Global Asset Allocation Book Review: Comparing 12+ Expert Model Portfolios

gaafaber(Update: The kindle version of this book is free for a very limited-time. So are two other books Global Value and Shareholder Yield (my review). Supposedly it ends Friday, but not sure if that means Friday morning or night. )

I am a regular reader of Meb Faber’s online writings, and volunteered to received a free review copy of his new book Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies. It is a rather short book and would probably be around 100 pages if printed, but it condensed a lot of information into that small package.

First off, you are shown how any individual asset class contains its own risks, from cash to stocks. The only “free lunch” out there is diversification, meaning that you should hold a portfolio of different, non-correlated asset classes. For the purposes of this book, the major asset classes are broken down into:

  • US Large Cap Stocks
  • US Small Cap Stocks
  • Foreign Developed Markets Stocks
  • Foreign Emerging Markets Stocks
  • US Corporate Bonds
  • US T-Bills
  • US 10-Year Treasury Bonds
  • US 30-Year Treasury Bonds
  • 10-Year Foreign Gov’t Bonds
  • TIPS (US Inflation-linked Treasuries)
  • Commodities (GSCI)
  • Gold (GFD)
  • REITs (NAREIT)

So, what mix of these “ingredients” is best? Faber discusses and compares model asset allocations from various experts and sources. I will only include the name and brief description below, but the book expands on the portfolios a little more. Don’t expect a comprehensive review of each model and its underpinnings, however.

  • Classic 60/40 – the benchmark portfolio, 60% stocks (S&P 500) and 40% bonds (10-year US Treasuries).
  • Global 60/40 – stocks split 50/50 US/foreign, bonds also split 50/50 US/foreign.
  • Ray Dalio All Seasons – proposed by well-known hedge fund manager in Master The Money Game book.
  • Harry Browne Permanent Portfolio – 25% stocks/25% cash/25% Long-term Treasuries/25% Gold.
  • Global Market Portfolio – Based on the estimated market-weighted composition of asset classes worldwide.
  • Rob Arnott Portfolio – Well-known proponent of fundamental indexing and “smart beta”.
  • Marc Faber Portfolio – Author of the “Gloom, Boom, and Doom” newsletter.
  • David Swensen Portfolio – Yale Endowment manager, from his book Unconventional Success.
  • Mohamad El-Erian Portfolio – Former Harvard Endowment manager, from his book When Markets Collide.
  • Warren Buffett Portfolio – As directed to Buffett’s trust for his wife’s benefit upon his passing.
  • Andrew Tobias Portfolio – 1/3rd each of: US Large, Foreign Developed, US 10-Year Treasuries.
  • Talmud Portfolio – “Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.”
  • 7Twelve Portfolio – From the book 7Twelve by Craig Israelsen.
  • William Bernstein Portfolio – From his book The Intelligent Asset Allocator.
  • Larry Swedroe Portfolio – Specifically, his “Eliminate Fat Tails” portfolio.

Faber collected and calculated the average annualized returns, volatility, Sharpe ratio, and Max Drawdown percentage (peak-to-trough drop in value) of all these model asset allocations from 1973-2013. So what were his conclusions? Here some excerpts from the book:

If you exclude the Permanent Portfolio, all of the allocations are within one percentage point.

What if someone was able to predict the best-performing strategy in 1973 and then decided to implement it via the average mutual fund? We also looked at the effect if someone decided to use a financial advisor who then invested client assets in the average mutual fund. Predicting the best asset allocation, but implementing it via the average mutual fund would push returns down to roughly even with the Permanent Portfolio. If you added advisory fees on top of that, it had the effect of transforming the BEST performing asset allocation into lower than the WORST.

Think about that for a second. Fees are far more important than your asset allocation decision! Now what do you spend most of your time thinking about? Probably the asset allocation decision and not fees! This is the main point we are trying to drive home in this book – if you are going to allocate to a buy and hold portfolio you want to be paying as little as possible in total fees and costs.

So after collecting the best strategies from the smartest gurus out there, all with very different allocations, the difference in past performance between the 12+ portfolios was less than 1% a year (besides the permanent portfolio, which had performance roughly another 1% lower but also the smallest max drawdown). Now, there were some differences in Sharpe ratio, volatility, and max drawdown which was addressed a little but wasn’t explored in much detail. There was no “winner” that was crowned, but for the curious the Arnott portfolio had the highest Sharpe ratio by a little bit and the Permanent portfolio had the smallest max drawdown by a little bit.

Instead of trying to predict future performance, it would appear much more reliable to focus on fees and taxes. I would also add that all of these portfolio backtests looked pretty good, but they were all theoretical returns based on strict application of the model asset allocation. If you are going to use a buy-and-hold portfolio and get these sort of returns, you have to keep buying and keep holding through both the good times and bad.

Although I don’t believe it is explicitly mentioned in this book, Faber’s company has a new ETF that just happens to help you do these things. The Cambria Global Asset Allocation ETF (GAA) is an “all-in-one” ETF that includes 29 underlying funds with an approximate allocation of 40% stocks, 40% bonds, and 20% real assets. The total expense ratio is 0.29% which includes the expenses of the underlying funds with no separate management fee. The ETF holdings have a big chunk of various Vanguard index funds, but it also holds about 9% in Cambria ETFs managed by Faber.

Since it is an all-in-one fund, theoretically you can’t fiddle around with the asset allocation. That’s pretty much how automated advisors like Wealthfront and Betterment work as well. If you have more money to invest, you just hand it over and it will be invested for you, including regular rebalancing. The same idea has also been around for a while through the under-rated Vanguard Target Retirement Funds, which are also all-in-one but stick with simplicity rather than trying to capture possible higher returns though value, momentum, and real asset strategies. The Vanguard Target funds are cheaper though, at around 0.18% expense ratio.

