This idiot-proof portfolio has beaten traditional stocks and bonds over 50 years

Do you have the right portfolio for your retirement savings?

When it comes to long-term investing, the most important problem, by far, is the global allocation of assets: in terms of stocks, sectors, assets, and so on. Choosing individual securities within these asset classes (individual or bond stocks, for example) is often much less important.

The most common reference is the so-called “balanced” portfolio known as 60/40: 60% shares, 40% bonds. It is the model that pension fund managers around the world follow. The theory is that stocks will outperform in the long run, while bonds will provide some stability.

And it’s done pretty well overall, especially at the time since the early 1980s, as inflation and interest rates have fallen, and stocks and bonds have risen. But what about the other periods?

Doug Ramsey, Leuthold Group’s chief investment officer in Minneapolis, is also following up on something different. As mentioned earlier, it is called the “All Assets, No Authority” portfolio and consists of equal investments in 7 asset classes: shares of large U.S. companies, the S&P 500 SPX Index. ,
+ 2.39%,
Shares of small US companies, using the Russell 2000 RUT Index,
+ 3.06%,
shares of developed international markets in Europe and Asia, through the so-called EAFE index, 10-year Treasury bonds, gold, commodities and US real estate investment trusts.

Anyone who wants to follow this portfolio is not a recommendation, just an observation, you could easily do this using 7 low-cost traded funds, such as the SPDR S&P 500 SPY,
+ 2.39%,
iShares Russell 2000 IWM,
+ 3.17%,
Vanguard FTSE Developed Markets VEA,
+ 2.81%,
iShares 7-10 years of IEF Treasury bonds,
SPDR GLD Gold Shares,
Invesco DB Commodity Index Tracking Fund DBC,
+ 1.37%
and Vanguard Real Estate VNQ,
+ 2.64%.

It’s a smart idea. Try to get out of our current era, arguing that the future may not look like the last 40 years. And it’s foolproof, because it takes all the control out of the hands of individuals. It allocates equal amounts to all major asset classes, while not making a big bet on any.

Ramsey has looked at how this portfolio has been (or should have been) since the early 1970s. You can see the results above, compared to a 60/40 portfolio of 60% invested in the S&P 500 and 40% invested in 10-year US Treasury bonds. Both portfolios are rebalanced at the end of each year. Note: The numbers have been adjusted for inflation, showing “real” returns in constant US dollars.

They skip several things.

First, the All Asset No Authority has produced higher total returns over the last half century than the 60/40. (It has outperformed the S&P 500, much more volatile, but much less than you might think).

Second, this superior performance (as you can imagine) was really due to the 1970s, when gold, commodities, and real estate went well.

Third, while AANA did better in the 1970s, it still did quite well even during the era of rising stocks and bonds. Since 1982, it has achieved an average real return of 5.7% per year, compared to just under 7% of the 60/40 portfolio (and just over 8% of the S&P 500).

But fourth, and probably most interesting: AANA’s portfolio has been lower risk, at least measured in some way. Instead of looking at the standard deviation of yields, I’ve looked at actual yields at 10 years because that’s what matters to real people. If I have a portfolio, what better situation will I have in 10 years and, most importantly, what is my likelihood of losing ground?

Maybe this is too gloomy a way to look at things. Maybe it’s a reflection of the current sale.

However, I have found that in almost half a century AANA has never produced a negative real return in 10 years. The worst performance was 2.6% above annual inflation, which was in the 10 years to 2016. This still generated a 30% increase in your purchasing power over a decade. Meanwhile, a 60/40 fund (and a 100% allotment to the S&P 500) over a couple of 10-year periods has made you lose money in real terms, and in some other cases it has cost you less than 1%. annual above inflation. . (Excluding fees and taxes, of course.)

Ramsey notes that throughout this period, this All Asset No Authority portfolio has generated average annual returns of less than half a percentage point less than the S&P 500, with nearly half of its annual volatility. According to my calculations, average returns have exceeded a portfolio of 60/40 by more than half a percentage point per year.

As usual, this is not a recommendation, just information. Do whatever you want.

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