. The primary means of wealth accumulation is through improving income (and hence savings) – the capital markets should just be used for capital preservation.
There’s a lot of truth to that view.
Please don’t use this book as one of your initial finance reads! Start with Coffeehouse Investor then anything by John Bogle. For me, I took a pass on Robbin’s book after looking at the reviews on Amazon. Happy New Year.
Yes, plenty of better books out there. If there’s one thing Robbins can do, it’s sell stuff. Before anyone buys it, here’s a bunch of free info on the book that may help readers decide if they’d like to spend money on it: http://abnormalreturns.com/2014/11/19/buy-tony-robbins-selling/
For me personally I find the charismatic personality type to be too distracting to any valid point that could potentially be in the book. It’s like the robot from Lost in Space is running around in the back of my mind screaming, “Warning. Warning. Danger. Danger.” My time for reading and finance is finite. So I pass.
Interesting article. It’s not the allocation that I would use because of the commodities and gold portions, and I’m young so 55% in bonds sounds like a portfolio killer to me right now. But I could see it doing ok for someone in retirement who needs less volatility, although I think there are other easier ways to achieve that.
It does seem that all investment gurus tout their allocations as the best way to be protected. I hear advertisements on the radio every day that say with this proven portfolio or that product “my clients didn’t loose a dollar in the 2008 stock market crash!” Fear is the biggest enemy to investing. Fear of loss, so one never starts. Fear of not doing as well as the hot stock/sector, so one switches allocations around to often.
Great point Ricky. I 100% agree. Fear of loss or fear of failure keeps a lot of people from starting ANYTHING in life. We are going to lose money investing for sure. What we do when we’re losing money is what matters most, or what we do after we “fail” at something is really what will determine how big of a failure that experience will be.
Until people lose some money investing, and understand how they handle their emotions (i.e. not panicking, sticking to target asset allocation), it’s hard to say what they will do.
Regarding the Dual Momentum Investing strategy, why didn’t I think of that??!! It really sounds simple. Just be in the market 100% when it is a Bull Market and 100% when we are in a recession. That makes perfect sense. Awesome. And to top it off with a commodity futures trading strategy is even more brilliant! It is all clear to me now.
I had to smile
YES!! I just hope your sarcastic doubt doesn’t discourage others who wish to pursue it; because it is possible, very rewarding, and the Forbes 400 is full of them.
One of the best features of your post was the critical fact that the commodity/futures trading strategy is only .0001 correlated to other investments. What a critical and important statistic! What kind of foolish investor settles for assets that are .001 correlated? I mean really, who would do that?
This post is a lot different then what I have come to expect from WCI. Your guest posts are great when they impart knowledge or share about an experience that some of the younger people haven’t quite made it through yet. The guest posts about market timing and what I am going to call “emotional investing strategies” kind of weird me out. It doesn’t help that Donald Wieczorek is advocating market timing in the comments and claiming he is not. I can’t imagine what I would have said if this was the first article I read on your website.
Arkydore, I think there’s quite a bit of knowledge and experience discussed here. These discussions may even prove helpful come the next crisis/recession. “All Weather” and fixed allocations just don’t work that great. Just ask those who thought they were “diversified” how they did in ’08. Ask those who’ve owned gold miners the last couple years, or energy recently how that’s working out. Ask Dalio himself how his risk parity did the first quarter of last year (hint: it forced them to re-think the entire strategy).
I think part of me gets a kick out of presenting really simple, robust and successful strategies, backed by hard data spanning decades and all economic environments, supported by thousands of hours of research and experience, which are fully explainable, and then still see people disregard them. You could put them on the front page of the WSJ or even write a book about them (like Antonacci did), and still less than 1% of people would use them. Absolutely fascinates me; The angst and close-mindedness is always so palpable!!
Fixed asset allocations work just fine. I had one in 2008. I lost money. I had the same in 2009-2014 and made lots of money. Would I like to make more money with less risk? Of course. But I fail to be convinced by the data that there is a more reliable way to do that than what I’m doing, especially on an after-tax, after-expense basis.
Backtested data is not nearly as useful at predicting the future as one might think. Think of it this way. If your trend following gave such awesome returns, why isn’t there a simple low cost mutual fund out there having smashing success doing this? It should be the biggest fund in America. But it isn’t. The astute investor will consider why that is. It isn’t that people aren’t looking for funds with high returns. There are plenty of people out there looking for funds with the highest returns. Those funds don’t hide well. And even if the guy running this fund were only getting 10 basis points a year off it, he should be raking it in. There’s no one stopping you from that starting that fund. But you probably ought to stop and think about why there is no huge fund out there doing this. It might just be because it doesn’t work. Consider that alternative hypothesis to yours that people are just closeminded.
A couple points Jim (and I swear this is my last post!):
1). I appreciate the discussion about the pros/cons of All Weather static allocations and potential viable alternatives. But your link above is exactly what’s difficult with internet discussions, especially blogs, and even more so the comment section of blogs. The article you linked discussing the issues with trend following momentum is written by a teenager in undergrad with seemingly zero experience. But because you recommend it, readers of the blog will believe that over a book like Antonacci’s Momentum book which is the most comprehensive discussion ever published about what momentum really is and why it works, based on literally hundreds of SSRN research papers, real world investing experience, large amount of in and out of sample testing, and most importantly clear, rational, objective reasoning. Despite momentum being such a pervasive market anomaly, it remains largely and curiously misunderstood by investors (as the comments section on this blog show!). This book is to momentum investing what Graham and Dodd are to value investing, or Bogle is to index funds. All I can do is voice my concern with All Weather fixed allocations, and then offer the best alternative that I know exists.
