Tyler's Pinwheel Portfolio

[ochotona]

I took a look at Tyler's PortfolioCharts, and my eye was drawn to the matrix which compares all portfolios, and I was further motivated to look at Pinwheel because it scored so well on metrics important to me. Yes, GB has a little better retirement performance, but legacy is also important to my wife and I, so Pinwheel may be a better crapshoot for our kids, plus we have the 10% gold already. That's the psych hurdle, isn't it?

https://portfoliocharts.com/portfolio/portfolio-matrix/

It deserves a look. I thought there was a thread already about it, well now there is one. Allocations plus my ETF picks, followed by another way to implement, which works slightly better

15% Total US Stock Market ITOT
10% Small Cap Value IJS
15% Total World Stock Market VT
10% Emerging Markets SCHE
15% Intermediate US Treasuries just buy the underlying
10% T-Bills / Cash just buy the underlying and/or use an online bank
15% REIT SCHH
10% Gold physical or GLDM


Variant 1 - break up Total World Stock Market (VT is 56% USA, 44% ACWI ex-US)

23.4% Total US Stock Market ITOT
10% Small Cap Value IJS
6.6% All Country World Index ex-US CWI
10% Emerging Markets SCHE
15% Intermediate US Treasuries just buy the underlying
10% T-Bills / Cash just buy the underlying and/or use an online bank
15% REIT SCHH
10% Gold physical or GLDM


Variant 2 - add some Dual Momentum (Gary Antonacci advises volatile indices like small cap, EM, REIT don't work well with GEM, so maybe don't even try)

30% Dual Momentum GEM (US stocks - ACWI ex-US pair; IVV & CWI)
10% Small Cap Value IJS
10% Emerging Markets SCHE
15% Intermediate US Treasuries just buy the underlying
10% T-Bills / Cash just buy the underlying and/or use an online bank
15% REIT SCHH
10% Gold physical or GLDM

[Kevin K.]

Thanks for the thoughtful post ochtotona!

The PInwheel is indeed a really impressive portfolio. It strikes me as being a PP-informed variant on the Merriman Ultimate and other complicated slice-and-dice allocations.

My situation is different - ER'd but with a smaller-than-ideal nest egg and no legacy needs so the volatility and drawdowns of the Pinwheel scare me, but I much prefer its global approach to stocks, smaller gold % and slug of real assets to eithere the PP or GB, both of which use only U.S. stocks. My guess is the Pinwheel is more likely to do well going forward given valuations and its symmetry of assets makes rebalancing pretty easy. Your more complicated iterations of it are no doubt great for more sophisticated and active investors but the "standard" PW is about as much as I could get my wife to look at (she'd much prefer for us to be in something dead simple like Wellesley or one of Vanguard's Lifestrategy funds).

Thanks for starting a thread on this portfolio, and for reminding all of us to check in on Tyler's site often. It continues to improve by leaps and bounds and is an incredible resource.

[jacksonM]

Too many moving parts for my taste.

I converted my portfolio from a pure PP to the Golden Butterfly last year but this sounds a little too complicated for an investing ignoramus like me.

[Tyler]

Glad you like it, Ochotona.

For clarification, I think you may have missed the footnote on the World stock allocation. The default assumption is that US-based investors would choose a World Ex-US variant with only non-US investors using a true global fund. Think of it more like "international" without doubling up on US stocks. Writing for a global audience is tricky, but I do my best to translate things for different types of investors.

[ochotona]

Glad you like it, Ochotona.

For clarification, I think you may have missed the footnote on the World stock allocation. The default assumption is that US-based investors would choose a World Ex-US variant with only non-US investors using a true global fund. Think of it more like "international" without doubling up on US stocks. Writing for a global audience is tricky, but I do my best to translate things for different types of investors.

Ah that's what I suspected! So there is no need for my "variant 1". 15% to ACWI ex-US then for USA users.

[Kbg]

I’m more of a DM guy for us vs. foreign but if one doesn’t want to do active then foreign should definitely get a slice of your investment pie. A very interesting combo is say QQQ and EEM for DM.

[sophie]

Question for Tyler: What's the optimal gold-free portfolio, and how much of an advantage does it give you over the standard 60/40, the three fund portfolio, and a Vanguard target-date retirement fund?

I ask because I'm stuck with a gold-free portfolio for my active retirement account, as many are, and currently have a three fund portfolio in there. I'm not sure about the rest of you but I don't plan to hold that portfolio forever, only until I get the money out and into accounts over which I have full control. This could be a long time, but it does mean that the "ulcer index" and total growth are more important than the safe withdrawal rate.

Wondering when Vanguard will start a gold mutual fund, because that might find its way into my retirement funds list. Probably at approximately the same time that hell freezes over.

[Tyler]

Question for Tyler: What's the optimal gold-free portfolio, and how much of an advantage does it give you over the standard 60/40, the three fund portfolio, and a Vanguard target-date retirement fund?

Good question, although I'm not sure there's an "optimal" solution suitable for all people.

