So, was lately thinking about this portfolio, and its flaws (not talking about Dalio's, but the way Tony Robbins, if I´m not mistaken, put in his book). If I understand correctly, the allocation per asset classes imply equal risks, right? That's why equities are only 30%, while bonds in total are 55%. Yet, wouldn´t this assume risk is static over time? Is it, really?

What made me think a bit deeper about this is valuation. It's obviously a risk factor, and as such should enter the calculations when designing this type of portfolio. For equities for example, maybe the allocations should vary according to CAPE or other similar variable? For long term bonds, maybe using some mean regression estimations?

And I know the dumb Robbins portfolio backtested well, but I also know there was a big tail wind for bonds during the timeframe he chose. Considering what I put above, if correct, this hardly sounds like something a passive investor could do, only care to rebalance maybe yearly or twice yearly, forget and expect to always get good risk adjusted returns.

What do you guys think? Anyone ever wondered about portfolio construction, especially the nits more worried with capital preservation than growth?

I'm definitely interested in portfolio construction. The theory that bonds are a risk safehaven was debunked in 2020 when you had both the stock market and bonds fall in a major crash and recession. How do we know this won't be the case every stock market crash going forward? Two years now. Even now with the stock market falling bonds are falling right with them.

Now we have the prevalence of quantitative strategies at the big institutions whose job it is to find the tiniest spreads between assets for profit. Asset class parity is the new normal in my opinion. The bonds in the past would only protect during those major crash years for the most part. The rest of the time you are just underperforming stocks.

https://blogger.googleusercontent.co..._vs_bonds.webp

But I know you are asking more about volatility. The 5% of a portfolio in gold backtests show it smooths out portfolio volatility well but I'm not sure it will continue.

The conservative portfolio of equal or more bonds is nothing new. The idea behind it is as someone gets older you gradually increase bonds and reduce stocks. So, in retirement this persons portfolio is "risk free" and getting income. Personally I like very high dividend stocks and ETFs instead of the bonds as I'm building. Peter Lynch did a study on dividend stocks as an alternative to bonds for income and return and it was better or similar to bonds. But it's all about individual risk profile in my opinion. It's about what makes you comfortable to sleep at night in the end right? Some people are fine 100% stocks and won't panic sell in the crash others will panic sell with 40% stocks or less. It's all about individual risk tolerance. But I think you understand this just wanted to make the point for other people reading. It really opened me up to investing for dividends. Personally I'm ok with stocks as long as they have dividends to offset. So they are like bonds to me. I read Marc Lichtenfeld's Get Rich with Dividends: A Proven System for Earning Double-Digit Returns. It really opened me up to investing for dividends. Personally I'm ok with stocks as long as they have dividends to offset. So they are like improved bonds to me.

https://www.amazon.com/Get-Rich-Divi...89962620&psc=1

If hedging risk is the goal the most logical way to do it is to hedge straight up against stocks. Retired money manager Puru Saxena came up with a method of straight hedging his growth stocks by shorting futures outright using a trend following system. He backtested it over 100 years. He has a few Twitter threads on it. I think he made a tweak lately. He has youtube interviews on it too. I haven't used this system and can't vouch for it but I think this is the route to go if you want to be more than total passive which it sounds like you are smart enough to do and want to do.

https://twitter.com/saxena_puru/stat...569024?lang=en

https://twitter.com/saxena_puru/stat...412800?lang=en

More on that Saxena method. He mentioned he hedged with ARK ETF short then. I've seen him mention the straight hedge with Nasdaq futures NQ more often lately and to me that seems like a better vehicle.

OP
Imho the all weather portfolio did great in the last 40 years (ex-last 2 years) because you were in a deflationary period where interest rates keep going down in market turmoil .
So bonds are a great edge to stocks in that environment.

Last 2 years you had big inflation wich render bonds less useful .
You can’t drop rates during inflationary period so bonds act like stocks in those periods .
Even worst they need raise rates when inflation still has upside , hurting bonds even more .

If you really want to sleep at night and really focus on preserving your wealth instead of aiming at make money in this unpredictable environment you should look into the permanent portfolio instead.

Ps: a good alternative to long bonds would be reits.

All Seasons hasn't even outperformed a simple 60/40 over the last 15 years, let alone over the past 40 years. Check it out on portfolio visualizer if you want.

Permanent Portfolio has performed worse than both.

Hi,
first off i was responding specifically to this from OP


i was not implying the permanent portfolio was the best build to maximize growth .


Second i dont see how we disagree much, especially when u care about only the last 40 years.


when u got bonds at 15% 40 years ago and u bring it down to literally 0% during that time span it isnt really hard to conclude that bonds and stocks will have a huge run.

Not forgetting during that time bonds and stocks, got bailed out many time with QE instead of getting destroyed.....

when u look in the 1970s the 60/40 do not seem to have been great because of inflation and raising rates which the permanent portfolio is aim at protecting vs this as well, not to bother much about your investment for nit.

yes u will have less of a return but u wont suffer massive draw down either.

fwiw i believe if u think inflation will win the battle vs deflation in the next 5-10 years, it might a good idea to diverge from the 60/40 portfolio.