2). All of your (and others’) questions and doubts about momentum are answered unequivocally in the book. Whether its issues with backtesting data, whipsaws, big fund guys who do it (hint: there’s many), or literary any other concerns, they’re answered. Whether you actually want the answers is a personal decision. In markets, everyone gets what they want. Through the years, I’ve found many investors would rather accept lower returns and greater risk than challenging their premises and admit they could be wrong. But please do know, the evidence for momentum is worth the effort to understand it. Rising prices attract buyers, and falling prices attract sellers. Always have, always will.
Very well, it doesn’t hurt to read the book. I’m certainly not arguing that momentum in stock prices doesn’t exist. I’m definitely not convinced it is the ideal way for me, or my readers, to invest however.
You are posting on the wrong site if you really didn’t anticipate the response to your posts:)
BTW, I am pretty sure that anyone that buys into the obvious logic and brilliance of the Dual Momentum Investing Strategy combined with commodity/futures trading that is benefiting so many of the Forbes 400 will not be deterred by my comments!
I don’t wish for this to get off point. My main critique with All-Weather portfolios such as Dalio’s is that static allocations create massive performance drag. You just don’t need bonds all of the time. It hurt the last few years. Emerging markets, gold, energy are not always needed either, and the last few years should help clarify that picture, for they were massive drags as well. Stocks (specifically just the S&P) has been the place to be. That will change at some point. The main argument is that if you truly want superior risk-adjusted returns, a dynamic allocation methodology could provide this, for it by design utilizes whatever assets that are working at the most appropriate times. It gives the best of both worlds while reducing the performance drag that comes from a permanent allocation to some assets. My blending the above Dual Momentum strategy with a futures strategy is a personal choice since I think adding my futures strategy is a nice diversifier because of it’s non-correlation.
Unfortunately, due to cognitive dissonance and anchoring bias, it may take the next bear market in bonds for investors to finally give up the notion that holding a substantial amount of bonds in their portfolio is the prudent thing to do. This case can be made for stocks, gold, whatever.
My mention of the Dual Momentum book is simply a way to give an example of one such dynamic allocation system that can be employed by anyone and everyone. The author has decades of investment professional experience and is widely recognized as a foremost authority on momentum and dynamic models.
The cool thing is no one needs to believe it. It won’t affect how I manage assets, but it may turn a light bulb on in someone else’s head, and if that’s the case, then awesome!
Why do you need non-correlating asset classes when your plan is to just be in the best asset class all the time by trend following? I’m having a hard time reconciling those two strategies. Either you need non-correlated assets, or you can be in the best asset class all the time. Which is it?
Good question. It’s actually both. The goal is to be in the most uncorrelated assets that currently exhibit momentum. It just increases return while also smoothing the ride.
For example, I’ve been long S&P500 with Dual Momentum for last several years, but short crude, long US Dollars, short gold (among other trending futures) in my futures program for the last few quarters.
All of the above positions exhibit momentum, which by definition means price change (ie no point in being in anything that’s not moving), and then when you combine uncorrelated assets, time frames, and strategies you end up with a pretty sweet equity curve!
But is not this dual momentum kind of like performance chasing? For eg, for 2014 Biotechnology, Healthcare and REITS and airlines did amazing in 2014. Doesnt mean they will do great in 2015. Similarly before them energy, and commodities during the crash, and even gold one year did amazing.
Wouldnt performance chasing be like buying high and selling now.
While there is some persistence in returns (i.e. momentum) over the longer term there is a reversion to the mean phenomenon. Donald’s advocated trend following scheme is that as an asset class starts to go down, you get out of it, getting back in when it starts to go up. If you’ve invested into a trend-following portfolio recently, and then that asset class goes down in value, you will then have bought high and sold low. If the market “whipsaws” you can do that repeatedly, which is obviously going to hurt investment returns.
It’s not so much “performance chasing” as trying to figure out a methodology to use the anomaly of momentum to catapult you to greatly outsized gains. For example, think of this simple, robust, S&P-crushing equity system:
1. Throw darts to randomly pick 25 of IBD’s top 100 momentum stocks at the beginning of the year (make sure they’re uncorrelated/diversified though, very important).
2. Equally weight them. As one stocks hits a 60-day low, sell it, and re-allocate the proceeds equally to the remaining 24 stocks in the portfolio.
3. Repeat process if/when a stock hits a 60-day low. Cuts losers, presses winners.
4. At the end of the year, you’ll be left with nothing but the best performing stocks, and in size. You’ll look like a genius without predicting a thing, market timing, nor using any secret “indicator.” Pretty cool huh?
Moral of the story: prediction and market timing is impossible. However managing positions (ie cutting losers and riding winners) produces extremely outsized gains if done correctly; the very existence of momentum in markets allows these strategies to work. Re-jigger the way you “think” about markets, and you may just be surprised with what comes of it…again, you don’t need to predict markets to significantly beat them.
If that really works that well, shouldn’t be hard for a mutual fund to do it and show incredible returns, no? Where are they? A few issues- first, what happens when all of the stocks hit their 60 day low in a market downturn….Also, your portfolio becomes less diversified as you go, exposing you to single company risk.