My first reaction is that the Ivy and 7Twelve portfolios deserve a look, although you probably will have even less luck finding a commodities fund than a gold fund in a retirement account. Something in the spirit of the Larry Portfolio (or Desert Portfolio) might be a good option, with the highest-returning stocks you have access to balanced by larger percentages of safe bonds. But practically speaking, the best answer is probably to look at the low-cost index options in your retirement account and just do the best you can not putting all of your eggs in one basket.

[Phorteun]

Another question for Tyler:

Playing around with the "My Portfolio" page, I was very interested by the results for an allocation that consisted of:

Stocks:
14% USA MCV
14% USA SCV
14% WLDx MCV
14% (TSM) EM

Bonds:
12% USA Long Term
10% USA Short Term

Real Assets:
12% Gold
10% REIT

Then I thought about trying to turn the theoretical into practical, but there seems to be no real option for a "WORLD ex-US Mid Cap Value" ETF/Mutual Fund. That got me thinking, "what exactly would the data set for these returns be?" PortfolioVisualizer doesn't even have a non-US Mid Cap section for it's "Backtest Portfolio Asset Class Allocation" page. Would love to hear where the data comes from, if you think it's a fair representation of the asset class, and what would be the most realistic implementation of it as an ETF/Mutual Fund etc.

Thanks.

[Tyler]

Then I thought about trying to turn the theoretical into practical, but there seems to be no real option for a "WORLD ex-US Mid Cap Value" ETF/Mutual Fund. That got me thinking, "what exactly would the data set for these returns be?" PortfolioVisualizer doesn't even have a non-US Mid Cap section for it's "Backtest Portfolio Asset Class Allocation" page. Would love to hear where the data comes from, if you think it's a fair representation of the asset class, and what would be the most realistic implementation of it as an ETF/Mutual Fund etc.

Thanks.

The international data comes from two places. From 1991 on, I calculate the returns using my stock index calculator from Fama-French source data. And prior to that, I use published returns from IIA. You can read more about the data sources here: https://portfoliocharts.com/portfolio/tools-data/

But your point is very valid, as both sources are academic and are not directly pulled from real-world funds. International mid cap funds are pretty rare in the real world, which is also why sites like Portfolio Visualizer don't have access to that data. I've had to calculate a lot of it myself (and if you read the fine print, you may notice PV also uses my calculation techhnique for their US stock asset class data. )

So long story short, just because I can calculate the performance of an asset class using standard index definitions does not mean that an index fund is offered for that asset class. In the case of world ex-US MCV, the closest funds I'm aware of for US investors are large cap value funds (VTRIX, EFV) or small cap blend funds (VSS, SCZ, or GWX). BTW, my working list is here: https://portfoliocharts.com/portfolio/index-funds/

[Kevin K.]

Another possible alternative sophie is the "Sandwich Portfolio" recommended by Bob Clyatt in his pioneering book "Work Less, Live More." Here's the link to the page about it on his site, including historical returns:

http://www.workless-livemore.com/ration ... portfolio/

And here are the allocations, using Vanguard Funds (though obviously it's easy to substitute other funds or ETFs):

20% VFINX S&P500
8% VTMSX Tax Managed Small
6% VGTSX Total International Equity
10% VINEX Internat'l Explorer (small)
6% VEIEX Emerging Markets
30% VBIIX Intermediate Bond Index
11% BEGBX International Bond
5% VGSIX REIT Index
4% Money Market Fund

Kind of a pre-Pinwheel Pinwheel or perhaps more accurately "the thinking person's 3 Fund." Obviously more volatile than the Larry Portfolio that Tyler wisely recommends but better diversified and without the tracking error that goes with the territory if you're 100% in the PP, GB, etc. world.

[Tyler]

Another possible alternative sophie is the "Sandwich Portfolio" recommended by Bob Clyatt in his pioneering book "Work Less, Live More."

Ooh... Thanks for referencing that! I love that book, but apparently forgot about his portfolio recommendation. Looks like I'll be re-reading it soon.

[buddtholomew]

70/30 AA in retirement accounts, split 55/45 US/INT. Bonds are IT index and Stable Value. This is pretty easy to maintain.

US Total - 35%
US SCV - 10%
REIT - 10%
INT LC - 20%
INT SC - 10%
EM - 15%

[Kevin K.]

I figured you'd know about Clyatt's book Tyler. Just listened to a nice interview with him on the FIRE Drill podcast talking about his 2+ decades in semi-retirement. Very smart guy.

I did a few comparisons of his Sandwich Portfolio with the PInwheel on Portfolio Visualizer. No gold ETFs before 2004 so that was a limiting factor but returns were neck-and-neck but with far lower drawdowns for the Sandwich. Looking for the retiree holy grail of steady 5-8% CAGR with few negative years was the basis for the extensive DFA modeling Clyatt paid for when he wrote the book. One thing I really like about his approach is that Clyatt recommends a mixture of stocks, bonds and "other" (mostly hard assets) @ roughly 40:40:20 and, wants to own the entire global market, and captures the small cap and value premiums without getting into ultra-complicated slice and dice.

