A Survey of 15 Top Asset Allocation Strategies

[MachineGhost]

Including the Permament Portfolio.  You can get the eBook for free if you promise to write a review: http://freebook.mebfaber.com/

[ILoveMoney]

Thanks for posting MG.

How can I get this? I entered my name and email and all I get is. "Thank You! Your form has been submitted."

No email, nothing.... can you perhaps upload the book to mediafire or another file host and share it here, if you have it?

[Pointedstick]

Is "random-ass guessing" in the top 5?

[MachineGhost]

How can I get this? I entered my name and email and all I get is. "Thank You! Your form has been submitted."

Give it time.  Faber will send you a $2.99 Amazon gift card you can use to purchase the eBook.  Also, his other two eBooks are free for another two days

Hmm, only a .91% annual real return from 1973 to 1981 for the PP?  That really sucks!  I'm guessing riding the gold bubble pop down really gutted the PP.

[Ad Orientem]

How can I get this? I entered my name and email and all I get is. "Thank You! Your form has been submitted."

Give it time.  Faber will send you a $2.99 Amazon gift card you can use to purchase the eBook.  Also, his other two eBooks are free for another two days

Hmm, only a .91% annual real return from 1973 to 1981 for the PP?  That really sucks!  I'm guessing riding the gold bubble pop down really gutted the PP.

1981 was a pretty brutal year for every asset except cash. When the Fed jacks interest rates that much there is just no where to hide. Peak to trough shows a CAGR of 13.02% for Jan 1 1973 - Jan 1 1981 (12.99% if you reinvest the dividends) with rebalancing bands at 15/35. If you take that out to Jan 1 1982 the CAAGR drops to 10.48% and 10.61% respectively.

[dragoncar]

How can I get this? I entered my name and email and all I get is. "Thank You! Your form has been submitted."

Give it time.  Faber will send you a $2.99 Amazon gift card you can use to purchase the eBook.  Also, his other two eBooks are free for another two days

Hmm, only a .91% annual real return from 1973 to 1981 for the PP?  That really sucks!  I'm guessing riding the gold bubble pop down really gutted the PP.

I got it the next day, but haven't downloaded it yet.  Can I use the card for something else? :-P

edit: it looks like you can use it for anything.  Kinda strange.  But I guess I'll get the book.  SIGH

[MachineGhost]

The only portfolio that actually beats the PP on a risk/reward basis and the 70's is Swedroe's, though its hard to tell what returns is for the Fat Tail Minimization Portfolio and some other one.  I think clive of infamy was into that before he left the forum.  Of course, there were no TIPS in the 70's, so its all hindsight.  However, I think we could probably learn something from Swedroe to enhance the PP or to put into a VP for the purists.

Doom porner Faber also beats the PP but thats only because he was 50% weighted to real assets for the 70's.  That's clearly a huge macro tilt, so it doesn't count.

[MachineGhost]

Not sourced from the book but FT (paywall).

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[Kbg]

A couple of real stand outs ref PP...

1. Has the worst real returns of any portfolio

2. It has basically under performed everything else since 1994

3. Does not do well (comparatively) in anything other than a highly inflationary environment

4. Has very low (comparatively) volatility

I personally do not believe a PP is all that great for someone younger trying to build wealth. An older set is probably well served by it. I think it is an outstanding approach with some engineering either via leverage or some minor percentage adjustments for unleveraged. ( But now I'm predicting.  )

Ref the overall book...

1. Wow...only a 1.84 CAGR from worst (PP) to best (El-Erian) (makes all the hand wringing we see on the board and others quite funny to think about)

2. Excellent point about costs really being the thing that matters

[craigr]

I need to read the book, but don't want to get on any junk lists so I've not signed up yet.

Volatility is a killer for most investors. They can't handle it and will almost always bail. I've seen it over and over again. The high flying strategies had tremendous volatility. In 2008 it looks like -40% declines. I know very few people why are going to sit by and watch a 40% decline. This even includes pros. They are going to bail and then they have the problem of when to get back in.

Most people do not match market returns because they are constantly going in and out of the market, changing strategies, etc. It is a huge problem for individual investors and even the pros again. If you can stick with a simple 60/40 strategy and keep costs low that's great. Same for the PP. Same for something else. But that volatility really smokes out a lot of people and that's often where they get hammered.

Also keep in mind that 1980-2000 was the biggest baddest stock bull market in U.S. history. It really skews the numbers. These kinds of charts look a lot different if you go outside the U.S. where stock markets have not done as well.

