Improving the Dalio/Robbins All-Seasons Portfolio

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azanon
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Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 8:28 am

Lately, I've been working on a project of improving the Ray Dalio All-Seasons portfolio, discussed by Bridgewater here: https://www.bridgewater.com/research-li ... -strategy/ but the brought more in the public eye by Tony Robbins recent book.

If you compare the paper to the portfolio that Dalio allegedly gave Robbins, it really doesn't match the white paper, and it also clearly is not maximizing the strategy as discussed in the paper. Specifically, it seems to over-allocate to defending against deflation, and under-allocate to defending against inflation The other issue is the Robbins portfolio isn't adequately designed to generate enough return, especially considering that it isn't leveraged.

Anyway, here's my version:

15% Vanguard Mid-Cap Value Index (mutual fund or ETF)
15% Vanguard FTSC All-World ex-US Small Cap ETF (VSS)
20% Vanguard Extended Duration Treasury ETF (EDV)
20% Vanguard TIPS (VAIPX)
10% VanEck Vectors JP Morgan EM (local currency) Bond ETF - (EMLC)
10% United States Commodities Index (USCI)
10% iShares Gold Trust (IAU)

Ok, so what do I have going on here? First of all, I was able to keep the low stock position at 30%, but amp up the expected beta (by a full 1% on the portfolio) simply by using a value and small tilt on the US, and a small tilt on the foreign, while still keeping the cost low on both.

For the long-duration treasuries, instead of using 40% LT government bonds that pay interest (such as VGLT), I'm substituting 25-yr zero-coupon Treasuries to create a maximize faux leverage which allows me to drop the total allocation to use elsewhere. And using calculators at portfoliovisualizer, I was able to estimate that the 30% position on equities that I'm using approximately match the volatility of a 20% position in the zeros (amazing isn't it, that it takes a 1.5:1 of stocks to match the volatility of those STRIPS).

I'm going with a 20% position in TIPS because the white-paper clearly addresses the importance of inflation-linked bonds, and how they would be favored in 2 of 4 investing climates. While I briefly considered short-term TIPS due to less correlation with EDV, and the stocks, I'm ultimately rejecting it, because independently and over a long-term, the regular TIPS would have a higher return, and the collective duration exposure of EDV and VAIPX would still be lower than the "Robbins/Dalio" portfolio. That being said, if you wanted a bit more stability, and could live with slightly less return, short-term TIPS would be a decent substitute IMO.

For additional inflation fighting (and really an important "enemy"), I'm including 10% commodities. For similar reasons, I'm adding in 10% Gold (and also for Dalio's strong statements on Gold). Note also that this is close to the Robbins/Dalio allocation.

I'm rounding the portfolio out with 10% in local currency EM debt because it's listed in the white-paper, because it gives additional currency diversification (only 15% without it in this portfolio), and because EM debt should have high independent return.

I believe the portfolio comes out to a weighted cost of 0.23%. That's cheap enough to not be an issue. Rebalance annually.

So anyway, that's it. If you like this sort of thing, I think my version is considerably better than the half-baked Robbins one. If you have suggestions for how to tweak it further, please let me know, but please limit them to ones that would be consistent with the strategy as described in the white paper.

Again, remember, the point of the strategy is to hold a portfolio that has neutral bias towards what the future holds. So, it avoids the bias that most people have in their portfolio, which is towards economic expansion/growth/prosperity (due to high stock allocations).

........................
Edit (9/20/2017)

I wanted to make sure my most up-to-date portfolio is listed up front. See the thread to see how that evolved with others help (Also, I actually own this portfolio for my non TSP holdings which is about 40%):

Revised portfolio:
25% Vanguard Mid-Cap Value ETF (VOE) 0.07%
10% Market Vectors Emerging Mkts Local ETF (EMLC) 0.44%
20% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
30% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.20%
7.5% ETFS Bloomberg All Commodity Strategy (BCI) 0.29%
7.5% iShares Gold Trust (IAU) 0.25%

................
Edit (9/5/2018)

I took a closer look at estimating long-term standard deviation for each asset class (using Portfoliovisualizer), and the weight/loading to each of the 4 economic scenarios discussed in the Bridgewater "The All Weather Story", and realized that the overall weightings still weren't as optimized as they could be. I was able to drop the spread between the highest risk quadrant and the lowest risk quadrant by 67% by making one change: Dropping VOE by 5% to 20%, and raising LTPZ by that same 5% to 35%. This will, of course, lower overall portfolio expected return but, again, the aim here was to create an improved, non-leveraged risk parity portfolio. It's expected return "is what it is". Anyway, by my revised calculation, the spread in risk between the riskiest quadrant, and the least risky quadrant is now only 7%, or 7% more risky.

Revised portfolio:
20% Vanguard Mid-Cap Vaue ETF (VOE) 0.07%
10% Market Vectors Emerging Mkts Local ETF (EMLC) 0.30% (note the ER dropped since last year)
20% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
35% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.20%
7.5% ETFS Bloomberg All Commodity Strategy (BCI) 0.29%
7.5% iShares Gold Trust (IAU) 0.25%

...............
Edit (6/6/2019)

> Two relatively minor changes; SGOL for IAU (it's cheaper, in short), and VFVA for VOE. Use caution with this second change because VFVA still has very small AUM which increases spreads and makes it more vulnerable to not being sustained, but I don't see Vanguard throwing in the towel on factoring any time soon. As for why the change, VFVA still averages as "mid-cap value", but it loads the value factor quite a bit more than VOE, but includes stocks ranging all the way from micro-cap to large cap, and holds quite a bit more stocks too. As best I can tell (by substituting similar etfs to VFVA on asset correlation screening), i anticipate VFVA will have lower correlation to the other holdings in the portfolio in comparison to VOE.
> At this point, i consider these changes to be just tweaks. If you decided to use one of the two previous portfolios, they're close enough.

Revised portfolio:
20% Vanguard U.S. Value Factor ETF (VFVA) 0.13%
10% Market Vectors Emerging Mkts Local ETF (EMLC) 0.30%
20% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
35% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.20%
7.5% Aberdeen Standard Bloomberg All Commodity Strategy K-1 Free ETF (BCI) 0.25%
7.5% Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL) 0.17%
Composite ER = 0.17%
Last edited by azanon on Sat Aug 24, 2019 3:38 pm, edited 14 times in total.

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badbreath
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by badbreath » Wed Dec 21, 2016 9:17 am

I get what you are saying but I am sure you are going to lose vs the three fund portfolio
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 9:34 am

badbreath wrote:I get what you are saying but I am sure you are going to lose vs the three fund portfolio
There are plenty of threads to discuss the three fund portfolio. To be concise, this isn't one of them.