1). Unfortunately, it’s just not worth the massive legal and compliance fees to start a fund that runs a strategy that takes 1 min/day to run, and that anyone can just employ themselves; plus hardly anyone would invest in it since the majority think like you and don’t “believe it.” The guy who told me about this strategy (ridiculously successful top-ranked Wall St technical analyst and asset manager) always laughed and said he could never raise money with it b/c his institutional clients thought it “too simple,” thus felt “can’t possibly work.” Really interesting actually. You just can’t start a fund for such strategies since managers can’t qualify charging the fees for something so simple. The big money fees in asset management are achieved in blackbox, opaque, “magic sauce” strategies that require 1,000 PHDs from Harvard to run. But what’s funny is that returns are more often perfectly inverse of complexity. It’s too bad more people don’t realize this.
2). When all stocks hit 60-day lows, portfolio goes to all cash until end of year. This means when it does have stocks (bull markets), it’s in the highest returning stocks, and all cash during large recessions. I can email you a 30-yr track record of it you’d like; it’s actually pretty ridiculous. But again, few do it because they want something more complex.
3). This is just a framework and an example how to start thinking differently. You can start with 100 stocks if you want less idiosyncratic risk, and when you get to 50, re-throw the darts to get a fresh 100. This will limit the company-specific risk. Or better yet, start with 500 (each equity from the S&P500), and run the system. You’ll see exactly how and why it beats the index as it cuts the losers and presses winners. Or even better yet, include totally different asset classes, time frames, and add in the ability to short. My point is that the out-performance comes from a level of THINKING (ie all about management of positions, no predicting necessary, cut losers, ride winners, etc…) that is very unconventional to classical thinking. At the end of the day, most people lose in markets, so if you want to win, by definition you need to do something different…and if you study what the winners do, you’ll see they all have commonalities.
4. That Dual Momentum book I mentioned earlier uses basically the same concept, but even simpler, with just 3 ETFs. All stocks (either S&P500 or All World Equity ETF) during bull markets, but when it breaks down, switches to all bonds. Keep checking back into Amazon every so often, and keep watching the 5 star reviews tick up like clock work…some people are finally starting to grasp these simple but extremely powerful concepts. These strategies are simple, cheap, and effective, but it takes a willingness to buy into a way of thinking that is very contrary to what is taught in BSchool, investing books, or on CNBC. But remember, the individuals actually making money in markets don’t write about it, teach it, or talk about it on CNBC…and when they do, they get push back like I’m getting which makes them less inclined to do so again! But it’s cool knowing at least some people will read these comments, put the time into reading, researching, and testing systems derived from these concepts and be pleasantly surprised at what they find!!
2.Oh, so there’s more rules you didn’t mention. Any others someone implementing this should know? Good thing I didn’t run out and start doing it yesterday as I thought that was all there was to it. 🙂 You mean a back-tested 30 year track record? Or do you have the records of someone who has actually been doing this for the last 30 years? How did October 1987 treat them? Sounds like they sold pretty low to me that month.
3. Oh, another rule. You sure this isn’t complex enough for a hedge fund yet? Most of the “market winners” I know (those with millions and plenty to retire on) follow a buy and hold strategy.
4. What do you mean it’s different from what’s taught in investing books? It IS an investing book, no?
It’s just a framework of how to think; you just don’t need “All Weather” or “Risk Parity” or diversification with losers just for the sake of diversification. It just creates massive performance lag. People can create whatever “system” or rules they want based on these simple concepts; it’s better for them to read, research, test, and create themselves in order to build the confidence and discipline to actually believe it and stick to it, which is THE most important part. My point is that it’s not difficult, and people can do it themselves, but only if they’re willing to change their way of thinking. I’m proof—when I changed my way of thinking, I created a strategy that has compounded at 30%+/yr for the past 7+ years though bull, bear, and flat periods, without predicting a thing. I could retire now at 28 years old, but the mental game fascinates me. Plus I need something to do when my wife is pulling EM shifts or it’s raining out preventing me from fishing or golfing 🙂
What if I were to tell you that, although we all know the average returns for stocks has been 7-8% over history, it would be 16-18% if you just removed the few generational crises over the past 100 years (ie Great Depression, ’74, tech crash, ’08 crisis)? There are extremely simple strategies out there that get you into all cash (or bonds) during these rare events. Dual Momentum is the best book out there for people looking for something like this. I’m just trying to help people cut through the BS books (like Tony Robbins’) and get to ones that actually help.
Forgive my skepticism- it has saved me hundreds of thousands thus far in my investing career. Might it cause me to miss out on some good opportunities from time to time? Sure. But it has also saved me from many scams, “new and wonderful” investing techniques, and advisory fees. You run a fund that invests based on principles of momentum. I expect you to be fully sold on the concept. I see it as one more investing technique that may work just fine, but that I do not need to reach my goals. Many roads to Dublin and all that.
30%+ per year for 7 years would turn a $500K portfolio into a $3.1 Million portfolio. Bernie Madoff wasn’t claiming that. Why are you still working again? 🙂 I think people would be more convinced if you posted your statements for the last 7 years.
Responding to your comment below this: I totally understand your skepticism, and yes, I agree it has served you well. What’s funny is you and I actually have way more commonalities than differences. I love 99% of this blog and your book; I’ve been passing your book around my wife’s entire residency program. I too believe in keeping costs very low, being passive, not predicting anything, buy and hold, do it yourself. The slight and main difference is just that I only buy and hold things that are “working” and am out of, or short, things that are “not working.” The difference may be slight in thinking, but vast in performance. With Dual Momentum for example, it’s holding a low-cost equity ETF (S&P500) for literally 80-90% of the time, owning it often for years at a time. Except during recessions. Slight difference, but it more than doubles the long-term CAGR from 7-8%/year to 16-18%, AND reduces the worst drawdowns by half…it’s worth the 2 hours it takes to read the book!