I think a stable portfolio is a great way to invest because it means investors will stay in the game longer and it's time that is their biggest ally. If they are in something volatile they will bail (just like anyone else), and that's where the problems start. I have known people that got burned in the Tech bust in 2001, and again in 2008 and just stay out of the market entirely as a result. That's really bad news but was a result of taking huge losses from volatile portfolios.

Sadly, spreadsheet data does not have a formula expression for this:

=REALRETURNS(EMOTIONS(SUM(A1:A36)))

If that formula did exist, I bet we'd see a lot more realistic returns from many portfolios.

[gizmo_rat]

The subtle one is the fees, it's very easy to sleepwalk into high fees just by taking professional advice, then being guided into actively managed funds. At no point is anyone actually ripping your face off, you're just buying into sub PP returns with eye watering volatility.

There's a nicely balanced riff on fees, arising from Faber's booklet here:

http://monevator.com/costs-trump-the-be ... decisions/

To paraphrase, for the competitive consumer 2.25% is a small price to pay to have the #1 performing portfolio

[Kbg]

I need to read the book, but don't want to get on any junk lists so I've not signed up yet.

Volatility is a killer for most investors. They can't handle it and will almost always bail. I've seen it over and over again. The high flying strategies had tremendous volatility. In 2008 it looks like -40% declines. I know very few people why are going to sit by and watch a 40% decline. This even includes pros. They are going to bail and then they have the problem of when to get back in.

Most people do not match market returns because they are constantly going in and out of the market, changing strategies, etc. It is a huge problem for individual investors and even the pros again. If you can stick with a simple 60/40 strategy and keep costs low that's great. Same for the PP. Same for something else. But that volatility really smokes out a lot of people and that's often where they get hammered.

Also keep in mind that 1980-2000 was the biggest baddest stock bull market in U.S. history. It really skews the numbers. These kinds of charts look a lot different if you go outside the U.S. where stock markets have not done as well.

I think a stable portfolio is a great way to invest because it means investors will stay in the game longer and it's time that is their biggest ally. If they are in something volatile they will bail (just like anyone else), and that's where the problems start. I have known people that got burned in the Tech bust in 2001, and again in 2008 and just stay out of the market entirely as a result. That's really bad news but was a result of taking huge losses from volatile portfolios.

Sadly, spreadsheet data does not have a formula expression for this:

=REALRETURNS(EMOTIONS(SUM(A1:A36)))

If that formula did exist, I bet we'd see a lot more realistic returns from many portfolios.

So true...

HB's Best Laid Plans book is one of the best books I've read on investing...I liked how he said it was ok to go with a bias around a core and I think Meb's book makes the case it doesn't matter all that much. Asset mix does matter with performance and the macro environment.

[LC475]

I need to read the book, but don't want to get on any junk lists so I've not signed up yet.

Then why not just pay the three dollars?

http://www.amazon.com/Global-Asset-Allo ... B00TYY3F3C

[dragoncar]

I need to read the book, but don't want to get on any junk lists so I've not signed up yet.

Then why not just pay the three dollars?

http://www.amazon.com/Global-Asset-Allo ... B00TYY3F3C

Three whole dollars?  Have you seen the PP performance recently???

[MachineGhost]

Not just fees, but taxes as well.  We really ought to be more aggressive about those.  Pity it takes too much work or expensive structuring/tax sheltering.

I think what I'd like to see is an automated roboadviser like WealthFront offering up the PP rather than the staid academic baloney.  I would be willing to pay .25% a year after the first $10K to have these extra yearly gains:

Tax-Loss Harvesting +1.0%
Automatic Rebalancing +0.4%
Tax-Aware Allocation +0.6%

The major downside is continuous tax-loss harvesting is only available on accounts >= $100K.

[Kbg]

Not just fees, but taxes as well.  We really ought to be more aggressive about those.  Pity it takes too much work or expensive structuring/tax sheltering.

I think what I'd like to see is an automated roboadviser like WealthFront offering up the PP rather than the staid academic baloney.  I would be willing to pay .25% a year after the first $10K to have these extra yearly gains:

Tax-Loss Harvesting +1.0%
Automatic Rebalancing +0.4%
Tax-Aware Allocation +0.6%

The major downside is continuous tax-loss harvesting is only available on accounts >= $100K.

I would think continuous tax loss harvesting would be very difficult with a PP unless you were willing to expand your definitions of appropriate bonds, appropriate stocks and be willing to swap out gold with some other real asset. Wash rules still apply. With stocks not a big deal because correlations are so high you could make the case you were going into a different asset when you swapped. Could probably make the case with bonds as well by substantively changing duration/type. Otherwise, not sure how it would be done. I think you would need more than four assets (stock/bond/real asset types). Maybe this issue is what drives multiple ETF types in the robos? Also wonder what a tax attorney would say about something like GLD vs. UGLD?