[ochotona]

I am a homeowner... why would I want to own REITs in the Pinwheel, and overweight real estate even further?

[Kbg]

A while back I purchased and read Robert Carvers book Smart Portfolios. Highly recommended. One of the things he lays out early is that there are basically only two rational portfolios. Port 1 Max sharpe, Port 2 Max Geometric return. Everything else is a compromise. Iirc Max sharpe is 65/35ish bonds/stocks and Max geomean is 80/20 stocks/bonds. For the aggressive investor he recommends Max sharpe with a little under 2x leverage or Max geo. For more conservative Max sharpe or Max sharpe with cash.

There is a ton of good info in his book about all kinds of building and maintaining portfolio issues. Overall he pitches a process called handcrafting which implements the above basic premise in ever more complex variations using ETFs.

[Kriegsspiel]

I am a homeowner... why would I want to own REITs in the Pinwheel, and overweight real estate even further?

REITs provide a yield, which might be valued low or high. If you can buy rental properties/REITs at a good valuation, who cares what your housing situation is? Would you tell a small business owner to avoid investing in stocks, because he'd be overweighting business ownership?

[ochotona]

I am a homeowner... why would I want to own REITs in the Pinwheel, and overweight real estate even further?

REITs provide a yield, which might be valued low or high. If you can buy rental properties/REITs at a good valuation, who cares what your housing situation is? Would you tell a small business owner to avoid investing in stocks, because he'd be overweighting business ownership?

I indeed would advise people to avoid investing in their company or industry, because your investments are tanking just as you lose your job. It happened to me (I sold the Schlumberger stock as soon as I was vested, then 60 days later I was unemployed).

Why would one want to overweight an asset class which would be taking a hit at the same time you might be underwater on your home?

[Kriegsspiel]

I am a homeowner... why would I want to own REITs in the Pinwheel, and overweight real estate even further?

REITs provide a yield, which might be valued low or high. If you can buy rental properties/REITs at a good valuation, who cares what your housing situation is? Would you tell a small business owner to avoid investing in stocks, because he'd be overweighting business ownership?

I indeed would advise people to avoid investing in their company or industry, because your investments are tanking just as you lose your job. It happened to me (I sold the Schlumberger stock as soon as I was vested, then 60 days later I was unemployed).

You're responding to something I didn't say.

Why would one want to overweight an asset class which would be taking a hit at the same time you might be underwater on your home?

Owning one house in one neighborhood in one city (ad nauseum) is to owning your own company's stock
as
Owning a REIT is to owning a broad stock index.

[gull1]

Ooh... Thanks for referencing that! I love that book, but apparently forgot about his portfolio recommendation. Looks like I'll be re-reading it soon.

Hey Tyler + All,

So I have been looking at the Pinwheel (PW) in comparison to the PP. A few questions:

1. Tyler says the PW is for someone who "Is uncomfortable with high percentages of unconventional assets found in many modern portfolios" . Can someone explain, in this context, what unconventional assets are?
2. Also, I understand the PW has different performance, seemingly better, than PP but with higher standard deviation. Is it accurate to say it follows the same broad theory as PP but with, arguably, more optimized portfolio allocation?
3. the 15% Intermediate Bonds - if I were to purchase the bonds directly on secondary market at Fidelity, would you just purchase 100% of this asset of the longest maturity 10 year bonds or split 50/50 between 3 and 10 year or....?

[Tyler]

Hi Gull1. Good questions!

1. Tyler says the PW is for someone who "Is uncomfortable with high percentages of unconventional assets found in many modern portfolios" . Can someone explain, in this context, what unconventional assets are?

Flipping your question, the four "conventional" assets found in a large number of portfolios are a generic cap-weighted large cap fund, an international fund, intermediate bonds, and REITs. If you haven't already, I recommend reading this Pinwheel Portfolio explanation that walks through the assets.

2. Also, I understand the PW has different performance, seemingly better, than PP but with higher standard deviation. Is it accurate to say it follows the same broad theory as PP but with, arguably, more optimized portfolio allocation?

The Permanent Portfolio is built on four specific assets to track four economic conditions. The Pinwheel Portfolio is more about tilting traditional portfolio assets towards beneficial diversifiers. So while both take advantage of the benefits of diversification, I wouldn't go so far as to say they follow the same theory. I also wouldn't necessarily say one is more optimized than the other, as that depends on what you're personally interested in optimizing.

3. the 15% Intermediate Bonds - if I were to purchase the bonds directly on secondary market at Fidelity, would you just purchase 100% of this asset of the longest maturity 10 year bonds or split 50/50 between 3 and 10 year or....?

Personally, I'd just buy a intermediate treasury ETF like IEI or ITE. But if you want to buy bonds directly, you could either buy a ladder of 3-10 or simply use the PP method and buy 10-year bonds while selling them when they hit 3. And since we're talking intermediate bonds rather than long-term bonds, keeping them to maturity is also an option.