Well, my portfolio already very low in costs. So my own takeaway is that I should… do nothing! :)

Alpha Architect also has a review of this book.

TopCashBack: Shopping Portal That Promises Highest Payout

topcashnew

Update: There is a limited-time offer for new customers that gets you $9.90 cash back from Wal-Mart when you buy a 138 fl oz bottle of Tide liquid laundry detergent for $8.97 with free in-store pickup. Ends 7/8/15.

Visit Walmart through TopCashback, purchase a jumbo 138 fl oz bottle of Tide ‘Clean & Fresh’ (either in ‘Daybreak Fresh’ or ‘Freshing Breeze’ scent) or ‘Clean & Sensitive’ (in ‘Cool Cotton’ scent) liquid laundry detergent priced at $8.97 and within seven days $9.90 cashback will have posted in your TopCashback account.

In-store pick-up, subject to the item’s availability at the location, is free. The $9.90 should cover the cost of the product and any sales tax you may possibly be charged, effectively making the huge bottle of laundry detergent a fantastic freebie!

Within 21 days the $9.90 will turn payable and can be credited straight to your checking or PayPal account. Alternatively you could opt to be paid in an Amazon .com Gift Card, which with its 2.5% bonus on top would mean you’d get $10.14 instead of $9.90.

Original post:

When you shop online these days, it’s become habit to search out a coupon or go through a shopping portal that gives a percentage back on purchases made through their links. Well, talk about a race to the bottom. Instead of rebating you part of their merchant commission, TopCashBack.com promises to rebate you all of it (and make money via ads on their website). In addition, they even have no minimum payout threshold. You wouldn’t think that would be a viable business model, but the company is already the #1 cashback site in the UK so apparently it works for them.

For example, I get over 1% back on eBay purchases. You can also get your payouts in Amazon gift certificates with a 2.5% increase in value.

If you aren’t already a member, some other portals also offer sign-up bonuses:

  • eBates ($10 new user bonus after any $25+ purchase, $5 mininum cash-out)
  • Mr. Rebates ($5 new user bonus, $10 minimum cash-out)

Sometimes one of these sites may privately negotiate a higher payout temporarily, so TopCashBack may not always be the highest. Also, if you use miles or points, you may prefer getting 2 points/miles per dollar back as opposed to 2 cents per dollar back. For example, I’ve been warming up to the UltimateRewards Mall (must first have a Chase Sapphire, Chase Freedom, or Chase Ink card) as 1 Ultimate Reward point is worth 1.25 cents towards travel or converts to 1 United or British Airways mile.

Snagshout: Discounted Amazon Products In Exchange For Honest Reviews

thermo

If you're like most Amazon shoppers, you don't like buying anything unless it has a lot of positive 4 and 5 star reviews. But that makes it really hard for new brands and products to gain traction. Good ole' capitalism has created a new breed of … [Read the rest]

Current Amex Special Offers: Target, Wal-Mart, BJ’s Warehouse, iTunes (Targeted)

amexoffers

Updated 7/1/15. American Express cardholders can participate in "AmEx Offers" which offer discounts to various merchants. These promotions often offer the opportunity for easy savings without changing your spending habits. Sometimes I just buy a … [Read the rest]

My One-Page Financial Plan: Why Is Money Important To Me?

onepageplan1

I've already shared two nuggets from the book The One-Page Financial Plan by Carl Richards - the importance of getting started and the true value of a human advisor. But what about the title itself? Before even reading the book, I was impatient … [Read the rest]

5% Cash Back Credit Cards: Rotating Categories Update 2015

discoverit

3rd quarter activation for 2015 now open! The credit cards below offer a hefty 5% cash back on certain categories that rotate each quarter. It takes a little extra attention, but I also rack up over a hundred dollars in additional rewards per year … [Read the rest]

Why I Hold TIPS in My Portfolio (Treasury Inflation-Protected Securities)

EconompicData has a nice, relatively brief post about the relationship between US Treasury bonds, TIPS, and inflation. I would hold either Treasuries or TIPS (or both) because they have the highest credit quality available, and that is a big part … [Read the rest]

Best Frugal Chef’s Knife – America’s Test Kitchen (For 20 Years In a Row!)

cooks

Update: ATK just sent me a new review that considered newer chef's knives that have come onto the market, and the same knife won again! They say it has now been on top for 20 straight years. You can see the methodology and full rankings here, but … [Read the rest]

Early Retirement Portfolio Income Update, Mid 2015

The closer I get to the reality of living off of my portfolio, the more I like the idea of living off dividend and interest income. However, you can't just buy stocks with the highest dividend yields and junk bonds with the highest interest rates … [Read the rest]

Early Retirement Portfolio Asset Allocation Update, Mid 2015

1506aa

Here's a mid-year update on my investment portfolio holdings for 2015. This includes tax-deferred accounts like 401(k)s and taxable brokerage holdings, but excludes things like physical property and cash reserves (emergency fund). The purpose of … [Read the rest]

The Most Important Factor To Maximize In Your Portfolio

wrench

When it comes to constructing an investment portfolio for yourself, there are many things you could tweak and maximize. Obviously, you can look back at historical data and maximum past annual returns while minimizing volatility. For some, this … [Read the rest]

Liquidating My LendingClub Loans Using Folio Investing

lctradeing5

I recently finished liquidating the remaining loans in my $5,000 LendingClub P2P portfolio, but due to a unfortunate crash I lost many of my notes and screenshots. I can still share the most important parts like my final results and selling … [Read the rest]