This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


Larry Swedroe is one of my favorite writers and researchers.  With 15 books to his name, his focus on evidence based investing fits in well with how we view the world. We debated about including this portfolio in the book since it requires using a value tilt, but think it is an important example of how a simple smart beta strategy may be beneficial to the overall portfolio.

The biggest difference between the allocation and others in this book is that he allocates to small cap value.  Small cap value stocks have outperformed broad small caps by about four percentage points a year, which is a lot.  The value stocks have slightly more volatility and a higher drawdown as well.


FIGURE 57 – Larry Swedroe Eliminate Fat Tails Portfolio 


Source: Swedroe

Below are the portfolios returns for comparison.

Swedroe’s unusual allocations are another example of a consistent performer due to including a mix of stocks, bonds, and real assets.  We include the performance of including small cap as well as small cap value to illustrate the improvement in performance.  The portfolio with the value tilt results in the highest Sharpe ratio of any portfolio in the book.


FIGURE 58 - Asset Class Returns, 1973-2013




Source: Global Financial Data


This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


William Bernstein is a retired doctor based in Oregon and is well-known for his writing on asset allocation with at least 10 books as well as a blog and investment advisory.

Below is his suggested allocation.  Not surprisingly, with an allocation of 75% in stocks, the portfolio returns are very similar to the broad stock market.


FIGURE 55 – William Bernstein Portfolio 


Source: The Intelligent Asset Allocator, 2000


FIGURE 56 - Asset Class Returns, 1973-2013



Source: Global Financial Data


This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


The 7Twelve allocation was proposed by Craig Israelsen in 2008.  Craig is the author of three books and is a principal at Target Dale Analytics.

7Twelve is one of the more consistent portfolios, having made positive real returns in every decade.


FIGURE 53 – 7Twelve Portfolio 


Source: 7Twelve Website, 2008


Figure 54 – Asset Class Returns, 1973-2013




Source: Global Financial Data



This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


“Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.” -Talmud

You can’t get much more basic than this.

Figure 51 – Talmud Portfolio 


Source: Talmud, 500 C.E.

FIGURE 52 – Asset Class Returns, 1973-2013






This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


Andrew Tobias has written twelve books, including selling over a million copies of The Only Investment Guide You’ll Ever Need.

He proposes another basic Lazy Portfolio with only three holdings, which is also reminiscent of Bill Shultheis and Scott Burns’s three-fund portfolios.  The lack of real assets definitely hurt this portfolio in the 1970s.

Figure 49 – Andrew Tobias Portfolio


Source: The Only Investment Guide You’ll Ever Need, 1978

Figure 50 – Asset Class Returns, 1973-2013



Source: Global Financial Data



This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook.   If you promise to write a review, go here and I’ll send you a free copy.


I would classify both my mother and grandmother as traditional Southern cooks.  Their style was very much of the “finger” variety.  While they may have a broad recipe to go by, the food usually was sampled with many tastings and the adjusted to the individual’s preferences, etc.  I spent a lot of time as a child in the kitchen making chocolate chip cookies with both of them (also known as my chunky years).  That style of cooking often reminds me of asset allocation and investing.  As long as you have some flour, baking soda, sugar, eggs, butter, and chocolate chips – the exact amount really doesn’t matter.  Some people like vanilla in the recipe, other people nuts, and some even more chocolate.  But as long as you have some of all of the main ingredients, the results are usually similar, and delicious.  (I rarely made it to the final product as I was more of a cookie batter kid.)

Investing is similar.  As long as you have some of the main ingredients –stocks, bonds, and real assets- the exact amount really doesn’t matter all that much.  Does adding small allocations to emerging bonds (nuts), frontier markets (vanilla), or more chocolate chips (stocks) vastly change the outcome? Not really.  The only thing that does really alter the outcome is if you go and mess with all the ingredients while they are cooking – a sure recipe for disaster.  The single biggest take away from this book is to not ruin your allocation by paying too much in fees.

Below is a quick summary of the findings from this book.  Many of the steps below are similar to the same suggestions we provided in our first book, The Ivy Portfolio, back in 2009.

