Especially after the recent market volatility, Iām wondering if it makes sense to recommend people invest part of their wealth in bonds and commodities
From the article above:
Many people Iāve spoken to are almost fully invested in US equities. I think the rationale for this is that equities have been the best returning asset historically, so thereās no reason to own anything else. Another rationale is that since you canāt beat the market, you should put everything into equities.
But US stocks do not equal āthe marketā. If you try to tally up all global financial assets, you get something like this:
18% US stocks
13% Foreign developed stocks
5% Foreign emerging stocks
20% Global corporate bonds
14% 30 year bonds
14% 10 year foreign bonds
2% TIPs
5% REITs
5% commodities
5% gold
This represents the truly agnostic portfolio. If you think you have no ability the beat the market, then this is the portfolio with the best risk-return. 100% US equities is a huge bet on just one asset.
From 1973 to 2013, a portfolio like this returned 9.9% per year. In comparison, stocks returned 10.2%. So you only gave up a tiny 0.3% to switch to this portfolio.
In return, you had far lower risk. The volatility of the 100% equity portfolio was 15.6%, whereas this diversified portfolio had a volatility of only 8%. The maximum drawdown was also only ā27% compared to ā51% with equities. The wide diversification also makes you less vulnerable to unforeseen tail risks.
The much lower volatility means you could have levered up 2x and ended up with the same amount of volatility and same drawdowns as equities, but returns that were twice as high, at 20% per year.
(Source: Meb Faberās book āGlobal Asset Allocationā)
Going forward can we expect a similar result? If US equities do unusually well compared to other assets, then the diversified portfolio is going to perform worse than 100% equities (as has happened in the last few years). But due to the far greater diversification, and so long as you have no strong reason to believe you can pick which assets will outperform, we should expect the global market portfolio to deliver the best ratio of risk to return. [...]
@Lorenzo Buonannošø you might like the work of Frank Vasquez from Risk Parity Radio. Donāt let the lack of design aesthetic deter you :) Heās made a lot of waves in the FI community pushing for alternative approaches to the 3-fund portfolio.
I donāt have the necessary expertise to evaluate the portfolios, but I would be curious to know what you usually recommend to the people you advise. Is it closer to all-stocks, 3-fund, or something else? Or is it highly dependent on the specific individual financial situation?
First, I want to be clear Iām not an investment advisor.
But with that out of the way, I almost always lean towards the 3-fund portfolio. Itās easy, low-cost, transparent, and leads to the least amount of speculation. My personal strategy is āset it and forget itā. I rarely look at fund performance, Iām just playing the long game and investing in as many types of assets as possible that require minimal-to-zero effort on my part. With that said, I do tailor my 3-fund strategy to my specific financial situationāitās minimal tailoring, but I focus on my allocations (stocks vs. bonds broadly speaking) and the types of accounts Iām investing in (e.g. 401k vs. regular investment account).
If I am to question this strategy, itās in one of the legs of the 3-fund stool. I have no major qualms with investing in the index funds that represent the stock market (maybe some moral ones but generally speaking not really). Where I pause is with Bond Funds. Stocks are meant to support growth in your portfolio (and maybe dividend payouts). Bonds? Well what are they for? To perform well when stocks are down? To provide consistent cash payments? To stabilize your portfolio? Provide inflation protection? Total Bond funds like BND try to do all of this and as a result kind of do none of this.
So TLDR: I think itās worth considering a more tailored bond strategy that is specific to your financial situation, where as you probably donāt need to be doing this with stocks.
With all that said, the more you tailor the more you speculate!
Agreed that there are other options out there for those who want to invest more time and energy. But itās the 10% case, and what Iāve outlined here was designed for the 90% case. I tried being a more active money manager, and I realized Iād rather spend my time and attention focused on other things š
Anytime someone picks a seemingly pointless and random date range like that they are biasing the results. Bonds had record possibly never to be repeated again returns in 1970s and stopping at 2013 ignores the tail end of this incredibly bull run we are in right now. Pretty sure if someone looked at 1990 to 2020 or 1920 to 2020 this overly complex portfolio wouldnāt compare as well.