[MachineGhost]

Well now, Schwab is now providing what WealthFront does but for free.

https://intelligent.schwab.com/

Still doubtful you can customize it for a PP.  Need only >= $50K for continuous tax loss harvesting.

EDIT: Here's a look at the composition of the portfolios: http://www.etf.com/sections/blog/schwab ... lios-x-ray

[Mark Leavy]

I would think continuous tax loss harvesting would be very difficult with a PP unless you were willing to expand your definitions of appropriate bonds, appropriate stocks and be willing to swap out gold with some other real asset. Wash rules still apply.

Stocks - swap between VTI and SPY.
Bonds  - hold individual bonds and move between bonds with a couple of years or interest point difference.
Gold    - hold physical.  No wash sale rules.  You can sell and buy back from your brother with no spread.

[dragoncar]

I would think continuous tax loss harvesting would be very difficult with a PP unless you were willing to expand your definitions of appropriate bonds, appropriate stocks and be willing to swap out gold with some other real asset. Wash rules still apply.

Stocks - swap between VTI and SPY.
Bonds  - hold individual bonds and move between bonds with a couple of years or interest point difference.
Gold    - hold physical.  No wash sale rules.  You can sell and buy back from your brother with no spread.

I recently rebalanced my bonds at TD Ameritrade and saw a ridiculous spread.  Like .4% below the price Fidelity was offering. Ugh.  TD had a system called "request bids" or something like that.  I didn't find much if any discussion on this concept online.  The first bid was terrible and a second one didn't materialize within a couple hours.  I canceled my request, resubmitted, and the next bid was a little better.  I know this is offtopic, but what are you supposed to do here?  Just not buy individual bonds with TD?

[Mark Leavy]

I recently rebalanced my bonds at TD Ameritrade and saw a ridiculous spread.  Like .4% below the price Fidelity was offering. Ugh.

Ouch.
I use Vanguard for bonds.  The spreads are tight.  No commission.  The user interface sucks.

[dragoncar]

I recently rebalanced my bonds at TD Ameritrade and saw a ridiculous spread.  Like .4% below the price Fidelity was offering. Ugh.

Ouch.
I use Vanguard for bonds.  The spreads are tight.  No commission.  The user interface sucks.

Yeah, I didn't have a choice in the broker (401k window), but we're switching to Schwab so hopefully this aspect improves. 

[MachineGhost]

I recently rebalanced my bonds at TD Ameritrade and saw a ridiculous spread.  Like .4% below the price Fidelity was offering. Ugh.  TD had a system called "request bids" or something like that.  I didn't find much if any discussion on this concept online.  The first bid was terrible and a second one didn't materialize within a couple hours.  I canceled my request, resubmitted, and the next bid was a little better.  I know this is offtopic, but what are you supposed to do here?  Just not buy individual bonds with TD?

Markups and Markdowns

Broker-dealers who hold bonds in inventory increase or “mark up”? the price when a customer buys a bond from them, and reduce or “mark down”? the price when a customer sells a bond back to them. This markup or markdown is built into the customer’s price rather than identified separately.

This pricing method of these so-called “principal”? transactions is similar to that used by any retail store. A store that sells stereos, for example, will buy a stereo from the manufacturer for one price and sell it to the customer for a higher price. Built into the difference or markup is the store owners’ proportional cost of rent and other overhead, the salaries of the salespeople, some compensation for the risk that the price may have to be reduced if the stereo doesn’t sell, and a profit for themselves. The person who buys the stereo does not know the amount of the markup, but can shop around for the best price.

Bond dealers face virtually the same issues: they have overhead costs, they need to pay their salespeople, they face the risk that interest rates or market conditions might cause a bond they hold in inventory to decline in value, and they need to make a profit. Their markups and markdowns may also be affected by the size of the transaction—the larger the amount, the lower the cost—and the liquidity of the security. Bonds that trade frequently should have lower markups and markdowns than thinly traded securities.

Both the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) have rules governing how much a broker-dealer can mark up (or mark down) the price of a bond he or she sells (or buys from) you.

You can sometimes estimate the amount of the markup if you know the “bid-ask”? spread, or the difference between a price a dealer is willing to pay for a bond (the bid) and the usually higher price the dealer is willing to sell the same bond for (the ask).