I “work” because it’s intellectually stimulating. I think these conversations are fun. I like watching people get that “aha” moment when they learn something new or different than what they previously thought. I can’t post my fund statements/data due to SEC regulations, but that shouldn’t matter. I don’t need any new investors, and it’s not about me. It’s about trying to share a way of thinking that may help others. And the best part is they can do it themselves, cheaply, simply, and effectively.
Sounds like Will Roger’s investment philosophy:
Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.
And last I checked, the SEC doesn’t regulate an individual posting their own Roth IRA statements.
Haha, I like it. Pretty similar actually, you’re getting closer! Just do more of what’s working, and less of what isn’t. Not a bad life motto either.
I have just two investment strategies I use. The one I created for my privately offered hedge fund which the SEC prevents me from sharing. And the other which is the Dual Momentum strategy which anyone can replicate (and should!). These two strategies blend well since their monthly performance correlation is 0.00. All of my Roth IRA, Solo 401k, and Solo Roth 401(k) assets are in Dual Momentum. Here are those returns vs global equity index…for the past 6 years the system has just held the S&P500…but notice how it performs during recessions when it switches to bonds: http://www.optimalmomentum.com/trackrecord3.html
The reason people attempt to “diversify” is because they feel like it will help them when recessions come. But what if you could just side-step the majority of the length of each recession? Do you still need those diversifying laggards in your portfolio during bull markets? I’d argue no. And Dual Momentum is an example of how to achieve this.
Obviously if you could just side step the bear markets you would want to. Who wouldn’t? But it obviously isn’t that easy. I’m surprised you can’t see this. There are millions of people in the world trying. Some are too early getting out. Some too late. Some too early getting back in. Some too late. You can automate and remove some of the emotion, but you’re still driving while looking in the rear view mirror, like everyone else. This of course ignores transaction/tax costs, which can be minimized, but eliminated.
It’s still beyond me why you would use an S&P 500 fund and not a TSM fund.
The strategy is maybe 2 pages of the book. The other 175 pages is the good stuff, helping to re-frame the mind into understanding why exactly it will continue to always work.
I know it. The author of Dual Momentum knows it, and AQR knows it too. And you don’t need to buy options at all; that’s just for the extremely paranoid skeptics. The system was still nicely positive in ’87 even after the crash.
I just must not be very good at explaining it, or you not good at receiving it. Would be cool to get a 3rd party whom you trust (maybe your pal Swedroe!?) to read the book or our conversations and see what they think. He’s probably already even read it.
I just think it would be incredible if you, with your following and voice, believed in this stuff and could help other Docs realize the huge benefits from such a beautifully simple system.
But it’s ok, I still like you and have a lot of respect for what you’re doing. And who knows, maybe someday you’ll look back and say “hey maybe that little whippersnapper of a kid was onto something after all!”
The system was hypothetically nicely positive in 1987. Nobody was actually doing it. See, the way to evaluate these things, and I’m not sure why this is tough for you, is to take the date the book was published, and look at the data going forward. You apparently haven’t had the experience yet of seeing something that worked great in the past, but did not in the future.
Swedroe, like me, does believe in momentum as a factor last I checked. I’m not sure he’d consider me a pal though. The question for someone who believes in momentum, of course, is how big of a bet you want to make on it.
Obviously, being a value (buying stuff that hasn’t done well lately) investor works pretty well. Apparently momentum (buying stuff that has done well lately) also works well. Guess what buy and hold is? It’s a great way to combine those two strategies at ultra-low cost and effort.
I agree, buy and hold works very well, and it’s better than 95% of the other junk out there. I’m just talking about that other 5% that really is incredible, crushes buy and hold, is much better than All Weather or Risk Parity, and is very simple and achievable.
I guess you’re also right, I have not had the experience yet of seeing what’s always worked in the past for centuries (selling losers and riding winners) not work in the future…..makes me wonder if I’ll ever see it NOT work?! For it to not work in the future, the opposite would then hold: profits would be derived from selling winners quickly and holding onto, or better yet adding to, losers! Oh boy, now that sounds like the type of negatively asymmetric payoff structure I should build an investing strategy around. I bet my investors would LOVE that! Ugh, I can’t think of a quicker way to consistently lose money. What’s funny is that’s actually what the vast majority of investors make the mistake of doing based on their anchoring bias, disposition effect, confirmation bias, overconfidence bias, the list goes on…
I bet my investors would love to go from making 30%/yr to losing money consistently by doing the complete opposite of what’s worked for centuries 🙂
I’m glad you’ve found a technique that not only works for your personal investments, but allows you to earn a living helping others. There are many roads to Dublin.
Ahmen, exactly right, many roads to Dublin.
Like I tell my wife and our Doc friends, they don’t need me or any other person or special strategy to make them a lot of money…they’ll make plenty enough from working, and if they just protect/invest it via all the topics you cover in your book and blog, they’ll do wonderfully. I trade/invest differently strictly for the intellectual pursuit…and to post on this blog once in a while to maybe stimulate a new way of thinking about markets or investing. Thanks for indulging in this conversation and putting up with me.