2013 cuts off before US shot forward past international. Conversely, international might shoot ahead next time. I think international exposure is good, but also remember that everyone can tell a story with a graph
The numbers look so good because bond rates were much higher in the past than they are now. 10-year Treasuries (for example) were over 10% in the 80s, while now theyāre down below 2%. In the 70ā²s those bonds were giving 15+ percent which will almost certainly never happen again. If you run the same test again but assume bonds max out at a much more realistic rate the performance will be much more in line with the risk (likely less than half the performance of US equalities).
Even if this was an optimal asset mix, most people are probably too lazy to manage something like that even if they could figure out how to set it up. There gets to be a point when the marginal gain for a different asset mix isnāt worth the extra hassle and cost of rebalancing.
For the specific portfolio recommended in the 80k article, how often did they rebalance and what would your trigger point be for rebalancing? If youāre selling to rebalance in a taxable account, then the capital gains tax is going to eat away at your investment gains.
Run ideas through Portfolio Visualizer and see how it makes you feel. The idea isnāt to chase past performance but more to gut-check how youād feel in the middle of a drawdown and then contrast it to where you end up.
(Note that these comments werenāt my original thoughts, but are from a conversation about investments in which I brought up the asset allocation recommended in Benjamin Toddās article)
This portfolio has nothing to do with chasing past performance. According to standard finance theory (including making a bunch of assumptions about rational investors, zero transaction costs etc.), the global market portfolio is the theoretically optimal portfolio to hold. The idea is that if markets are efficient then you canāt predict which asset classes will outperform, so you should just hold some of everything.
This portfolio doesnāt require any rebalancing. Itās the global market portfolio (or it was as of 2015). If you have 18% in US stocks because they represent 18% of the global market portfolio, and then US stocks go up to 20%, your holdings also go up to 20% so you donāt have to do anything. Although it might still take some work to manage if youāre adding more money to the portfolio on a monthly basis (or whatever) because you need to deploy your new investment in the correct proportions.
Realistically you can get pretty close to the global market portfolio by buying global stocks + global bonds and not worry about the smaller positions. You can do a 2-fund portfolio with 50% VT, 50% BNDW.
1973 to 2013 isnāt arbitrary. 1973 was the chosen start year because thatās the earliest date at which we have good data on global equity returns.
For me (and most people, I suspect), usability is a top value. I used to read the Motley Fool and followed some of their advice. I even bought into their premium service for a year. And I found that I didnāt want to spend my time tracking investments, trying to time things, buy low, sell highā¦
I like the buy-and-hold strategy. I think itās good foundational advice, and you can start to tinker and diversify as you personally see fit.
Thank you for sharing this.
What do you think of this old article from 80,000 hours that argues against investing everything in US equities?
Especially after the recent market volatility, Iām wondering if it makes sense to recommend people invest part of their wealth in bonds and commodities
From the article above:
@Lorenzo Buonannošø you might like the work of Frank Vasquez from Risk Parity Radio. Donāt let the lack of design aesthetic deter you :) Heās made a lot of waves in the FI community pushing for alternative approaches to the 3-fund portfolio.
Thanks for sharing!
I donāt have the necessary expertise to evaluate the portfolios, but I would be curious to know what you usually recommend to the people you advise. Is it closer to all-stocks, 3-fund, or something else? Or is it highly dependent on the specific individual financial situation?
First, I want to be clear Iām not an investment advisor.
But with that out of the way, I almost always lean towards the 3-fund portfolio. Itās easy, low-cost, transparent, and leads to the least amount of speculation. My personal strategy is āset it and forget itā. I rarely look at fund performance, Iām just playing the long game and investing in as many types of assets as possible that require minimal-to-zero effort on my part. With that said, I do tailor my 3-fund strategy to my specific financial situationāitās minimal tailoring, but I focus on my allocations (stocks vs. bonds broadly speaking) and the types of accounts Iām investing in (e.g. 401k vs. regular investment account).