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Ethelred
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by Ethelred » Wed Dec 21, 2016 10:20 am

Interesting. Have you done any backtesting on this proposed AA?

livesoft
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by livesoft » Wed Dec 21, 2016 10:23 am

with 35% of portfolio in mid-cap value and the mid/small extended market fund, why not just put 35% in VBR, small-cap value which has a hefty slug of mid-caps? If you want large-caps, then get some.

Oh, now I see your didn't say Extended Duration for EDV, so I cannot tell if "duration" is missing or you meant to use VXF.

If you work your way up to 31 funds, then you can call it the Baskins/Robbins All-Flavors Portfolio.
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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 10:26 am

Ethelred wrote:Interesting. Have you done any backtesting on this proposed AA?
You can get close to backtesting it at portfoliovisualizer by substituting LT treasuries for the Government Zeros, and substituting foreign bonds (unhedged) for EMLC.

The results are actually ridiculous(ly good), and so good that I'd rather not even list them because I think it would give a misleading impression or claim that I'm not making now. Clearly, the backtested result were enchanced by the LT bonds (due to a 30-year steady drop in interest rates) and gold, but what I think is more important to notice from back-tests is the very low standard deviation that the portfolio produces despite most of those individual components being very volatile. I actually give my word I didn't design this by backtesting it, but it's eye-popping when you do backtest it.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 10:35 am

livesoft wrote:with 35% of portfolio in mid-cap value and the mid/small extended market fund, why not just put 35% in VBR, small-cap value which has a hefty slug of mid-caps? If you want large-caps, then get some.
Because I wanted to continue the theme within the stock component of trying to maximize uncorrelated assets to boost risk-adjusted return. Specifically, if I use small caps on both international and US, then there's no market cap diversification. Stated another way, mid-cap "large" US is less correlated to foreign small, than VBR to foreign small. And for all practical purposes, mid-cap value vanguard is just smaller, large caps.

It wouldn't be terrible though if you used VBR instead. But compare that to what I used on a simulator, and I think you'll find the risk-adjusted return isn't better. Large-Cap value also wouldn't hurt the portfolio either. I'm going with the Mid-cap's though for a bit of flair, slight boost in return, and still offsets somewhat from the foreign small.

Also, as mentioned initially, that specific mix of stocks at 30% weight matches the volatility of 20% EDV. If you change the stock mix, you might need to adjust the EDV percentage as well. (I determined this by comparing a 50/50 of VG mid-cap value and VSS vs. 100% EDV, and noticed i had to multiply by 1.5 for the 50/50 to match volatilities).
Oh, now I see your didn't say Extended Duration for EDV, so I cannot tell if "duration" is missing or you meant to use VXF.
I meant to use EDV. I'll fix the typo.
If you work your way up to 31 funds, then you can call it the Baskins/Robbins All-Flavors Portfolio.
LOL. I hope you're not suggesting 7 is too many. That's reasonable, and pretty easy to manage, especially if its tax-advantaged like my portfolio.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 10:50 am

I'll add one comment of my own to this effort. I wasn't really able to find a way to incorporate US Corporate Debt even though the research paper mentioned it as one possible asset class for the rising growth situation (and I also found an older quarterly report of Bridgewater's All-weather which did have a small position in Corporate Debt). Anyway, its inclusion either threw off the weights to one of the 4 possible investment climates, or any other adjustments I tried to make by including corporate debt just ended up lowering the expected return, but not really improving the expected risk (standard deviation). So I just left it out. If it's any consolation, Dalio left it out when he met with Robbins as well.

.....

One other comment - that 4Q 09' All-Weather report I got my hands on emphasized the importance of "global". The Robbins portfolio didn't include a global component for some reason. Mine is global, and has 30% foreign currency exposure.
Last edited by azanon on Wed Dec 21, 2016 11:02 am, edited 1 time in total.

taguscove
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by taguscove » Wed Dec 21, 2016 10:51 am

What is All-Weather?
-----
The all-weather portfolio is a passive investment fund that:
1. Assumes that the market of investible risky assets is generally fairly priced
2. Balances assets to be indifferent to when growth is above/below market expectations and when inflation is above/below market expectations.

The Bogleheads forum seems to strongly prefer diversified equities; however, if you believe that assets are fairly valued and that you are paid to accept systemic (non-diversifiable) risk, then it's sensible to diversify beyond equities. A standard 60% stock/ 40% bond portfolio concentrates 85-90% of the risk exposure in equities because equities are inherently more volatile. Any asset (other than cash) can be levered to have stock-like volatility. Bridgewater uses leverage to gain risk exposure across asset classes.

Advice for a retail investor replicating All Weather
-----
Having worked at Bridgwater Associates for 3 years, it's difficult for a retail investor to replicate the all-weather portfolio:
1. the management complexity balancing risk exposures
2. The operational complexity of leveraging low-return assets. You either need to manage a portfolio of rolling futures contracts and/or access the repo (repurchase) market.

The simple solution: increase allocations on long duration nominal bonds (EDV), long duration inflation linked bonds (LTPZ), gold (IAU), and commodities (GSG).
The complex solution: Open an Interactive Brokers account and gain the appropriate risk exposure through equity, interest rate, and commodity futures. This is expensive analytically and far beyond the capabilities of retail investors.

Disclaimer
-----
I don't represent Bridgewater Associates. The information comes from publicly available information, and I am not disclosing any trade secrets. I did have a non-disclosure/non-compete with Bridgewater Associates that expired in 2015.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 11:10 am

Wow, thanks for posting that tag! Any insights on Bridgewater are welcome. It's actually nice to see that I was on the right track on some points by going with EDV, and longer duration TIPS (at least in comparison to the short term version that Vanguard endorses).

While I don't claim to be able to fully replicate the real thing, I think you can get pretty darn close. The fact of the matter is that this 100% unleveraged version I'm working on has plenty of expected return built in. I'm not even sure someone could convince me that leveraging it (even if it was possible to do it for free, or easily at the individual investor level) would be worth it. As far as risk matching goes, that's not as easy, but I'm doing what I can by, say, matching the past risk of EDV at a given percentage to the risk of my stocks. But even Bridgewater wouldn't know what the forward risk is.

I noticed you listed GSG. I'm not "married" to USCI by any means. I've been trying to read up on all the choices for broad basket commodities options, and there are several that seem nice. PDBC also looks like a good choice. I just liked the strategy for USCI best, despite the cost, for addressing contango and backwardation. So any reason why GSG might be optimal?