If you think inflation will win the battle, then why would you want to go to the permanent portfolio with a 25% allocation of cash? You also said bonds were hurt more in an rising rate/increasing inflation environment, yet you want to go to the permanent portfolio which is 25% long term treasuries?

Because in a volatile environment everything can happen and big swing of inflation/deflation can happen during those times .
The great thing about this portfolio , you will always have a 25% of your portfolio that will do great to mitigate the losses .
It is clearly more of a defensive strategy then a attacking strategy but in the very unstable environment we seem to go to , focusing on preserving capital first , seem a good idea .

I’m not necessarily advocating a permanent portfolio for the future ,
I’m just saying it probably will do better then a 60/40 if inflation do persist .
There is probably better build out here if you are sure inflation will dominate and aim at maximizing your return .

For OP perspective I believe it is was what he was aiming at .
Keeping it simple and solid while still squeezing some return .

Ps: I did said in my first reply replacing long term with some reit should be something to think about .
A mix of the the 2 could be advisable due to higher interest rates for inflation but
u get some upside from the RE.

Thank you guys, just would like to add a few points:

DJI in Aug, 1929: 380.33
DJI in Aug, 2022: 31,510.44

4.86% cagr

DJI in Aug, 1932: 73.16
DJI in Aug, 2022: 31,510.44

6.97% cagr


So, even in the very long term, depending on how wild the market gets, when we do buy matters for our long term returns. And in the long run, we are all dead

* I don´t need to tell you guys that the difference in returns in realistic investing horizons was way more brutal than this right?

We can´t time the market, but we have all the tools to know we are in a huge bull market, or we are in a big bear market, just by looking at a graph, and can adjust our exposures, for example like Intelligent Investor's 50/50, 75/25 or 25/75.

The type of risk I wanted to bring here wasn´t exactly monthly std deviations or so, which are ofc real and important if you, for example, withdraws from your portfolio to survive, but the drawdown risk, which increases as the market goes up and decreases as it goes down. I should have made this point a bit more clearer in my first post.

Yet even Ben Graham's stocks/bonds allocation are in danger nowadays


Diverging a little bit from the main topic, I find interesting that people were more or less assuming the low inflation/low interest rates thing would be the norm forever. Pretty sure if internet forums were a thing in 1979, the talk would be a bit different lol. I would be careful in discarding one portfolio and embracing the other only bc the other outperformed. Even not really being a nit at all

Cheers

My, still untested, view is that this truer all weather portfolio that uses valuations to increase/decrease exposures per asset classes wouldn´t experience bigger drawdowns (most likely they would be way smaller), it´s monthly stddev would be higher but not that much higher, and the returns would be considerably higher, hence higher risk adjusted returns.

Just need to model this, get the historical data and test it.

Not saying I´m wrong because someone else thinks differently and he's smart so he must be right, or right because someone else thinks differently and he's part of the crowd and the crowd is always wrong, but.....

Ofc Dalio, Browne etc didn´t think this way, and my humble self thinks there is a possibility my reasoning is at least a bit flawed. Hence bringing the subject to a public forum with smart people from around the world

Cheers

So the portfolio rules would buy and sell based off standard valuation like PE ratio? That's like crystal ball level market timing. One factor would be the nature of baseline level PE ratios to seem to increase over time. But the root problem with using valuation is the market is always forward looking and you can have many years of high PE levels but continued high returns from companies. Take for example 2009. The avg PE ratio on the year was a staggering 70 times earnings on the S&P. Overvalued? No that was the start of a bull market because the market was forward looking and ahead of the earnings coming back strong. In the 90s PE ratios were high for years because market sentiment was bullish a long time. But yeah you could smooth out volatility with valuation but definitely not risk adjusted returns from everything I've read. Stick around. I know there are atleast a couple people here who can code a system with rules like that. But I've read about this debate before about using valuation and its tricky bc of what I mentioned. What exactly are the valuation rules you would incorporate? What would the CAPE levels be and how would they work?

https://money.stackexchange.com/ques...gh-on-may-2009

I think it was in the Intelligent Investor book, on one of the commentary sections by Jason Zweig, that he brought a study of CAPE ratios and subsequent 10 year market returns.

I believe that, as long as we always have some allocation to equities, the market timing thing wouldn´t matter that much, assuming history will keep repeating itself over and over again.

One caveat here is that all other assets in the portfolio fluctuate, correlations change etc. I probably should start with equities and cash maybe

You might benefit from doing an in-depth risk profile and take into account your age and time horizon. Do a couple like this one

https://retirementplans.vanguard.com...7Q09-A0BC-MTTL

Non-profit AAII profile for asset allocation. I was an AAII member for a long time and it is a good resource. If you are interested in Graham they run a model portfolio "Shadow Stock Portfolio" based on deep asset value among other metrics. It outperformed the indices for many decades.

https://www.aaii.com/asset-allocation

A lot of people on this forum liked bogleheads for planning too.

You could try using Google. I am sure that there are articles that explore whether your hypothesis is correct. This saves a lot of time.