  • Any asset by itself can experience catastrophic losses.
  • Diversifying your portfolio by including uncorrelated assets is truly the only free lunch.
  • 60/40 has been a decent benchmark, but due to current valuations, it is unlikely to deliver strong returns going forward.
  • At a minimum, an investor should consider moving to a global 60/40 portfolio to reflect the global market capitalization, especially right now due to lower valuations in foreign markets.
  • Consider including real assets such as commodities, real estate, and TIPS in your portfolio.
  • While covered more extensively in our other three books and white papers, consider tilting the equity exposure to factors such as value and momentum. Trendfollowing approaches work great too.
  • Once you have determined your asset allocation mix, or policy portfolio, stick with it.
  • The exact percentage allocations don’t matter that much.
  • Make sure to implement the portfolio with a focus on fees and taxes.
  • Consider using an asset allocation ETF, advisor, or other automated investment service in order to make it easier to stick to the portfolio and rebalancing schedule. Yearly (or even every few years) rebalancing is just fine. Even better, rebalance based on tax considerations.
  • Go live your life and don’t worry about your portfolio!




Where can I find software or a website to backtest my own allocations and strategies?

We send out a basic Excel backtester to subscribers of The Idea Farm that will let you test all of the allocations in this book.

Below are a few free or low-cost options you can access on the web:

You can also download free data sources to Excel and test on your own.

What about other asset classes? 

This book is meant to describe the main asset classes that comprise the majority of the global market portfolio.  The allocations provided in this piece form the basis for a core portfolio.  However, many asset classes are perfectly reasonable in an asset allocation framework to include in the core or perhaps as satellite allocations – MLPs, infrastructure, emerging market bonds, municipal bonds, frontier market stocks, global TIPs, or even catastrophe bonds.

What about “Smart Beta” strategies?

Smart beta is a phrase that refers to strategies that move away from the broad market cap portfolio. (So in U.S. stocks, think the S&P 500 versus a portfolio sorted on dividends or perhaps equally weighted.)  The market cap portfolio is the market, and the returns of the market portfolio are the returns the population of investors receive before fees, transaction costs, etc.  However, market cap weighting is problematic.

Market cap weighted indexes have only one variable – size – which is largely determined by price.  (While not the topic of this book, market cap indexes often overweight expensive markets and bubbles – you can find more information in our book Global Value.)  Many smart beta strategies weight their holdings by factors that have long shown outperformance, including value, momentum, quality, carry, and volatility.

Here is a fun interview with William Bernstein on factor tilts.  We are big proponents of smart beta and factor tilts applied to a portfolio.  Indeed, it is very difficult to beat a portfolio allocated one-third each to a) global equities with a value and momentum tilt, b) bonds, and c) managed futures or a similar trend strategy.  We didn’t want to dive too deep into smart beta strategies in this book since we have covered them so extensively in the past.


What about tactical approaches to asset allocation?

We firmly believe there are a number of strategies that work well in tactically managing a portfolio.  Our 2007 paper, “A Quantitative Approach to Tactical Asset Allocation,” lays out very simple momentum and trend-following strategies.


What about factors in sector or country rotation strategies?

There is evidence that these strategies can work as well.  Our “Relative Strength Strategies for Investing” paper outlines a very simple sector rotation methodology based on momentum and trends.  Our Global Value book looks at rotating countries based on value.

Figure 46 is a graph that looks at country stock rotation strategies based on various metrics.  Note: You want the countries with the highest yield, worst trailing currency returns, and worst trailing GDP growth!!

FIGURE 46 – Rotation Strategies in Developed Markets



Source: Credit Suisse

Should I hedge foreign stocks?

We are actually agnostic on this topic, but once you decide on your choice to hedge or not, you should stick with it.  Currencies go through periods of under and outperformance, but over time, real currency returns are very stable.  The key words being over time.


Should I hedge foreign bonds?

Bonds are a little different.  Since sovereign bonds in general have lower volatility than stocks, adding the additional volatility of currency returns doesn’t make much sense and therefore hedging foreign sovereign bonds is reasonable.  A good Vanguard paper on the topic is “Global Fixed Income: Considerations for U.S. Investors.”