1.This is the whole point; it’s extremely easy if people change their thinking (or just read the book). Or any other paper proving this stuff. AQR came out with a free paper a couple months ago showing how it’s worked on every rolling 10-yr period for the last 100+ years. It’s beyond me why people won’t just spend literally two hours reading something that literally could make them so much more, while also preventing huge catastrophic losses! Simply put, bear markets and bull markets are MASSIVE trends that often last many quarters or even years. Side-stepping bear markets only a couple months into them (ie reactive, not predictive, admittedly these systems do lag by a couple months) does absolute wonders for long-term returns. And then you’re back into equities a couple months after a bull market resumes. That’s the point of the book. I agree these strategies would not work if bull markets and bear markets were completely random and lasted only a few days at a time. But they don’t. Sure you’ll get whipsawed once in a while, a couple times every couple years, but it certainly outweighs losing 50% of your portfolio!
2. In terms of S&P500 vs TSM, or any other equity exposure fund, I think it’s just based upon personal preference. The TSM and S&P500 are very similar: http://stockcharts.com/freecharts/perf.php?VOO,VTSMX To each his own. I don’t focus on this stuff. My focus is on not losing money during recessions. I personally like the S&P500 because I can rest assured that I will always have the best 500 companies in the most advanced country in the world for the rest of my life. It’s actually “actively managed” too in the sense that it drops losers and presses winners (since it’s market cap weighted). Someday when the S&P no longer is performing better than the All World ex-US index, the Dual Momentum strategy switches into that for equity exposure based on relative momentum. The portfolio is literally either 100% in the S&P, or 100% in the All World Equity ex-US, or 100% in short-term bonds, all based on both absolute and relative momentum which is simply calculated on the 1st of each month. The liberating feeling of not needing to predict anything, or worry about anything, is quite nice. The only risk is if the stock index drops massively in a period shorter than a month before the system tells you to switch all into bonds (ala ’87 crash). But if you’re worried about that, you just buy some short-term, cheap, way out of the money put options to cover that risk.
I don’t need to read the book. You’ve explained the philosophy. I’m confident it backtests well. I understand the data on momentum well that AQR is famous for. The question is how well it will work going forward. You don’t know that, neither does AQR or the authors of the book.
I’m curious as to why you think the S&P 500 represents the 500 best companies.
Now I’ve got to buy options too? This strategy is getting more complicated all the time for being super simple.
Aren’t steps 2 and 3 the definition of buying high and selling low? Seems like if they are all good companies it might be better to sell when they hit the high and then buy the underperformers?
Ricky, that’s what most people think, but no, you need to cut the losers and press the winners. It’s because of 2 main things:
1). Your “if” statement doesn’t hold…they will not all be good companies, and the worst need to be eliminated. Those are the ones that are performance drags. The system just automatically weeds them out for you without predicting anything, or knowing in advance which will do what. Just think about your own personal history of investing (or hobbies, or dating, or anything!) and ask yourself if you’d be better off if you took your losses quicker over the years and added to the ones that worked.
2). If markets were completely random and momentum didn’t exist, these strategies wouldn’t work. But momentum does, for a variety of reasons, and means some stocks will be huge winners (and others huge losers). If you can capture the winners, while eliminating the losers, you’ll do very well. This is just one really simple strategy to help illustrate how to think about doing it.
Ricky, another way I like to think of it is this way: we have a garden behind our house, and we don’t cut the flowers and fertilize the weeds. Investing is the same thing. Get the weeds out of there and give your winners some oxygen. Weeds don’t turn into flowers. If they were flowers they would’ve started as flowers.
As Paul Tudor Jones says, “losers average losers.”
So there are some interesting arguments and analogies flying around here. It certainly would be great to get rich by timing the market. I don’t think this is the proper forum for that argument. Maybe someone can do it. That person or method just hasn’t been identified. Donald is self-reporting a track record better than Warren Buffett’s. Good for him! Either we don’t have all the data, or it works ex post but not ante post, or he is exceptionally lucky. In that case I say congratulations but stop trading now before your luck runs out. It eventually does for everyone (e.g. even Bill Miller). We need to teach doctors to save and invest simply and to do so in an evidenced-based manner. They don’t need extraordinary returns to become very wealthy, but if they follow the wrong “miracle system” they may very well end up dirt poor. That would be very sad.
WealthyDoc, you make a really good point there at the end. You’re spot on–there is risk in trying to find a good strategy among all of the terrible ones out there. I think that’s a difficult problem the industry faces. For every one good one, there’s 99 terrible ones. And you’re right, doctors don’t need to try to find a great strategy, for they will do just fine following Dr. Dahle’s advice.
This is more of an intellectual discussion of how the main idea in the article above (Dalio’s All Weather strategy) can be improved upon greatly, and in an even simpler way. It takes time to find or create great strategies. For example, I read hundreds of books, spent thousands of hours testing strategies, studied what the winners do, and traded/invested live for more than a decade though bull, bear, and flat markets. Trust me, repeatable success is not random; if it was, all of the winners would have completely different ways of making money. But they don’t. They all will have winning investments/trades bigger than their losers, are diversified so as to catch the big moves, avoid (or short) crisis, and have extreme patience and discipline. Yes some predict and are lucky, while others are reactive and systematically just follow trends. I agree that the days are numbered for those in the “lucky” or “prediction” camp. They should stop trading immediately. But myself, I’m a systematic trend/momentum investor, never making predictions, and simply riding the waves that come along. You can’t be wrong if you don’t predict, right?! The list is endless of success stories. Look up Dr. David Druz. He found this philosophy during residency in the 70’s, quit practicing as an EM doc a few years later, and has been successfully using such a strategy for decades now. And yes, he too crushes Warren Buffett. But you won’t see him on TV or writing books about it. He loves wind surfing too much. It just takes an open mind, willingness to question conventional thinking, a bunch of hard work, and extreme patience and discipline. And about 2 minutes per day to run the system.
