Travel: Houston, Miami, Tucson, BC, Pittsburgh

A few upcoming events…come say hello!

January 12th, Talk at FPA, Houston

Jan 28th – Jan 28th, ETF Conference, Miami

Feb 12th, Talk CFA Society, Tucson

March 19-25, Vancouver (skiing)

April 15th, Talk CFA Society, Pittsburgh

May 16th, Talk Los Angeles AAII

NY Resolution For You – Don’t Buy a Tesla

Vanguard, like many of the robo-offerings, markets the fee difference as a big reason to use their automated investment service. (Though as Kitces mentions, Vanguard isn’t quite a robo since they employ lots of CFPs.) They compare the difference between their fees (0.30%) and the industry average (1.32%) which sounds high to me, as I think it is around 1% although average mutual fund is 1.25%.



returns v


If you assume a $1M portfolio, let’s look at how much fees eat into your returns over time at 0%, 0.3%, 1.32%, and 2% advisory fees.  We will ignore the underlying ETF costs to try to compare apples to apples, and assume all use low cost index ETFs.  Lest you think there are not people charging 2% to manage a buy and hold portfolio let me remind you otherwise with the chart at the end of the post with a fee summary.  0% is achievable either by investing on your own or using something like our 0% management fee ETF or Schwab’s upcoming offering.

30 bps in fees costs a portfolio only $3k per year, but 1.32% ($13k) and 2% (20k) are much more dramatic.  20k is basically a new Tesla every few years.  This doesn’t mean of course an advisor isn’t worth their fees, I’ve said a million times on the blog that they can we worth their weight in gold if they offer value added services like tax planning, estate planning, insurance, wealth management, etc.  (Or keep you from doing something even dumber on your own.)  But $20k per year is a really high bar to justify. Mentally visualize carrying a briefcase of $20,000 every year to your advisor instead of it being automatically deducted from your account.

For a buy and hold asset allocation portfolio you want to be paying as little as possible.

So, for an investment lifetime of 30 years, assuming 6% returns, how much did the various fee levels cost the investor?


Now think about that for a second.  Over your lifetime, if you started with $1M in assets, you transferred anywhere from $240,000 to $1.1 million to your advisor.  (The above table also shows in the fees lost column the difference you lose by not compounding the lost fee assets.)  2% a year means you end up paying your advisor your entire initial investment amount.  When you sit down with your advisor that you choose to have for the next 10 years ask yourself – “Is this advice worth $240k in total (nearly a third of total starting portfolio value) if you’re paying 2%?”

What if markets actually returned 10% per annum?  The figures get even more gross since your portfolio grows to a much higher balance.  At 2% the original $20,000 you paid 30 years ago is now a whopping fee of $200,000 per year.  Even at the average advisor fee of 1.32% that is $160,347 per year.

Maybe your New Years resolution should be to not buy someone a new Tesla this year?

People in red below are over .50%


Stock Valuations Around the World

I talk a lot about foreign stocks being cheaper than they are in the US.  I’ve shown this on a CAPE basis before (and also in our book Global Value) where the US is the highest valuation (27) relative to foreign stocks (15) ever.  Good news is 27 isn’t awful like 1999, and 15 is downright pleasant.

Below is two more valuation metrics, regular old 1 year PE ratio and PD ratio (dividends).  Both say the same thing, albeit with different magnitude: look abroad for cheaper stock valuations.

Blue line is average over the period, both right around zero!



Source: DataStream, Stansberry Research for concept

Market Outlook 2015

I penned a short market outlook last year , and this year’s outlook is basically the same.  It was correct on a few points (small cap underperformance, dividend stock underperformance), and incorrect on a few points (US stocks charged higher, foreign stocks lagged).  We now have an interesting period where US stock valuations (CAPE of 27)  relative to foreign stock valuations (around 15) will close at the highest level over the past 35 years.  Four out of five of the biggest relative overvaluations resulted in big foreign outperformance the following year.  The only exception?  2014

Below you can see just how fantastic 2014 was (real estate, bonds, US stocks) or terrible (commodities, foreign stocks).

Asset Class Returns 


The moderate portfolio from our old while paper is ending 2014 on a fairly conservative note – only 40% invested in US stocks and real estate, and 60% in cash and bonds (out of commodities & foreign stocks).  As you recall from my old articles, the best environment for US stocks is cheap and in an uptrend.  The worst?  Expensive and in a downtrend.  We are currently in the middle (expensive, uptrend).  When the trend changes, watch out!