FIGURE 47 – Hedging Foreign Bonds



Source: Vanguard


How do stocks and bonds perform relative to various inflation regimes?  And what about real interest rates?

Stocks and bonds perform best when inflation is below about 3%.  Above 5% inflation and returns fall off a cliff.

The opposite goes for real interest rates, stocks and bonds love rates above 3%.  While stocks hold up okay with lower real interest rates, bonds get clobbered.

FIGURE 48 – Stock and Bond Real Returns vs. Inflation and Interest Rate Regimes



Source: Credit Suisse



Small Cap CAPE Ratios

We sent this to The Idea Farm, and I’m a big fan of the work Norbert and crew do at Star Capital.

Click to enlarge.



Three Years Down in a Row System

I wrote about mean reversion in my book The Ivy Portfolio back in 2008.  Below is a chart from the book with a couple studies of what has happened after you buy assets down multiple years in a row. (You can also search the blog archives for words like “reversion” to find lots of old posts like this on CTAs , this on falling knives, and this on homebuilders.)  You doubled your returns in the year following three down years for both country stock markets and asset classes.


I wanted to expand this study to the Dimson, Marsh, Staunton database.

The old study showed median country returns of 10.65% and 3 years down at 19.57%.  This only happens about 3% of the time, so pretty rare.

The new DMS database showed median country returns of 8.74% and 3 years down at 15.94%.  Similar results of doubling your money, and this only happens about 5% of the time, so also pretty rare.

Great to see the results match in a “sort of” out of sample.  I say sort of since equities are fairly correlated, and even though we went from 5 to 18 countries, not totally independent.

Currently  I don’t think we have any down three year asset classes (commodities down two), any countries?  I’m not certain this applies to industries and highly concentrated sectors due to the higher volatility, perhaps you could volatility weight the results by making it 3 or 4 down years instead of 2 or 3.  Will have to look into it.  If you decide to run the industry study with the free French Fama data, let me know!

6 Million Dollar Fintech Opportunities

Over two years ago I did a post called “Five Million Dollar Investing Ideas”, though you could now replace “Investing” with “Fintech”.  I update the status of all of the ideas at the bottom of the post, and it is great to see many companies tackling the opportunities there.  Lots of innovation going on in our space, even if some of the ideas and valuations are getting a little into Sillytown.

Two of the five ideas are still not being addressed so I will include them again as 1/2 below as well.

1.  Liquid Alts Newsletter – Most investors, retail and pro alike, have a hard time making heads or tails of all of the new funds coming to market.  There are about 10,000 mutual funds (though the number peaked in the early 2000s) and about 2,000 ETFs.  How in the world is an investor supposed to stay abreast of all that is going on, what is reasonable and what is crap (a lot)?  I would love to see a paid product that each month tackled a topic (say managed futures funds), new launches, and maintained a portfolio or two that targeted this space.

Sam Lee was closest here at ETFInvestor at Morningstar, but he is now setting up his own RIA (believe me, I tried to hired him) so I hope they pick a great replacement.   Brian Haskin does a good job at Daily Alts, I just wish I could talk him into doing a premium product.

2.  Private Research Boutique Newsletter – Most of my ideas in this post fall into the category of “I would pay someone to do this since no one is doing it”.  There are a few sites that are targeting the notoriously low information private company space, but none comprehensively and most importantly, none ACTIONABLY.  I would love to see an in-depth letter each month with alerts that focused on making invest/pass recs for these angel or secondary private investments.  A value added research shop would be huge here.  Is the Tim Ferriss syndicate a good idea?  What about that recent EquityZen offering?  You could cobble together a team of six former motivated VC/consultant/MBAs and let them loose.  Some companies sort of tackling the space, but more from an information/database standpoint, are Triton ResearchDisruption, DataFox, CB Insights, and Mattermark.

Again, if you want to get started here, lemme know!

3.  Syndicate Podcast and Newsletter – Along the same lines as above, but would love to see a podcast and/or newsletter where the host interviewed the syndicate heads on Angelist with current offerings and simply asked them why they are leading a round for their investment.  This sort of dovetails with the #5 idea from the old list below where the interviewer asks just one question, “What is your best idea RIGHT NOW?”  Both would be fun, and as long as you got the disclosures right, not too hard to do.