If I am to question this strategy, itās in one of the legs of the 3-fund stool. I have no major qualms with investing in the index funds that represent the stock market (maybe some moral ones but generally speaking not really). Where I pause is with Bond Funds. Stocks are meant to support growth in your portfolio (and maybe dividend payouts). Bonds? Well what are they for? To perform well when stocks are down? To provide consistent cash payments? To stabilize your portfolio? Provide inflation protection? Total Bond funds like BND try to do all of this and as a result kind of do none of this.
So TLDR: I think itās worth considering a more tailored bond strategy that is specific to your financial situation, where as you probably donāt need to be doing this with stocks.
With all that said, the more you tailor the more you speculate!
Agreed that there are other options out there for those who want to invest more time and energy. But itās the 10% case, and what Iāve outlined here was designed for the 90% case. I tried being a more active money manager, and I realized Iād rather spend my time and attention focused on other things š
Anytime someone picks a seemingly pointless and random date range like that they are biasing the results. Bonds had record possibly never to be repeated again returns in 1970s and stopping at 2013 ignores the tail end of this incredibly bull run we are in right now. Pretty sure if someone looked at 1990 to 2020 or 1920 to 2020 this overly complex portfolio wouldnāt compare as well.
2013 cuts off before US shot forward past international. Conversely, international might shoot ahead next time. I think international exposure is good, but also remember that everyone can tell a story with a graph
The numbers look so good because bond rates were much higher in the past than they are now. 10-year Treasuries (for example) were over 10% in the 80s, while now theyāre down below 2%. In the 70ā²s those bonds were giving 15+ percent which will almost certainly never happen again. If you run the same test again but assume bonds max out at a much more realistic rate the performance will be much more in line with the risk (likely less than half the performance of US equalities).
Even if this was an optimal asset mix, most people are probably too lazy to manage something like that even if they could figure out how to set it up. There gets to be a point when the marginal gain for a different asset mix isnāt worth the extra hassle and cost of rebalancing.
For the specific portfolio recommended in the 80k article, how often did they rebalance and what would your trigger point be for rebalancing? If youāre selling to rebalance in a taxable account, then the capital gains tax is going to eat away at your investment gains.
Run ideas through Portfolio Visualizer and see how it makes you feel. The idea isnāt to chase past performance but more to gut-check how youād feel in the middle of a drawdown and then contrast it to where you end up.
(Note that these comments werenāt my original thoughts, but are from a conversation about investments in which I brought up the asset allocation recommended in Benjamin Toddās article)
This portfolio has nothing to do with chasing past performance. According to standard finance theory (including making a bunch of assumptions about rational investors, zero transaction costs etc.), the global market portfolio is the theoretically optimal portfolio to hold. The idea is that if markets are efficient then you canāt predict which asset classes will outperform, so you should just hold some of everything.
This portfolio doesnāt require any rebalancing. Itās the global market portfolio (or it was as of 2015). If you have 18% in US stocks because they represent 18% of the global market portfolio, and then US stocks go up to 20%, your holdings also go up to 20% so you donāt have to do anything. Although it might still take some work to manage if youāre adding more money to the portfolio on a monthly basis (or whatever) because you need to deploy your new investment in the correct proportions.
Realistically you can get pretty close to the global market portfolio by buying global stocks + global bonds and not worry about the smaller positions. You can do a 2-fund portfolio with 50% VT, 50% BNDW.
1973 to 2013 isnāt arbitrary. 1973 was the chosen start year because thatās the earliest date at which we have good data on global equity returns.
Just want to quickly note that that article was written in 2015, so looking at 1973-2013 doesnāt seem that random.
I definitely agree with this, but Iām skeptical that 100% US equities is already at the point where adding some diversification is too costly.
If I understand correctly, donating stocks can be a way to partially offset this that might be useful to keep in mind for EA investors.
That said, Iām really not knowledgeable in this, and it seems plausible that the best way to diversify doesnāt include bonds
For me (and most people, I suspect), usability is a top value. I used to read the Motley Fool and followed some of their advice. I even bought into their premium service for a year. And I found that I didnāt want to spend my time tracking investments, trying to time things, buy low, sell highā¦
I like the buy-and-hold strategy. I think itās good foundational advice, and you can start to tinker and diversify as you personally see fit.