However, most of the positive momentum in the world is still in US based assets – stocks, real estate, and bonds.  Most of the value is found in foreign equity markets (and arguably commodities, but with less traditional valuation methods).  My favorite intersection is when value and momentum intersect.  If and when the trend changes I think you could see truly explosive returns for foreign equity markets.  But as we all know, and oil is a timely reminder of this now, trends can last a loooonnng time.  And if US assets are the final shoe to drop….well then all equities around the world will get cheaper.


1.  US stocks are expensive, but not quite in a bubble.  Future returns should  be around 3% (nominal) per year.  US bonds likewise should return around 2.2% per year.  Both should return around 0-1% real.  US stocks can continue their strong returns and get more expensive, but if and when the trend changes, it would be wise to be more conservative.

2.  Foreign stocks are priced for higher returns, but currently in a downtrend with terrible momentum.

3.  Here is my allocation for 2015.  As a trendfollower, I like the idea of having half of my portfolio being tactical and able to move to cash or hedges if markets trend down.  As a value investor, I also want exposure to assets that may be cheap over long horizons.  Main changes since last year have been rolling the old private fund assets into GMOM, allocating to new funds (new private fund strategy, new launches GMOM and GAA), and rebalancing to buy more beaten down holdings (GVAL).


Broad Groupings

Tactical or Market Neutral Strategies 44%

Long Only Strategies 56%


Within those categories:

GVAL 25%

GMOM 23%

Private Fund 21% (Cambria Special Situations – a leveraged, tactical fund investing in US stocks, is 200% gross long and can be 0 to 100% net long)

GAA 18%

FYLD 12%


I will update again in 2016!



December Tweets

My Portfolio for 2015

Note: Please read this old post before the below for background info.

As I have detailed in the past, I think it is paramount for your money manager or advisor to have ‘skin in the game’.  I am happy to be 100% transparent with my holdings, and have detailed my approach to investing my own assets in the past a number of times.  You should ask your money manager what they do with their own money – it may surprise you!  I place all of my assets in Cambria funds.

Not much is different for me going into 2015 as there exist the same themes from the old interview:

“As you can see, my holdings are dominated by foreign stocks, portfolios that can and do have the ability to tactically move to cash (and have a high exposure to real assets), and stocks that are shareholder-friendly and returning lots of cash to investors. I am least exposed to traditional bonds, but for me they are not that attractive at these levels for my time horizon and goals. If stocks experienced a large drawdown of 30% to 90%, I would shift more and more of the allocation to the equity portion. As I’ve mentioned in our new book, I don’t think U.S. stocks are that attractive currently, but I am very positive on foreign stocks.”

 As a trendfollower, I like the idea of having half of my portfolio being able to move to cash or hedges if markets trend down.  As a value investor, I also want exposure to assets that may be cheap over long horizons.  Main changes have been rolling the old private fund assets into GMOM, allocating to new funds (new private fund strategy, new launches GMOM and GAA), and rebalancing to buy more beaten down holdings (GVAL).  I still have a few more allocations to make in January but by month end the allocation should be roughly:


Broad Groupings

Tactical or Market Neutral Strategies 44%

Long Only Strategies 56%


Within those categories:

GVAL 25%

GMOM 23%

Private Fund 21% (Cambria Special Situations – a leveraged, tactical fund investing in US stocks, is 200% gross long and can be 0 to 100% net long)

GAA 18%

FYLD 12%


I will update again in 2016!


How did CAPE do in 2014?

Readers know that I am a fan of using long term valuation metrics as a fundamental anchor to pick stock markets around the world.  It worked great in 2013, but in 2014 that worked fairly poorly as many of the cheap markets have gotten even cheaper.  I joked with a friend the other day that I was going to write a new edition of my book called Global More Value.

The median stock market had a negative year in 2013 of -1.33%

The average of cheap markets (defined as cheapest 25%) declined -12.88%

The average of expensive markets gained 1.36%.

The names have shifted around a little bit (I sent updated values to Idea Farm members earlier today) but the cheap ranks are still dominated by the continent across the Atlantic, and Russia and Brazil…

Screen Shot 2015-01-01 at 5.18.53 PM



Cloning the Largest Hedge Fund in the World: Bridgewater’s All Weather

Bridgewater is the world’s largest hedge fund at $160 billion, and employs over 1,400 people.  You can find a 140 page document on the culture of Bridgewater if you would like to know more about how the company works.  And if you want to know more about how the economy works, here is a fun video.

They manage two main portfolios.  All Weather is their buy and hold “beta” offering using their risky parity methodology.  Often Dalio mentions that is how he would invest for his trust or if he passed away and needed a simple allocation for his children etc.  You can find more info on All Weather in these publications on Bridgewater’s website:

Risk Parity is About Balance

Engineering Targeted Returns and Risk

(Pure Alpha is their active multi-strategy product.)