Of the videos I've seen of Dalio, he has endorsed many times that he encourages the average investor to derive a balanced portfolio, and then he proceeds to describe essentially an all-weather portfolio. This is one that's not supposed to change (like Bridgewater Pure Alpha), so it should be reasonable to get it pretty close.
Last edited by azanon on Wed Dec 21, 2016 11:36 am, edited 2 times in total.

josh1130
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by josh1130 » Wed Dec 21, 2016 11:15 am

livesoft wrote:If you work your way up to 31 funds, then you can call it the Baskins/Robbins All-Flavors Portfolio.
8-)

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 11:21 am

josh1130 wrote:
livesoft wrote:If you work your way up to 31 funds, then you can call it the Baskins/Robbins All-Flavors Portfolio.
8-)
Jokes aside, I bet we're no more than 5-10 years away from being able to "construct" our own custom portfolio with infinite amounts of very small allocations (fractional shares) to many asset classes, by using roboadvisor-like tools to do it with. So it'd work like a buffet of, say, 100 different ETFs and you could add whatever percentages of each to your own personal mix at, say, Betterment (for a small, nominal fee, of course).

Seriously, mark it down. This is coming. 10 years max.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by josh1130 » Wed Dec 21, 2016 11:29 am

I heard an ad on a podcast the other day for a new service called M1 finance, and it sounds like that is exactly what they do. Like a betterment/wealthfront but you pick your own desired allocation, and for 0.35%. I only briefly checked it out.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 11:37 am

josh1130 wrote:I heard an ad on a podcast the other day for a new service called M1 finance, and it sounds like that is exactly what they do. Like a betterment/wealthfront but you pick your own desired allocation, and for 0.35%. I only briefly checked it out.
I had "someone' at Betterment infer that it's in the works for them. They probably won't recommend someone tinkering with their portfolio, but it's definitely on the project list. They already have fractional shares. They'd only need to allow someone to specify what percentage of each ETF that they want, which shouldn't be that hard to do.

Anyway, as it relates to this thread, if there is a robo that includes commodities, gold, and LT Bonds as an option, it's a possible way to implement something like this. But I'd suggest just avoiding the fee and buying the ETFs through a broker, and since several are Vanguard ETFs, Vanguard brokerage suffices.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by Theoretical » Wed Dec 21, 2016 11:54 am

azanon wrote:I'll add one comment of my own to this effort. I wasn't really able to find a way to incorporate US Corporate Debt even though the research paper mentioned it as one possible asset class for the rising growth situation (and I also found an older quarterly report of Bridgewater's All-weather which did have a small position in Corporate Debt). Anyway, its inclusion either threw off the weights to one of the 4 possible investment climates, or any other adjustments I tried to make by including corporate debt just ended up lowering the expected return, but not really improving the expected risk (standard deviation). So I just left it out. If it's any consolation, Dalio left it out when he met with Robbins as well.

.....

One other comment - that 4Q 09' All-Weather report I got my hands on emphasized the importance of "global". The Robbins portfolio didn't include a global component for some reason. Mine is global, and has 30% foreign currency exposure.
What about a Fallen Angel High-Yield fund like Van Eck's ANGL or Vanguard's? The latter is bit explicitly a fallen angel fund but it's got many of the same characteristics by focusing on the highest quality junk.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Wed Dec 21, 2016 12:04 pm

Theoretical wrote:
azanon wrote:I'll add one comment of my own to this effort. I wasn't really able to find a way to incorporate US Corporate Debt even though the research paper mentioned it as one possible asset class for the rising growth situation (and I also found an older quarterly report of Bridgewater's All-weather which did have a small position in Corporate Debt). Anyway, its inclusion either threw off the weights to one of the 4 possible investment climates, or any other adjustments I tried to make by including corporate debt just ended up lowering the expected return, but not really improving the expected risk (standard deviation). So I just left it out. If it's any consolation, Dalio left it out when he met with Robbins as well.

.....

One other comment - that 4Q 09' All-Weather report I got my hands on emphasized the importance of "global". The Robbins portfolio didn't include a global component for some reason. Mine is global, and has 30% foreign currency exposure.
What about a Fallen Angel High-Yield fund like Van Eck's ANGL or Vanguard's? The latter is bit explicitly a fallen angel fund but it's got many of the same characteristics by focusing on the highest quality junk.
I think it's possible to work something like that in, and the fact that it's high yield could also add another faux leverage effect.

To be honest, the biggest strike against adding any corporate debt fund/ETF (since it was in the white-paper), is that it'd mean one more ETF. As joked about above, 7 ETFs is already a fairly large "lazy portfolio". The other complicating issue is that corporate debt is a type of nominal bond, so adding it in place of some equities might require lowering the percentage of EDV or VAIPX, both of which also have bond duration, further exposing the portfolio to unexpected increases in interest rates. On the other hand, maybe I don't have enough duration since tag (indirectly) suggested LTPZ instead of VAIPX for TIPS.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Fri Dec 23, 2016 8:04 am

I just wanted to add something I ran across that gives some pretty good additional clues/insight as to how to construct this. Looks like this small investment firm located here: https://www.appianroad.com/ was basically co-founded by former Bridgewater employees and their investment model essentially IS the all weather portfolio. If you fill out the base profile at that site, they basically give you the allocation that they use, which conforms to the All-Weather paper linked in my OP.

My takeaway from it, was that my portfolio posted above is probably too low on TIPS, and too high on commodities/EM Debt (collectively). The other takeaway for me, is another confirmation that the Robbins/Dalio "all-weather" portfolio in Robbins book really is half-baked, even for an unlevered version. It completely lacks IL bonds, which is the largest holding at appianroad.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Fri Dec 23, 2016 1:46 pm

taguscove wrote:What is All-Weather?
-----
The all-weather portfolio is a passive investment fund that:
1. Assumes that the market of investible risky assets is generally fairly priced
2. Balances assets to be indifferent to when growth is above/below market expectations and when inflation is above/below market expectations.

The Bogleheads forum seems to strongly prefer diversified equities; however, if you believe that assets are fairly valued and that you are paid to accept systemic (non-diversifiable) risk, then it's sensible to diversify beyond equities. A standard 60% stock/ 40% bond portfolio concentrates 85-90% of the risk exposure in equities because equities are inherently more volatile. Any asset (other than cash) can be levered to have stock-like volatility. Bridgewater uses leverage to gain risk exposure across asset classes.

Advice for a retail investor replicating All Weather
-----
Having worked at Bridgwater Associates for 3 years, it's difficult for a retail investor to replicate the all-weather portfolio:
1. the management complexity balancing risk exposures
2. The operational complexity of leveraging low-return assets. You either need to manage a portfolio of rolling futures contracts and/or access the repo (repurchase) market.

The simple solution: increase allocations on long duration nominal bonds (EDV), long duration inflation linked bonds (LTPZ), gold (IAU), and commodities (GSG).
The complex solution: Open an Interactive Brokers account and gain the appropriate risk exposure through equity, interest rate, and commodity futures. This is expensive analytically and far beyond the capabilities of retail investors.

Disclaimer
-----
I don't represent Bridgewater Associates. The information comes from publicly available information, and I am not disclosing any trade secrets. I did have a non-disclosure/non-compete with Bridgewater Associates that expired in 2015.
Thanks for the post. It sounds like a lot of the success of the Bridgewater version is the use of leverage. The use of leverage is beyond what most retail investors would want to attempt. How good would a retail investor do trying to do this without the use of leverage?