It’s too bad people can’t grasp the idea that there is a HUGE fundamental difference between market timing and trend following/momentum trading. We do not market time. We never make predictions about when a market will change course. We simply position ourselves to ride the waves, not ever knowing when they’ll occur or how long they’ll last. We only react to market movements as they happen and then enjoy the ride.
I tried showing this type of thinking with that simple 25 stock trading system I mentioned. Re-read that and think hard about it. It has nothing to do with luck or prediction. I literary could enter 25 stocks tomorrow morning (must be uncorrelated) and make money simply by managing the positions well (ie cutting losers and riding winners). If you think this is market timing or prediction or lucky, then you’re just completely misunderstanding these simple concepts.
It doesn’t increase returns to be invested in assets that aren’t earning the highest possible returns. Who needs to smooth things out when they’re just going to go up?
Perhaps Donald is on to something. Could it be that Warren Buffett succeeds because he is the puppetmaster, always one step ahead of the market because it is always the case that the herd does whatever he already did? It will be interesting to see if Dalio can get the herd to follow his approach by having a siren like Robbins as his pitch man. By the time the herd realizes they entered a blind canyon Dalio will have long before moved elsewhere.
I had a preceptor in med school who was very much into Tony Robbins and always had some get rich quick scheme in mind. These sorts of plans work so long as you’re on top of the pyramid pulling the marionette strings.
Great comment! I’ve considered the same about Jim Cramer.
Pump…and dump. There is obviously momentum in the markets, as they are certainly not rational day to day. Really, since a large proportion of the money generated in the market is generated by trading, it makes sense. Things need to move, any direction will do, for folks to make money.
I dont think it’d be terrible to think of momentum in a longer term sense, as bulls/bears seem to last a while overall. Kind of a boost to your overall strategy, not necessarily deviating from it. Just like the energy sector being down today and over the near future, but of course it will most likely go back up at least reverting to the mean. I havent looked specifically but there is probably some value and many of these companies pay good dividends and just are falling with sentiment. Stuff like that makes sense, but not as a likely overall strategy, just bargain buying i guess.
If the energy sector goes down and you believe in momentum, then you sell it, not buy it. Its like people in 2013 swear by small cap, how ever small cap did pretty bad in 2014.
WCI is there a way to attach a picture or graph to comments?
I dunno, let’s try it.
Yup, you can. Just click on the “img” tag and insert the URL
hmmm,I dont see an img tag. All I see is name, email, website, captcha code and comment box. Buttons include cancel reply, post comment, sign up for newsletter and subscription.
I guess it’s just on the backend. If you like, post the URL and just ask me to post it as an image. If you know how to speak HTML you might be able to do that, don’t know. Sorry for the inconvenience.
Great symbolism in your pic choice!
The interesting thing about momentum and value is they are essentially opposites. The more something goes down, the better future returns are in the long run, but in the short run, it’s more likely to go down. Easier to just buy them all and forget about it in my view.
WCI, how bonds do you have in your portfolio? I know you have some TSP funds, anything outside of that?
I have 20% in bonds, though I am not eligible for TSP funds. This post makes me wonder if I have too much or too little.
My overall portfolio is 75/25, with my fixed allocation divided into the TSP G fund (10%), TIPS (10%) and P2P Loans (5%).
There’s no right answer as to how much you need in fixed income. It’s far more important to stick with your plan than which (reasonable) plan you stick with.
Robbins book is quite verbose but lots of useful information for beginners in the first half
Lots of talk about all the different fees one might get socked with if not a prudent invedtor
WCI & Kathryn
Thanks for a great post. I was going to write a similar review and you saved me a lot of work/time. I have been a fan of Tony Robbins for a long time but was disappointed in this book. He is out of his element and area of expertise. He also has a lot of contradictions and conflicts of interest. My only problem with this posting is that it came too late to spare me from reading hundreds of pages of Tony’s book. He did make several excellent points in the book but not enough to justify the time and money spent on the book.
Thanks WealthyDoc.
I am a fan of TR too, but just not for his portfolio/investment strategy knowledge. I don’t think he is trying to be misleading, just think he’s out of his ballpark a little as you say.
Clearly this Donald is trying to sell some books.
Good article, but many times I learn more from the comments than the blog post. This was one of those situations.
Thanks
That’s one reason I allow comments on posts. Many posts have great insights in the comments section.
one of the best guest posts to date, I enjoyed Ms. Cicoletti comment about Mr. Robbins, ; this guy makes people feel better and makes tons of money doing it and that’s OK. She seems to really understand investment value more than most and I think Mr. Robbins should probably avoid the topic.
