Last time I reviewed a great book, published originally in 2008, called The Gone Fishin' Portfolio by Alexander Green.  In this post, I review his proposed portfolio.

The Gone Fishin' Portfolio is a fixed asset allocation index fund portfolio rebalanced annually that consists of the following asset allocation:

  • US Large Cap Stocks 15%
  • US Small Cap Stocks 15%
  • European Stocks 10%
  • Pacific Rim Stocks 10%
  • Emerging Market Stocks 10%
  • REITs 5%
  • Gold Miner Stocks 5%
  • Inflation-adjusted bonds 10%
  • Short-Term Corporate Bonds 10%
  • High-yield Bonds 10%

Overall, I think it's a great portfolio.  Fairly aggressive with about 75% equities and other risky assets and 25% in fixed income.  (Remember that both corporate bonds and junk bonds have partial equity characteristics, so part of what looks like fixed income is actually equity).  He recommends it be implemented with the appropriate Vanguard funds, and suggests an alternative in case the Vanguard Precious Metals and Mining fund is closed, and suggests alternative ETFs if desired.

I like that it is internationally diversified.  I think REITs and miner stocks are pretty good alternative asset classes to include and I like the overall stock:bond ratio for a new investor.  The criticisms I have are minor.  First, there is no provision to make the portfolio less aggressive as you near retirement.  Volatility that is easy to stomach on a $100K portfolio at 35 would be much harder to stomach on a $3 Million portfolio at 65.  You can adjust that yourself, but I think he could have at least mentioned it as a concern. Second, the portfolio is VERY large cap heavy.  There really is no great reason to have a small tilt domestically and not internationally (except for the fact that Vanguard didn't have a small-cap international fund in 2008 when the book was published.)  He also gives nary a nod to the Fama-French data about value tilting.  His suggested bond allocation deserves discussion.

It seems as though he is trying very hard to avoid holding nominal treasuries.  Avoiding those in 2008 based on these recommendations would have been serious folly.  Other fixed income, such as the corporates and high-yield bonds he recommends, was definitely the wrong thing to have in the portfolio during that market crash.  Other authors make a very good point that fixed income ought to be very safe, and you should take your risk on the equity side.  Of course, 4 years later, I find myself quite tempted by his suggested portfolio.  Junk and corporate bond yield spreads look a lot more appetizing now than they have in a long time.  In fact, muni bond yields are pretty enticing right now.

His justifications of his bond choices leave something to be desired. He suggests that you should choose short term corporates over treasuries because they “pay more.”  He notes (at least at the time of writing) that ST corporates and LT treasuries have similar yields.  Of course, over the last 5 years the return of the Vanguard LT treasury fund has been 12% per year and the return of the Vanguard ST investment grade bond fund has been 4.31% per year.  Obviously they don't always “pay more.”

His justification for the high-yield bonds is that they have “returned more than either treasuries or high-grade corporates.”  It's true that over the last ten years that high yield bonds have outperformed intermediate treasuries and intermediate investment-grade corporates by almost 1% a year.  But look at 2008.  The treasuries were up 17%, the corporates were down 6% and the junk bonds were down 26%.  That's not exactly what you want at the time when you would prefer to be rebalancing from your safer fixed income to your riskier equities.  I find the argument to include junk bonds in the portfolio lacking.

He also suggests that TIPS are less volatile than traditional bonds and that they are tend to rise when other bonds are falling.  In my experience, neither of those statements are true.  Don't get me wrong, I think most static asset allocation portfolios SHOULD include TIPS, but not for either of those reasons.

All that said, I think over the long run, for a portfolio held for a very long time as the Gone Fishin' Portfolio is designed to be, an investor would be just fine with this fixed income allocation.  You do get some treasury exposure with the TIPS.  But I think he would have kept it simpler with a slice of Total Bond Market.

He actually puts together several pages in the book (Titled “What to tell the naysayers”) arguing against common criticisms of the portfolio, and these are some of the best pages in the book, whether you agree with him or not, because it demonstrates how lots of very reasonable people can disagree about the exact components and the exact amounts of those components in a fixed asset allocation.  The truth is that your savings rate and your discipline in maintaining any reasonable portfolio matter far more than the exact percentages in the portfolio.  As I've said many times before, there are many reasonable portfolios, including the Gone Fishin' Portfolio.  Pick one and stick with it.

Image Credit:  Petritap, via Wikimedia, CC-BY-SA