I think it can be done. The Harry Browne permanent portfolio is a good one and has worked in the past, 25% stocks, 25% long treasuries, 25% gold, and 25% cash. Doing a Bridgewater-like All-Weather portfolio would be a little dicey for me as I really don't understand commodities all that well. Another thing would be using the proper vehicles to represent the desired asset classes.

This is an excellent discussion.
A fool and his money are good for business.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by taguscove » Fri Dec 23, 2016 8:28 pm

Investors have an almost irrational fear of leverage. They don't realize that all kinds of investments have built-in internal leverage. When McDonald's issues a bond, the company stock leverage increases. An investor who wants amplify returns (and losses) on a stable asset can take external leverage. Taking a mortgage to buy a house is a common example. Residential real estate is far less volatile than stocks, but has similar volatility once you lever up 4:1 (i.e. finance with 20% equity, 80% mortgage). It's funny to me that the same people extolling small cap stocks with high internal leverage are uncomfortable taking external leverage on a 10 year US treasury.

If you want to move towards an all-weather allocation without external leverage:
Drop shorter and medium term bonds. Buy long duration bond funds
EDV or VGLT - long term nominal government index
LTPZ - long term inflation linked government index
VCLT - long term corporate index

Gold - IAU. lower expense ratio than GLD though with less market liquidity
Commodities - DBC, GSG. Honestly, I'm not very familiar with the nuance. GSG is higher on energy allocation.
Residential real estate (i.e. the home you live in): does reasonably well in high inflation, low growth scenarios where nominal bonds and stocks do badly. Your "dividend" of being able to live there rises with inflation. IMPORTANT: commercial real estate REITs are a completely different asset that's almost completely in retail, office, and industrial spaces. This is more sensitive to economic cycles.

If you want to venture into external leverage:
Look at e-mini futures S&P 500 futures contracts. The key insight is that you can exactly replicate S&P500 mutual fund returns by pairing cash with an emini futures contract. You can get your equity exposure through futures and buy low volatility assets with the remaining cash. This is a primary way that institutions get cheap external leverage.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 12:00 pm

nedsaid wrote:Thanks for the post. It sounds like a lot of the success of the Bridgewater version is the use of leverage. The use of leverage is beyond what most retail investors would want to attempt. How good would a retail investor do trying to do this without the use of leverage?
I just wanted to say, in general to those reading, that I mostly do not agree with this (that a lot of the success of a risk parity strategy requires leverage, whether by Bridgewater or by anyone else). I have been testing the proper portfolio weightings in the same manner as described by Dar Sandler in this interview here (http://www.doughroller.net/investing/ri ... r-sandler/), and then backtesting at portfoliovisualizer, and what I have found is that, for the most part, its possible to get very close to matching volatilities (aka establishing risk parity) between assets by going long on the bonds, and still having a theoretical portfolio that generates more than enough return for most people without the leverage.

Leverage isn't free. If you use a margain account, for instance as Dar mentions, you're going to be paying interest on the borrowed money. So literally right out of the gate, you're going to be dealing with diminishing (risk-adjusted) returns by levering the portfolio.

And another thing occurred to me is that it isn't really necessary to get the volatilities exactly equal anyway. You can go a long ways towards applying this concept/strategy by going moving away from a stock-dominated portfolio, and using something similiar to what I have in the original post (though adding more TIPS), and just keeping the stocks in the 30% range or so. So while that approach might not get you full parity, you're at least 70% there from where you started. So the concept is useful even if you can't achieve full risk-parity without leverage. It's not a strategy where if you cannot get perfect risk-parity, then it's all for not. The closer you get, the higher your Sharpe ratio.
nedsaid wrote:This is an excellent discussion.
I think so too. I believe the spirit of bogleheads includes a big part about wanting to achieve outstanding risk-adjusted return and at a low cost. I think it's possible to take this sort of approach and still be within the general spirit of that objective. I don't think I've read anywhere that a boglehead approach mandates that the portfolio be dominated by stocks.

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azanon
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 12:08 pm

taguscove wrote:If you want to move towards an all-weather allocation without external leverage:
Drop shorter and medium term bonds. Buy long duration bond funds
EDV or VGLT - long term nominal government index
LTPZ - long term inflation linked government index
VCLT - long term corporate index

Gold - IAU. lower expense ratio than GLD though with less market liquidity
Commodities - DBC, GSG. Honestly, I'm not very familiar with the nuance. GSG is higher on energy allocation.
I would add one additional idea, that could also improve upon my OP, and be in the spirit of this effort. Precious Metals Equity (such as VGPMX or GDX) would be a way to "lever" the gold/commodities component. I've read (from W. Bernstein and others) that it's very close to at least a 2:1 (if not more) faux leverage on regular gold and/or commodities. So this could buy 5-10% in the portfolio to use elsewhere, such as on the IL bonds.

Again, I think there's ways around the (direct) leverage, where it really isn't that necessary.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 12:18 pm

FWIW, this is my updated version:

15% Vanguard Selected Value Fund (VASVX) 0.39%
15% Vanguard International Explorer Fund (VINEX) 0.42%
10% Vanguard Emerging Markets Government Bond ETF (VWOB) 0.34%
15% Vanguard Long-Term Government Bond Index Fund Admiral (VLGSX) 0.07%
35% Vanguard Inflation Protected Securities Fund Admiral (VAIPX) 0.10%
10% Vanguard Precious Metals and Mining (VGPMX) 0.35%

> I updated the stock component to (low-cost) actives. I really got to thinking about what livesoft said, and then I thought maybe I'd be a bit more at ease if i actually don't index the stock component, and pay a little bit extra to have management for that portion instead of just "index boxing" the stocks. Explorer has an excellent history (doesn't even Bogle have some, or "had" some? Thought i read that somewhere...), and Selected Value looks very promising at reasonable cost. If you'd prefer some stock indexes there, that won't hurt. But I like that approach. The main thing here I would retain though is the tilts (value/small). Without the tilts, the expected return on the portfolio drops by about 1%.

> I switched the EM credit to Vanguard. I was mostly swayed by appianroad's use of Vanguard, and also have read at this isn't a currency play, rather just exposure to debt in those countries.

> I'm not fully convinced that the further added duration of EDV and LTPZ, are going to improve the risk-adjusted return vs. just VLGSX and VAIPX. One could certainly use EDV and LTPZ, but that's going to be an aweful lot of duration risk. I feel like just VLGSX and VAIPX is already going to be very different from what most people do (Vanguard, themselves, for instance now push investers toward the ST variant of TIPS). Also please note that appianroad did list regular LT bonds as options for them as well (though, admittedly, they may leverage them). The weighted duration of my choices are almost exactly 10 years, which qualifies as long. So that's average 10 yrs duration on 50% of the portfolio.