4. NewsletterSampler:  There isn’t a directory of investment newsletters anywhere.  Why?  I dunno.  Hulbert tracks a lot (index here and list of some outperformers here).  This opaque world needs some more sunlight (and maybe disinfectant!).

5.  HedgeFundLetters: Someone please come take over my old site and run with it.  It is shameful that there is no place to go and read all the great letters of Soros, Robertson, etc.

6.  Tactical Roboadvisor:  Almost all of the roboadvisors do the same thing (buy and hold tax optimized MPT).  That is a good thing in general, and it has driven down costs and made it a wonderful time to be an investor.  I’ve commented a lot here in the archives so I’ll be brief.  While I still think the best roboadvisor is an ETF, not a separate account,  however, many people prefer separate accounts, at least the ones where you have someone to talk to.   (A no fee ETF could eventually get to a negative expense ratio with short lending, think about that for a second.)

The sponsors/custodians will be impossible to beat here (firms that have their own funds) since they have a built in price advantage.  So I expect Vanguard at 0.3% if you want a planner, and Schwab at 0% if you want a pure robot to win out.  Vanguard is already about 10X anyone else, and Schwab is already #2 at around $3B.  Eventually I think you will see the big wirehouses buy/build a roboadvisor and an ETF shop.  That way they have the distribution, the ETFs, and the software.  Tough combo to beat.  I also expect firms like WisdomTree, First Trust, and PowerShares to enter the game eventually.

That doesn’t mean there will not be other successful models, but they will have to differentiate.  Hedgewise is doing risk parity for example.  I would love to see a robo do a simple trendfollowing model(s), or perhaps some very basic stock screens (AAII, etc.).  Again, I think an ETF is a better mousetrap, but still room for many billions of AUM to share.  I posted on Twitter that the 50 odd asset allocation mutual funds that charge over 2%! a year manage over $50B.  Easy pickings….

Also, what’s up with none of the robos tracking their performance with the industry GIPS?

What other ideas am I missing?

If you want to come work on some at the beach in LA shoot me and email and we can get started…

Old list from 2013 below with my comments and links to companies tackling the problems.  I will update with anything I missed if you email me:

1 – Public Alts newsletter

2 – Quant Backtester

3 – Tax Harvesting

4 –  Investment research boutique focused on private crowdfunded companies

5 – Investment newsletter focused on Best Ideas

6.  Rukeyser Reborn - Originally I wrote that Barry Ritholtz is in the lead here with an excellent Bloomberg podcast.  Well, Saramucci went and relaunched Wall St Week (have yet to check it out) – I love the renewed focus on long form content.

7. 2.0 - Yahoo Finance/Tumblr, BusinessInsider, and TalkMarkets seem to be the leaders here.  Frankly I think a group of writers should come together and form their own site instead of letting the other sites appropriate their content.  After all, they own all the value…


Trend Review – Last Man Standing

Below are some basic charts of the main asset classes with our old 10 month simple moving average overlaid.  The old QTAA model would be parked in a whopping 80% or so cash and bonds right now.  It is surprising to see, but the only market still in an uptrend is US stocks (I’m ignoring ethanol and cattle).  That is scary since US stocks happen to be one of the most expensive stocks markets in the world.

Click to enlarge any chart.

US Stocks

Screen Shot 2015-07-07 at 10.06.48 AM

US Small Cap Stocks

Screen Shot 2015-07-07 at 10.07.06 AM

Foreign Developed

Screen Shot 2015-07-07 at 10.07.20 AM

Foreign Emerging

Screen Shot 2015-07-07 at 10.07.31 AM

Long Bonds

Screen Shot 2015-07-07 at 10.07.49 AM


Screen Shot 2015-07-07 at 10.07.58 AM

Foreign REITs

Screen Shot 2015-07-07 at 10.08.09 AM


Screen Shot 2015-07-07 at 10.08.21 AM


Screen Shot 2015-07-07 at 10.19.51 AM



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