First, I’m a fan of Tony’s; his tapes got my 10-year old daughter over her fear of heights and I like the guy personally. Second, I’m a fan of Dalio’s; a successful investor who is serious about both bow-hunting and meditation is someone I’d like to know better. But here’s my problem. I don’t think Tony understood Ray’s All-Weather strategy quite. I may be wrong, but I don’t think Dalio’s risk parity strategy is managed as easily as allocating more money to bonds than to stocks. Here’s a quote from Dalio’s pdf “Our Thoughts about Risk Parity and All Weather” in the September 16, 2015 issue of Bridgewater Daily Observations where Ray writes about creating a ‘risk-adjusted’ portfolio:
“For example, if you put 50% of your money in global stocks and 50% of your money in global bonds, over the last 20 years, the return of your portfolio would have been 98% correlated with stocks and had a return of 6.5%. To have diversification, you would need the stocks and bonds to have comparable impacts on your portfolio. You could do that by taking more money out of stocks and putting it in bonds. To do that over that period, you would have had to change the asset mix from 50/ 50 to about 25% stocks and 75% bonds. If you did that, you would have achieved your diversification and thus reduced the risk by about 3%. But you also would have reduced the return by about 50bps.”
In other words, you can’t just add more bonds and less stocks without reducing your portfolio rate of return unless, as Kathryn points out in this article, you’re in a major bull market for bonds. If you did that over, say, the last 100 years, the lower return from bonds would lower the overall portfolio rate of return significantly. You’d have done much better to put up with the ups and downs of the market and just put your money in a broad market index. What Dalio is trying to do with All Weather is to give a stock market rate of return with much lower risk. Here’s what he proposes:
“On the other hand, if you levered up bonds to have a risk that was comparable to the risk of equities, the overall risk of the portfolio would have been virtually the same as the 50/ 50 portfolio (i.e., 7%) and the return would have been about 1.5% greater (8.0% versus 6.5%).”
To sum up, Dalio is saying that to get true risk parity without reducing your rate of return, the right answer is to buy more bonds with borrowed money. The leverage theoretically brings the rate of return in the bond bucket up to the rate of return in the stock bucket. The leverage increases the risk for bonds but decreases the overall risk of the entire portfolio and keeps the return high.
My guess is that Dalio and Robbins both realized that levering up bonds isn’t something the average investor can do so they settled for a very distant second-best idea – to allocate heavier into the bond side of things. Unfortunately, that plan leaves them open to a lot of well-founded criticism. Kathyrn carves up the plan here and the Washington Post does it there and those of us looking for the nirvana of ‘all weather’ must either learn how to lever bonds like Ray or, like Kathryn, face the probability that nirvana isn’t quite here yet.
The tricky thing is figuring out how to borrow money at a rate lower than the yield on bonds. Good luck with that.
Hmm. My initial reaction was the same… So much (long) bonds and after a historic 30 year bull market in bonds. But Ray Dalio is no simpleton. There is more here than meets the eye. One needs to stop and consider what it means to be at the end of a massive bond bull market, why interest rates are stuck at zero (or lower), why so much money printing and so little growth? I am reapeatedly reminded of Japan. We may find that where bond yields go all assets classes follow.
Here’s my challenge. 95% of the population do not understand even a portion of the terms and concepts being thrown around here. I’m not a financial expert AT ALL, so I’m honestly coming at this in terms of I want to learn. What I appreciate about the book is that it at least attempts to get people on the right track. Some might say his advice is BS, but would people be better off not investing at all?
The challenge is writing a book for the general population that makes things straightforward, easy to implement, and effective.
So can someone please recommend 3-5 resources for setting up investments? And please provide the reasons why they are sound resources (i.e. They will get the results people want). Some people say Bogle, some say Dalio, some say a whole bunch of other people. I want to study this area and other non-financially literate people do too, but unfortunately I’ve seen just more jargon and random books thrown here and there.
Tony Robbins can sell his book because he is selling simplicity. I doubt its perfect advice (by a long shot). But its simple. What are some other simple and easy to understand resources that do the job “properly”?
I’d start with:
If You Can or The 13 Word Retirement Plan.
It doesn’t get much simpler than that. Both are far better than Dalio’s in my view.
We got new insights about the all weather portfolio in Dalio’s new book “Principles”. It turns out that he created the portfolio to have his family trust money invested that way when he is no longer there. It was the answer to the question: how do I make sure that nobody screws up all my hard work? Just to make sure and preserve his wealth for generations to come (at least his trust’s wealth).
Something to be said for simplicity eh?
I prefer Warren Buffett’s plan: 90% in Vanguard S&P 500.
This is classic. Someone with 10 years experience vs. the worlds largest hedge fund with hundreds of the industry’s best minds, and millions of dollars in research designing this portfolio. You don’t think that they have thought of the interest rate risk? Of course they have. Their testing goes back way beyond 30 years. In fact, Ray even said so in one of his interviews. The portfolio returns approximately a 7% annual return over time with way less than half of the draw down of the stock market. So just open a margin account with IB, they only charge 3% on the amount borrowed. Allocate the all weather on 2x margin. Double the 7% return making it ~ 11% (14% – 3%) with still less downside risk than the stock market. And based on the margin maintenance requirements that I’ve seen, you’ll never get a margin call. So, the all weather allocation is one of the best ideas of all time, as long as you use leverage. Stock market return, with less downside risk.
It is classic. This post is 5 years old. At any rate, if you like the portfolio, use it. It’s a free country. But in the 5 years since I ran this post, this portfolio has DRAMATICALLY underperformed.
However, you’re using the wrong tense in your comment. You have no idea what the portfolio “returns”, only what it returned.
I disagree that investing with 2X margin on this portfolio is safe at all.