>The 10% VGPMX might look scary. But I've been backtesting the heck out of it at portfoliovisualizer, and it is downright shocking how well it helps the portfolio even including this most recent ~ -80% (or more) drop the past few years. Heck, I ran the simulation a few times because I just didn't believe the result. It really hit home that "it's the portfolio stupid". Very scary in isolation. But it works magic in a portfolio, mainly because it is really isn't correlated to anything else (except somewhat to the EM Credit).

>And finally, I got it to 100% Vanguard mutual funds. Added convenience.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sat Dec 24, 2016 3:19 pm

azanon wrote:
nedsaid wrote:Thanks for the post. It sounds like a lot of the success of the Bridgewater version is the use of leverage. The use of leverage is beyond what most retail investors would want to attempt. How good would a retail investor do trying to do this without the use of leverage?
I just wanted to say, in general to those reading, that I mostly do not agree with this (that a lot of the success of a risk parity strategy requires leverage, whether by Bridgewater or by anyone else). I have been testing the proper portfolio weightings in the same manner as described by Dar Sandler in this interview here (http://www.doughroller.net/investing/ri ... r-sandler/), and then backtesting at portfoliovisualizer, and what I have found is that, for the most part, its possible to get very close to matching volatilities (aka establishing risk parity) between assets by going long on the bonds, and still having a theoretical portfolio that generates more than enough return for most people without the leverage.

Leverage isn't free. If you use a margain account, for instance as Dar mentions, you're going to be paying interest on the borrowed money. So literally right out of the gate, you're going to be dealing with diminishing (risk-adjusted) returns by levering the portfolio.

And another thing occurred to me is that it isn't really necessary to get the volatilities exactly equal anyway. You can go a long ways towards applying this concept/strategy by going moving away from a stock-dominated portfolio, and using something similiar to what I have in the original post (though adding more TIPS), and just keeping the stocks in the 30% range or so. So while that approach might not get you full parity, you're at least 70% there from where you started. So the concept is useful even if you can't achieve full risk-parity without leverage. It's not a strategy where if you cannot get perfect risk-parity, then it's all for not. The closer you get, the higher your Sharpe ratio.
nedsaid wrote:This is an excellent discussion.
I think so too. I believe the spirit of bogleheads includes a big part about wanting to achieve outstanding risk-adjusted return and at a low cost. I think it's possible to take this sort of approach and still be within the general spirit of that objective. I don't think I've read anywhere that a boglehead approach mandates that the portfolio be dominated by stocks.
A couple things give me pause about the All-Weather portfolios that I have seen. First, I am nervous about long term bonds after a 30 plus year bull market in bonds. I also don't think bonds in general will do too well over the next few years. These portfolios tend to be very bond heavy. I also have been nervous about Gold and Commodities. Backtesting is very useful but again asset classes don't have to perform up to our expectations. What worked in the past may not work in the future.

It is probably better than the Nedsaid solution which is pretty much throwing enough asset classes at a problem hoping that all that diversification will work in a crisis. Over longer time periods, the All-Weather portfolios should work just fine but I am suspicious that they will limit shorter term volatility as much as their proponents claim.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 3:40 pm

nedsaid wrote:A couple things give me pause about the All-Weather portfolios that I have seen. First, I am nervous about long term bonds after a 30 plus year bull market in bonds. I also don't think bonds in general will do too well over the next few years. These portfolios tend to be very bond heavy. I also have been nervous about Gold and Commodities. Backtesting is very useful but again asset classes don't have to perform up to our expectations. What worked in the past may not work in the future.
> Here's the thing though. The price of bonds (and their associated yield), including long-term bonds, is a best-guess at what it should be, based upon future expectations. It is a composite of what the market thinks it should be. So if one independently opines that they don't think they'll do well over the next few years, you're actually stepping outside of the composite expectation. To be quite blunt about it, it's a market-timing statement since you're disagreeing with the composite viewpoint.

The 4 quadrants of the risk-parity are designed to be agnostic with respect to whether growth will be higher or lower than market expectations, and agnostic as to whether inflation will be higher or lower than expected. Today's prices of bonds and stocks always reflect the actual expectations. So there's a 50% chance it'll be one or the other for both growth and inflation. So risk parity, if anything, is the ultimate non-timing portfolio because the intent of the design is to balance the risk for all 4 scenarios, each of which have a 50% chance of deviating from market expectations. A stock heavy portfolio, in contrast, is betting on accelerated growth, and ideally lower than expected inflation, since that is the investing climate that portfolio thrives in.

Rates actually could stay put, more or less, for years on end. Case and point, how many years have we already gone since pundits have been expecting them to rise (I realize we went up a quarter point, but that doesn't mean it'll keep rising). And speaking of bull markets, how many years are we into this US stock bull market? It cuts both ways, I think.
nedsaid wrote:It is probably better than the Nedsaid solution which is pretty much throwing enough asset classes at a problem hoping that all that diversification will work in a crisis. Over longer time periods, the All-Weather portfolios should work just fine but I am suspicious that they will limit shorter term volatility as much as their proponents claim.
It mathematically, virtually ensures that risk-adjusted return will be higher. It is well known fact by virtually any expert in this field, that a portfolio with stock percentages in the 20-30% range have a higher risk-adjusted return than one with 60-70%. (Even the infamous 3-fund portfolio will have a higher Sharpe ratio if you allow the bond component to be larger.) The only tricky part with a low stock portfolio is getting the return itself high enough that it meets your needs since you're not using as much stocks. And then that's where the all-weather techniques discussed here come into play.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sat Dec 24, 2016 9:39 pm

azanon wrote:
nedsaid wrote:A couple things give me pause about the All-Weather portfolios that I have seen. First, I am nervous about long term bonds after a 30 plus year bull market in bonds. I also don't think bonds in general will do too well over the next few years. These portfolios tend to be very bond heavy. I also have been nervous about Gold and Commodities. Backtesting is very useful but again asset classes don't have to perform up to our expectations. What worked in the past may not work in the future.
> Here's the thing though. The price of bonds (and their associated yield), including long-term bonds, is a best-guess at what it should be, based upon future expectations. It is a composite of what the market thinks it should be. So if one independently opines that they don't think they'll do well over the next few years, you're actually stepping outside of the composite expectation. To be quite blunt about it, it's a market-timing statement since you're disagreeing with the composite viewpoint.

Nedsaid: No, I am not market timing here. What I am saying is that valuations are important. We just had a 33+ year bond bull market. Interest rates dropped from 14-15% to about 2%. Do we expect another 33 years of falling interest rates, do we expect -10% interest rates? What I am saying is that there is a certain reversion to the mean in the markets. The likelihood of a bond bear market here seems to be greater than a 33 year continuation of the bond bull market.