From the “Risk Parity is About Balance” article:

“Since 1996, our All Weather approach has been stress-tested through significant bull and bear markets in equities, two recessions, a real estate bubble, two periods of Fed tightening and Fed easing, a global financial crisis and periods of calm in between. Through these varied environments the All Weather asset allocation mix has achieved a Sharpe Ratio in line with the 0.6 expectation that we established at the outset of the strategy, and also in line with its performance over 85 years of back-testing.”

Below is a chart of the real-time returns to All Weather since inception in 1996 compared to the simple global market portfolio.  (We will call GAA for short – note this isn’t our new ETF although they are very similar.) The allocation is roughly 50% stocks, 40% bonds, and 10% real assets.  More specifically it is 20% S&P500, 15% EAFE, 5% EEM, 22% Corporate Bonds, 16% 10 Year Foreign Sov Bonds, 15% 30 Year US, 2% TIPS, 5% REITs.

How do they compare?  Below are the real returns net of inflation.




To compare apples to apples, let’s leverage up the GAA portfolio to similar volatility as All Weather as it uses leverage as well.  This is more challenging for individuals since most brokerages charge criminal margin rates, but futures allow institutions to use low cost leverage.  The global market portfolio is leveraged about 40%.  As you can see the results are very similar, in fact GAA outperforms All Weather, likely due to fees and transaction costs GAA doesn’t include in the backtest due to using index only data.  Then again GAA isn’t trying to optimize the portfolio or returns, but is just a very, very basic global portfolio.  Note – that isn’t a slight against Bridgewater but rather a compliment, if you are going to do buy and hold the global market portfolio is a great allocation that holds up in most market environments.




Pretty cool you can get access to the world’s largest hedge fund strategy for free by just buying the global market portfolio…

This just goes to show, if you’re going to do buy and hold, pay as little as possible!



Be a Good Loser

I’ve been writing this white paper/book on asset allocation strategies which has been really insightful and fun.  Actually I’ve been mostly putting off writing it but here’s to hoping that I get it done by year end.

One of the biggest challenges of investing is long periods of underperformance, or outright negative performance and losses.  Cliff Asness has a fun piece out on his blog where he talks about 5 year periods in stocks, bonds, and commodities and basically how anything can happen.

Unfortunately for investors there are only two states – all-time highs in your portfolio and drawdowns.  Drawdowns for those unfamiliar are simply the peak to trough loss you are experiencing in an investment.  So if you bought a stock at 100, and it declines to 75 you are in a 25% drawdown.  If it then rises to 110 your drawdown is then 0 (all time high).

One challenge for investors is how much time they spend in drawdowns.  It is emotionally challenging largely since they anchor to the high value in their portfolio.  If your account hit $100,000 last month up from $20k ten years ago, likely you think of your wealth in terms of the recent value and not the original $20k.  If it then declines to $80k, many think in terms of losing $20k rather than the long term gain.

I thought it would be interesting to look at a few asset classes and ask how long they spend in each outcome – either all-time highs or in a drawdown.  Below is a chart of a basic 60/40 portfolio’s drawdown since 1972, REAL RETURNS.  Notice how brutal the high inflation 1970s were to the portfolio:



The investor only spends about 22% of the time at new highs, and the other 78% in some form of drawdown.  A few values for common asset classes below….

US Stocks  17%

Foreign Stocks 12%

Bonds 16%

REITs 16%

Commodities 9%

Gold 4%

60/40  22%


So if you’re going to be an investor, get used to being a loser!



Global Asset Allocation White Paper

I’ve mentioned this a few times before, but I’m putting together a survey of various global asset allocation models.  I would be curious to know what sort of topics or questions you may like to see included…below is a very rough draft chapter outline…goal is for this to be short, with plenty of supporting material in the appendix…email me any ideas!!


Screen Shot 2014-12-04 at 10.43.24 AM


CHAPTER 1: A History of Stocks, Bonds, & Bills

CHAPTER 2:  Asset Class Building Blocks

CHAPTER 3:  The Benchmark Allocations: 60 / 40 and Global 60/40 (Norway)

CHAPTER 4 – All Weather and Risk Parity (Ray Dalio)

CHAPTER 5:  Global Market Portfolio

CHAPTER 6:  Rob Arnott

CHAPTER 7: Endowment Style:  El-Erian, Swensen, Ivy

CHAPTER 8: Buffett

CHAPTER 9:  Comparison of the Big Five (Dalio, Arnott, GAA, Swensen, and Buffett)

CHAPTER 10:  Implementation (ETFs, Fees, Taxes, Advisors)

CHAPTER 11:  Summary


APPENDIX B: Permanent & Global Permanent



APPENDIX E: Marc Faber


APPENDIX G: Bernstein


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