I realize margin isn’t for everyone. But I’m just saying, the last 10 years, if you did use this portfolio with leverage it would have almost matched the S&P with much less downside risk and volatility (12.72% vs 13.64% ).
Weird that you can find a portfolio that outperformed the S&P 500 in the past. That seems so difficult. So…..what’s your prediction for the next 30 years? That’s the time period I care about today.
Seriously though, it’s your money. You want to leverage up the all weather portfolio, knock yourself out. That’s the fun part about investing. We can all do it however we like.
Great article!
I have been only learning/doing investing for little more than a year and initially I really liked the idea of the All-Weather portfolio.
As I learned more and more about bonds and I realized we were in a very long bull market for bonds I decided not to have long bonds in my portfolio because I felt that the interest rate risk can screw my portfolio heavily.
I am still struggling to find an optimal bond part for my portfolio as a Hungarian. We have relatively high yield 5 year inflation linked government bonds for DIY investors in our own currency but I feel that using just that as my bond part is not optimal.
A Barclays global aggregate bond etf would be a good idea? I like it’s diversification but I don’t like it’s duration with it’s very low yield.
I am not sure that it’s YTM would be enough to beat inflation.
I would like to avoid buying multiple bond etfs to do this. For example I like the idea of having fixed-rate and inflation-linked bonds.
But in my case I would have to buy 2 etfs in EURO government bonds and 2 etfs in USD treasuries/tips to get a somewhat proper diversification.
What would be the best single global bond etf/index to use as the “buffer” in my portfolio?
Well….if you have to pick just one….
I’d probably use the Vanguard Global Credit Bond Fund Admiral Shares (VGCAX).
I can’t use that one. In Europe we can only use UCITS etfs, for example:
Amundi Index Barclays Global Aggregate 500M
https://www.justetf.com/uk/etf-profile.html?isin=LU1737654019
Xtrackers Global Sovereign
(DB Global Investment Grade Government index)
https://www.justetf.com/en/etf-profile.html?isin=LU0908508731
Xtrackers Global Inflation-Linked Bond UCITS ETF 5C
(Bloomberg Barclays World Government Inflation-Linked Bond index)
https://www.justetf.com/en/etf-profile.html?query=LU0908508814&groupField=index&from=search&isin=LU0908508814
Euro/US aggregate/corporate/government/government inflation linked
FTSE World government
Emerging sovereigns, etc..
My retirement plan is (30 years till then)
30% local inflation linked bonds
15% global bond etf
15% gold etf
40% ftse all world etf
Any advice is welcome!
(I know that stocks should be higher and gold should be lower.)
Thanks!
Sorry, I’m no expert in fund available in Europe, but I’d look at what it invests in, whether it is passive or active, and what the expense ratio is.
No problem.
Most of the UCITS etfs are similar to the US ones, just we don’t have that many yet.
Passive, low cost, index following stuff with tons of eurozone specific indexes.
The most similar ones to your suggestion are etfs that following this index:
Bloomberg Barclays Global Aggregate Corporate
For example: Vanguard USD Corporate Bond UCITS ETF Accumulating
Do you prefer corporate bonds over government bonds for this purpose?
I guess I prefer government bonds are my preference based on what I actually invest in, but I don’t really have anything against corporates. Yes, they don’t do as well as treasuries in a crisis, but they do have higher long term returns and higher yields.
The Wealth Virtues “no loss” portfolio even made money in 2008. It is a 50/50 stock/bond portfolio. the 3/5/10 year average (percent) is 16.09/14.73/13.88 with no loss from (and including) 2008 to 2020. It is the following: FDN – 5%, FDIS – 5%, JKE – 5%, QQQ – 5%, SDY – 5%, VGT – 5%, VIG – 5%, IHI – 10%, XLK – 5%, EDV – 30%, BSV – 5%, SPTI – 5%, BIV – 10%. Fees are roughly 0.162%. Lowest year was 2008 with a 0.2% return, the highest was 2019 with a 23.96% return. $250K invested at the end of 2007 would have reached $1.13M at the end of 2020.
Sounds backtested. I guess I’m not surprised to see the website popped up at the end of 2009. So the portfolio didn’t “make money in 2008” since it didn’t exist in 2008.
At any rate, I’m sure it’s a fine portfolio and may do just fine going forward. Overly complex for my taste though.
Very interesting, thanks for publishing and for all the comments. I was trying to make my mind about that portfolio, and there’s a lot to learn from the post and comments.
It sounds to me like there are multiple reasonable strategies, that most perform decently most of the time, and none of them can guarantee to never have a catastrophic year. They can have high returns and the emotional creature in us will often sleep a bit less well, or lower returns and we’ll (possibly irrationally) often sleep better, but not always.
Would splitting a portfolio over several of those strategies work well? I suppose, if the reasons that would make them perform poorly aren’t correlated. Is there any sound reasoning on this?
I’m also wondering if it isn’t a too extreme to insist on 100% mechanic, what about 99.9%?
I suppose in the very rare times when it smells like an aggressive rate hikes campaign might be in the cards, replacing long term bonds by money market funds or hedging them with out of money puts would bring significant safety without sacrificing too much return, no?
Sounds like it would introduce complexity without tons of benefit, but it wouldn’t be crazy.
I’m not a fan of long bonds. Never have been. But timing the interest rate/bond market isn’t as easy as it looks in retrospect.
You’ve seen this post, right?
https://www.whitecoatinvestor.com/150-portfolios-better-than-yours/
Ah yes, I read it, thank you!