Pretty much, I am saying that one of the underpinnings of these bond-heavy all-weather portfolios is not as solid as people think. Reversion to the mean and very low bond yields clue us in that bond returns will be less than in the past. Is that market timing?


The 4 quadrants of the risk-parity are designed to be agnostic with respect to whether growth will be higher or lower than market expectations, and agnostic as to whether inflation will be higher or lower than expected. Today's prices of bonds and stocks always reflect the actual expectations. So there's a 50% chance it'll be one or the other for both growth and inflation. So risk parity, if anything, is the ultimate non-timing portfolio because the intent of the design is to balance the risk for all 4 scenarios, each of which have a 50% chance of deviating from market expectations. A stock heavy portfolio, in contrast, is betting on accelerated growth, and ideally lower than expected inflation, since that is the investing climate that portfolio thrives in.

Nedsaid: It is easy to say. To be perfectly frank, I have probably not fully understood the risks that I was taking with my investments. I am not a quant, having almost flunked calculus in college. But I invested anyway. I don't do efficient frontiers, use complicated spreadsheets, calculate standard deviation and sharpe ratio of my portfolio, or backtest. Pretty much, I read the literature and eyeball things. I have argued that people believe there is a whole lot more precision in this than there really is.

From my layman's observation of the markets, it is my belief that the professionals and the quants don't fully understand the risks they are taking either. I have seen too many things blow up during my investment career to lose faith in the so-called experts. Let's see: portfolio insurance, Long Term Capital Management, AIG and credit default swaps, Lehman Brothers, etc., etc. etc.

Also, if the markets are as efficient as we are led to belief, why is there a Value premium?


Rates actually could stay put, more or less, for years on end. Case and point, how many years have we already gone since pundits have been expecting them to rise (I realize we went up a quarter point, but that doesn't mean it'll keep rising). And speaking of bull markets, how many years are we into this US stock bull market? It cuts both ways, I think.

Nedsaid: If you had to make a bet, would you: a) bet that the bond bear market will continue for another 33 years? or b) bet that somewhere during the next 33 years that there will be a bond bear market? Is the US Stock Market a better buy today that it was in March of 2009? Just sayin'.
nedsaid wrote:It is probably better than the Nedsaid solution which is pretty much throwing enough asset classes at a problem hoping that all that diversification will work in a crisis. Over longer time periods, the All-Weather portfolios should work just fine but I am suspicious that they will limit shorter term volatility as much as their proponents claim.
It mathematically, virtually ensures that risk-adjusted return will be higher. It is well known fact by virtually any expert in this field, that a portfolio with stock percentages in the 20-30% range have a higher risk-adjusted return than one with 60-70%. (Even the infamous 3-fund portfolio will have a higher Sharpe ratio if you allow the bond component to be larger.) The only tricky part with a low stock portfolio is getting the return itself high enough that it meets your needs since you're not using as much stocks. And then that's where the all-weather techniques discussed here come into play.

Nedsaid: Pretty much when I retire, the key will be how much return did I actually achieve? It is nice to quantify risk as much as possible so that we don't overdo it and wind up blowing up our portfolios. But really, does anyone really understand risk 100% and further can anyone really quantify it?

I have said that all-weather techniques can work. The Harry Browne Permanent Portfolio is a good example of that. Really, can a portfolio with 30% stocks generate enough return for the average Joe and Jane to retire on? I am wondering if an investor should be thinking of all-weather techniques later on in his or her investing career when principal preservation gets to be more and more important.

A fool and his money are good for business.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 10:59 pm

nedsaid wrote:Nedsaid: No, I am not market timing here. What I am saying is that valuations are important. We just had a 33+ year bond bull market. Interest rates dropped from 14-15% to about 2%. Do we expect another 33 years of falling interest rates, do we expect -10% interest rates? What I am saying is that there is a certain reversion to the mean in the markets. The likelihood of a bond bear market here seems to be greater than a 33 year continuation of the bond bull market.

Pretty much, I am saying that one of the underpinnings of these bond-heavy all-weather portfolios is not as solid as people think. Reversion to the mean and very low bond yields clue us in that bond returns will be less than in the past. Is that market timing?
In short, yes it is market timing. You're either a EMH proponent or you're not. Any talk of valuations is an argument against EMH viewpoint, and an argument for some aspects of market timing. Traditionally, bogleheads fall in the largely EMH camp, though there are some notables that aren't. All securities, at any moment, should be properly priced from an EMH viewpoint. That actually includes bonds. At any given moment, the yield with respect to the duration should reflect composite future expectations.

If you really know bond prices are incorrect and the securities are destined to fall, I'd find the longest duration bond or ETF and short the heck out of it. Seriously, don't dismiss me here. If you really know what's going to do well, or what's going to do poorly, use leverage for what's going to do well to maximize your profits, or short like crazy what you know will do poorly. Either you know, or you don't. Decide which is true, then invest accordingly.

You should consider following Larry Swedroe's annual column which covers how the experts expect securities to perform for a given year, then how they actually end up performing. It's almost entertaining how bad wrong the experts consistently are. It's borderline inverse correlation for predictions, lol.
nedsaid wrote:It is easy to say. To be perfectly frank, I have probably not fully understood the risks that I was taking with my investments. I am not a quant, having almost flunked calculus in college. But I invested anyway. I don't do efficient frontiers, use complicated spreadsheets, calculate standard deviation and sharpe ratio of my portfolio, or backtest. Pretty much, I read the literature and eyeball things. I have argued that people believe there is a whole lot more precision in this than there really is.

From my layman's observation of the markets, it is my belief that the professionals and the quants don't fully understand the risks they are taking either. I have seen too many things blow up during my investment career to lose faith in the so-called experts. Let's see: portfolio insurance, Long Term Capital Management, AIG and credit default swaps, Lehman Brothers, etc., etc. etc.

Also, if the markets are as efficient as we are led to belief, why is there a Value premium?
If you're not a quant, I'd probably steer you away from an approach like Risk Parity. A portfolio is never going to be a good one for someone who's not a huge believer in it. I don't care how good the portfolio should be, if you're not going to stick with it through thick or thin, look elsewhere. If I were you, I'd search for a portfolio that inspires passion, then use that one.

You've convinced me, this is not for you. I'd recommend the 3-fund portfolio instead.