Commissions

Brokers who are not also dealers or who do not have the particular bond you want in inventory will have to go into the marketplace to get it. In this case, the broker acts as an agent rather than as a principal, and the trade is sometimes called an agency transaction. In most cases, brokers will charge investors commissions on agency transactions, and the amount of the commission will be identified on the trade confirmation. (Remember, though, the agency broker also pays a markup to the dealer selling the bond.) Sometimes the commission will be based on a percentage of the bond’s price, and this percentage may decline as the size of the transaction increases. Other times, especially in the case of a discount or on-line broker, the commission may be a flat fee.

Keep in mind that the markup or commission is the fee imposed by the brokerage firm; the individual broker you work with will get a portion of that amount.

The bottom line is that you want the best price, and the broker you work with deserves to be compensated. To get the best price, you may have to shop around. Or you may decide that the service you receive from your broker is worth a higher price. If you build a relationship with a particular broker, you may also find that your transaction costs can be negotiated.

[MachineGhost]

Hey techo, any chance you could build in those WealthFront features into your software?

[dragoncar]

I recently rebalanced my bonds at TD Ameritrade and saw a ridiculous spread.  Like .4% below the price Fidelity was offering. Ugh.  TD had a system called "request bids" or something like that.  I didn't find much if any discussion on this concept online.  The first bid was terrible and a second one didn't materialize within a couple hours.  I canceled my request, resubmitted, and the next bid was a little better.  I know this is offtopic, but what are you supposed to do here?  Just not buy individual bonds with TD?

Markups and Markdowns

Broker-dealers who hold bonds in inventory increase or “mark up”? the price when a customer buys a bond from them, and reduce or “mark down”? the price when a customer sells a bond back to them. This markup or markdown is built into the customer’s price rather than identified separately.

This pricing method of these so-called “principal”? transactions is similar to that used by any retail store. A store that sells stereos, for example, will buy a stereo from the manufacturer for one price and sell it to the customer for a higher price. Built into the difference or markup is the store owners’ proportional cost of rent and other overhead, the salaries of the salespeople, some compensation for the risk that the price may have to be reduced if the stereo doesn’t sell, and a profit for themselves. The person who buys the stereo does not know the amount of the markup, but can shop around for the best price.

Bond dealers face virtually the same issues: they have overhead costs, they need to pay their salespeople, they face the risk that interest rates or market conditions might cause a bond they hold in inventory to decline in value, and they need to make a profit. Their markups and markdowns may also be affected by the size of the transaction—the larger the amount, the lower the cost—and the liquidity of the security. Bonds that trade frequently should have lower markups and markdowns than thinly traded securities.

Both the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB) have rules governing how much a broker-dealer can mark up (or mark down) the price of a bond he or she sells (or buys from) you.

You can sometimes estimate the amount of the markup if you know the “bid-ask”? spread, or the difference between a price a dealer is willing to pay for a bond (the bid) and the usually higher price the dealer is willing to sell the same bond for (the ask).

Commissions

Brokers who are not also dealers or who do not have the particular bond you want in inventory will have to go into the marketplace to get it. In this case, the broker acts as an agent rather than as a principal, and the trade is sometimes called an agency transaction. In most cases, brokers will charge investors commissions on agency transactions, and the amount of the commission will be identified on the trade confirmation. (Remember, though, the agency broker also pays a markup to the dealer selling the bond.) Sometimes the commission will be based on a percentage of the bond’s price, and this percentage may decline as the size of the transaction increases. Other times, especially in the case of a discount or on-line broker, the commission may be a flat fee.

Keep in mind that the markup or commission is the fee imposed by the brokerage firm; the individual broker you work with will get a portion of that amount.

The bottom line is that you want the best price, and the broker you work with deserves to be compensated. To get the best price, you may have to shop around. Or you may decide that the service you receive from your broker is worth a higher price. If you build a relationship with a particular broker, you may also find that your transaction costs can be negotiated.

Sure, I get that.  I just didnt find any discussion of the actual mechanics of selling at a good price-- wait for multiple bids? Try again tomorrow?  Or maybe the markup will be consistent so it doesn't matter and you should just take the first bid?  I always hear how liquid the treasuries market is, but my experience is that it takes way longer to execute (hours/minutes not minutes/seconds for SPY) with the three brokers I've used. 

Buying the bonds was simple- they told you the price they'd sell and that was that.

[Libertarian666]

Hey techo, any chance you could build in those WealthFront features into your software?

I already have some tax-loss (and -gain) harvesting features in there, and adding rebalancing among the four PP portfolio assets wouldn't be too much extra work.
That might be a good add-on. Thanks for the idea.

ETA: Actually I'm not sure that would really fit into my program, since it is forward-looking and therefore by definition cannot have the data on relevant (future) returns. I do let the user put in assumed rates of return for cash and portfolio assets in general, but I think trying to be much more specific than that would be misleading...