Asset Allocation Strategies

August 5th, 2013

by Mebane Faber

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.


I have been contemplating writing a book or white paper on asset allocation strategies. But like many pieces I have started to write this summer, I have simply ended up condensing an entire 200 page book into one blog post. Maybe it is a case of summer-itis, but I seem to be following the old Thoreau quote – simplify, simplify, simplify.

Below are a handful of the most popular asset allocation strategies from lots of different gurus. I did my best to recreate their allocations from public asset classes back to the 1970s. So which asset allocation strategy performed best?

Scroll to the bottom to find out!

60/40

60% US Stocks 40% US 10 Govt Bonds

Swensen Portfolio (Source: Unconventional Success, 2005)

  • 30% US Stocks
  • 20% REITs
  • 20% Foreign Stocks
  • 15% US Govt Short Term
  • 15% TIPS

El-Erian Portfolio (Source: When Markets Collide, 2008)

  • 15% US Stocks
  • 15% Foreign Developed Stocks
  • 12% Foreign Emerging Stocks
  • 7% Private Equity
  • 5% US Bonds
  • 9% International Bonds
  • 6% Real Estate
  • 7% Commodities
  • 5% TIPS
  • 5% Infastructure
  • 8% Special Situations

Arnott Portfolio(Source: Liquid Alternatives: More Than Hedge Funds, 2008)

  • 10% US Stocks
  • 10% Foreign Stocks
  • 10% Emerging Market Bonds
  • 10% TIPS
  • 10% High Yield Bonds
  • 10% US Govt Long Bonds
  • 10% Unhedged Foreign Bonds
  • 10% US Investment Grade Corporates
  • 10% Commodities
  • 10% REITs

Permanent Portfolio (Source: Fail-Safe Investing, 1981 )

  • 25% US Stocks
  • 25% Cash (T-Bills)
  • 25% US Long Bonds
  • 25% Gold

Andrew Tobias Portfolio (Similar to Bill Shultheis & Scott Burns's 3 Fund portfolios)

  • 33% US Stocks
  • 33% Foreign Stocks
  • 33% US Bonds

William Bernstein Portfolio (Source: The Intelligent Asset Allocator, 2000 )

  • 25% US Stocks
  • 25% Small Cap Stocks
  • 25% International Stocks
  • 25% Bonds

Ivy Portfolio (Source: Ivy Portfolio, 2009)

  • 20% US Stocks
  • 20% Foreign Stocks
  • 20% US 10Yr Gov Bonds
  • 20% Commodities
  • 20% Real Estate

Risk Parity Portfolio (Unlevered, Faber PPT)

  • 7.5% US Stocks
  • 7.5% Foreign Stocks
  • 35% US 10 Year Bonds
  • 35% Corporate Bonds
  • 5% GSCI
  • 5% Gold
  • 5% Real Estate

Below are three charts. The first is returns vs. volatility, the second is returns vs. maximum drawdown, and the third is returns vs. Sharpe Ratio. As you can see, they all performed pretty similarly. People spend countless hours refining their beta allocation, but for buy and hold, these allocations were all within 200 basis points of each other!

A rule of thumb we talked about in our book is that over the long term, Sharpe Ratios cluster around 0.2 for asset classes, and 0.4 – 0.6 for asset allocations. You need to be tactical or active to get above that.

Blue dots are generic asset classes, red dots are the portfolios from above.

What's the takeaway? Go enjoy your summer.



Originally posted at Mebane Faber Research
© Mebane Faber

Mebane Faber Research

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