The advantage of the 3-fund is that it has a huge following, and is highly popular. Even if it ends up doing poorly, it won't be because you stuck your neck out. You'll have pages and pages of threads of others to console with, because they did just as badly too. I don't mean this to sound like mocking though. There's actually a term for it; tracking error. 3-fund has 0 tracking error, and that's considered a good thing.
nedsaid wrote:If you had to make a bet, would you: a) bet that the bond bear market will continue for another 33 years? or b) bet that somewhere during the next 33 years that there will be a bond bear market? Is the US Stock Market a better buy today that it was in March of 2009? Just sayin'.
If I had any insight that was better than the market composite insight, I would not use a Risk Parity strategy. I would tilt to my insight. Sadly, I don't believe I have better insight than the market composite. I used to think I did, and you could find posts that implied as much, but I've finally been beaten into submission, and have to admit, I don't have a clue what will happen tomorrow.


nedsaid wrote:Nedsaid: Pretty much when I retire, the key will be how much return did I actually achieve? It is nice to quantify risk as much as possible so that we don't overdo it and wind up blowing up our portfolios. But really, does anyone really understand risk 100% and further can anyone really quantify it?
When I look back at my, most likely, very modest returns, I'll never forget that I intentionally chose to moderate my risk along the way, so I was always willing to pay that price. Call me strange, but I have a strong desire to have a return of my money (inflation adjusted), and less a desire of a return on my money. Perhaps if I didn't have to anguish so hard to earn it, I wouldn't be like that. I'm like a less extreme version of the way Zvi Bodie sees it. I want pretty darn low risk, but I'm not as hell bent on it as Zvi Bodie.

Zvi would just use 100% TIPS or I bonds. I say, well let's not go that extreme, MPT allows for both higher return and actually even lower risk, and risk parity is really nothing more than a way to implement MPT. And I know that despite the fact that I didn't graduate from MIT.
nedsaid wrote:I have said that all-weather techniques can work. The Harry Browne Permanent Portfolio is a good example of that. Really, can a portfolio with 30% stocks generate enough return for the average Joe and Jane to retire on? I am wondering if an investor should be thinking of all-weather techniques later on in his or her investing career when principal preservation gets to be more and more important.
Thought I'm sure the technique appreciates every endorsement it can get, it's all really gravy. They work, regardless if they're popular or not. Bridgewater is the #1 Hedge Fund. It got that way for a reason.

As for retirement, at mid career, I'm not so sure if it's the best of ideas to pull the trigger when you need a portfolio to generate 4%+ return. I'm starting to think it might be far more prudent to work that extra few years, and not make the portfolio work so hard and have that added peace of mind a 30% equities portfolio would bring.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sat Dec 24, 2016 11:38 pm

azanon wrote:
nedsaid wrote:Nedsaid: No, I am not market timing here. What I am saying is that valuations are important. We just had a 33+ year bond bull market. Interest rates dropped from 14-15% to about 2%. Do we expect another 33 years of falling interest rates, do we expect -10% interest rates? What I am saying is that there is a certain reversion to the mean in the markets. The likelihood of a bond bear market here seems to be greater than a 33 year continuation of the bond bull market.

Pretty much, I am saying that one of the underpinnings of these bond-heavy all-weather portfolios is not as solid as people think. Reversion to the mean and very low bond yields clue us in that bond returns will be less than in the past. Is that market timing?
In short, yes it is market timing. You're either a EMH proponent or you're not. Any talk of valuations is an argument against EMH viewpoint. Traditionally, bogleheads fall in the former camp, though there are some notables that aren't. All securities, at any moment, should be properly priced from an EMH viewpoint. That actually includes bonds. At any given moment, the yield with respect to the duration should reflect composite future expectations.

If you really know bond prices are incorrect and the securities are destined to fall, I'd find the longest duration bond or ETF and short the heck out of it.

You should consider following Larry Swedroe's annual column which covers how the experts expect securities to perform for a given year, then how they actually end up performing. It's almost entertaining how bad wrong the experts consistently are. It's borderline inverse correlation for predictions, lol.
What I have found is that ALL investors believe that valuations matter. Some of us admit it and others do not. Were the internet stocks that were priced to infinity without earnings and in a few cases without sales efficiently priced? If markets were perfectly efficient, in the 2000-2002 bear market it would have made zero difference in what types of stocks you owned. The speculative internet stocks should have been priced just as efficiently as the blue chip stocks. But they weren't and it shows what effect that irrational emotion and euphoria can have on a market. Markets can be very irrational and inefficient particularly at the extremes. Markets aren't efficient because humans are emotional beings and sometimes do crazy things.

The blue chips didn't fall as hard as the speculative internet stocks because there were less expectations for growth in the blue chips and quite frankly the expectations for blue chips were more realistic. There were stocks that had growth rates priced in that could not have been fulfilled under any realistic economic scenario that could be imagined. There was a lot of irrational exuberance, human emotion.

In my lifetime, forward P/E's have ranged from about 8 to about 32. Trailing P/E's have ranged from about 6 to 45. Certainly, earnings expectations, economic forecasts, interest rates, and other rational factors affect the multiple that the market puts on a dollar of earnings. But clearly, there is a big element of human emotion here as well. Greed and Fear. Euphoria and extreme pessimism. I might not be the sharpest tack in the drawer but I would rather buy the market at a P/E of 6 rather than 45. The future expected returns from a 6 P/E might be a wee bit higher than from a 45 P/E.

If my store marks down toilet paper 50% and at a big discount to the store's competitors, I am going to stock up on toilet paper and not write essays about the efficiency of toilet paper markets.

I am mostly a believer in efficient markets, that is they are efficient enough. For all intents and purposes, markets are 100% efficient to the average investor, as they do a good job of pricing securities. But there get to be times of irrationality whether euphoria or excessive gloom where all this just gets tossed out the window. There gets to be a point where things go crazy enough that even the most ardent believers of EMH have to raise an eyebrow and admit something isn't quite right.

Again, if markets are as efficient as you say, why is there a Value premium? And why is it that the experts cannot agree on why the Value premium exists? Some say it is a risk story, others say it is a behavioral story, and yet others say it is a mix of both. My belief is that the factors are caused by human nature and human behavior. Behavioral errors that humans make over and over, we just can't help ourselves. I don't buy that this is all from additional risk.

John Bogle quite often talks about reversion to the mean. This is a back door way of saying that valuations matter.

I just don't go for the one or the other type of thinking. I mostly agree with Efficient Market Hypothesis but there are certainly exceptions particularly at the extremes.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sat Dec 24, 2016 11:45 pm

So here's the thing. Even if you think valuations matter somewhat, it's possible to acknowledge that, then dive in on a strategy that intentionally pays no attention to it. In due time, you'll average out, then it won't matter if valuations really do matter or they do not.

I'd rather not have to constantly be having to figure out what the valuations say today or tomorrow. I'd rather play golf and just get my fair share of average market returns from a strategy intentionally designed with neutral bias. I'm 45 now, and I don't want to have to worry about this for years on end. I want to focus on other things, and maybe not even have to follow forums like this.

It would be nice to go back in time and be a 20 something, then just use a strategy that pays no attention to valuations. Just invest methodically in a way that pays no attention to it. Then just let all the sophisticated people debate about it at places like this, while I make better risk-adjusted return than they do with less effort.

There was supposedly a time in the 19th century where stocks were thought of as poor investments. I only know this from history books because I was born in 1971, and by the time I realized what was going on, stocks were always regarded as the best investment. I'd consider history, and maybe not regard stocks so great simply because since 1981 or so, they have been the best, even better than the bond bull market.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sat Dec 24, 2016 11:59 pm

Another point that I would make is that the creator of an all-weather portfolio has to make some judgments. Volatility of asset classes changes over time and certainly there are historical norms for valuation and volatility. Otherwise there would be no mean to revert to. But pretty much, all of this is a moving target. The real Ray Dalio portfolio is dynamic, the proportions invested in different asset classes change over time. Is Ray Dalio market timing?

I am not demeaning Ray Dalio in any way. The guy is a genius and clearly knows what the heck he is doing. The problem is that he would likely not return my phone calls and there is no way for me to invest with him. Us mere amateurs must figure out our own path if we want to pursue an all-weather strategy.

The thing is, I would like my portfolio to have real 5-6% returns and for those returns to be in a straight line without wiggles or squiggles. That is the investment holy grail but in real life doesn't exist. No matter what I do, if I want return, I have to accept volatility. The more return I want, the more volatility I have to accept. Maybe one of these All-Weather portfolios can achieve Nirvana of straight line and predictable growth. Unfortunately, less volatility is most often achieved with less return.

Sometimes an investment advisor can fake lessened volatility by putting a portion of the portfolio in illiquid assets. The problem is, valuations still fluctuate but you just don't know it. For example, homeowners would be shocked at how volatile home prices really are. They just don't notice it as people only move every seven years or so. Stocks wouldn't seem so volatile if you only checked prices every seven years.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sun Dec 25, 2016 12:10 am

azanon wrote:So here's the thing. Even if you think valuations matter somewhat, it's possible to acknowledge that, then dive in on a strategy that intentionally pays no attention to it. In due time, you'll average out, then it won't matter if valuations really do matter or they do not.

I'd rather not have to constantly be having to figure out what the valuations say today or tomorrow. I'd rather play golf and just get my fair share of average market returns from a strategy intentionally designed with neutral bias. I'm 45 now, and I don't want to have to worry about this for years on end. I want to focus on other things, and maybe not even have to follow forums like this.

It would be nice to go back in time and be a 20 something, then just use a strategy that pays no attention to valuations. Just invest methodically in a way that pays no attention to it. Then just let all the sophisticated people debate about it at places like this, while I make better risk-adjusted return than they do with less effort.
My advice to investors is to pick an asset allocation and stick to it. Investors should not be obsessed with valuations every waking moment. There are market extremes that should raise an eyebrow and perhaps adjustments could be made then. John Bogle has discussed this.

I am not excited about bonds in here, though the 10 year treasury bond has seen interest rates go up by about 1%. Bonds look a bit better to me now than they did back in October 2016. I am not excited about bonds even here but am I buying or am I selling? I am buying as I am age 57 and am slowly de-risking my portfolio. Not excited about valuations here but my need to de-risk outweighs my concerns about price.

Another reason that investors shouldn't be too obsessed with valuations is that bull markets always cause stocks to look expensive. New market highs are normal stock market behavior. Isn't that why all of us invest? Warren Buffett was once asked if the stock market was expensive. His answer was, "Yes, but not as expensive as it looks." That was a great quote.

Having said all of that, investors should be mindful of valuations. We should have an idea of the future expected returns of asset classes as that helps us with asset allocations. Valuations are the big factor that drives expected future returns. Who talks about this more than Larry Swedroe?

Really, the question is how actionable is this for the average investor? I have answered this in other threads but might discuss it more here.
Last edited by nedsaid on Sun Dec 25, 2016 12:12 am, edited 2 times in total.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 12:12 am

nedsaid wrote:Another point that I would make is that the creator of an all-weather portfolio has to make some judgments. Volatility of asset classes changes over time and certainly there are historical norms for valuation and volatility. Otherwise there would be no mean to revert to. But pretty much, all of this is a moving target. The real Ray Dalio portfolio is dynamic, the proportions invested in different asset classes change over time. Is Ray Dalio market timing?
Volatilities change, but not that much. I actually haven't read that. It's actually pretty easy to explain why each asset class has an anticipated volatility. It's the returns that are harder to predict. But the volatilities? They're pretty steady, actually.

Earlier, I addressed the fact that I don't think it's critical to achieve exact risk parity. Just moving towards it is all that matters, and is something I think all investors should consider, especially some 7 years now in a stock bull market. Again, the classic 60/40 is clearly extreme risk towards stocks, - about 85-90% of risk is in one asset class. It's not hard to improve on that risk equation.
nedsaid wrote:I am not demeaning Ray Dalio in any way. The guy is a genius and clearly knows what the heck he is doing. The problem is that he would likely not return my phone calls and there is no way for me to invest with him. Us mere amateurs must figure out our own path if we want to pursue an all-weather strategy.
I actually like where you're going with this. I don't think he's godly either. The whole point of my thread is I'm essentially claiming that it's not that hard to knock off their strategy especially given everything that's made public now. The portfolio that made them #1 is essentially public knowledge now.

Actually, I think Dalio said when he entered his 60s, he had achieved what he wanted to achieve, so he wasn't as worried about protecting his trade secrets. So a lot of these releases, such as that 2012 paper in the OP was probably part of that? Same thing for his recent video on the economic machine. Also, his meeting with Robbins he also said the same thing.
The thing is, I would like my portfolio to have real 5-6% returns and for those returns to be in a straight line without wiggles or squiggles. That is the investment holy grail but in real life doesn't exist. No matter what I do, if I want return, I have to accept volatility. Robbins might be right, you can have the great return, and low volatility. Only thing bad about Robbins, is Dalio gave him a crap version of the all-weather
I hesitate to mention this, but that revised portfolio I listed above? I backtested it at portfoliovisulizer to Jan 01, and it scored 5.99% real CAGR :mrgreen: Volatility was about 8.5%. 6% real despite 2 nasty bear markets in 15 years.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sun Dec 25, 2016 12:23 am

azanon wrote: I hesitate to mention this, but that revised portfolio I listed above? I backtested it at portfoliovisulizer to Jan 01, and it scored 5.99% real CAGR :mrgreen: Volatility was about 8.5%
Yes, but have you future tested it?

Backtesting has value, and it does help you put together a better portfolio. But history rhymes but does not repeat. What worked great since 2001 might not work so well from 2017 through 2032.

I think you have some great ideas here. The all-weather concept has a lot of merit to it. I just can't bring myself to load up on Long-Term Bonds, Gold, Commodities, etc. It involves investing in some things that I don't understand too well, so I guess I am admitting to my own limitations as an investor. I just can't be an expert on everything.

When I consult experts, they don't agree. I remember a thread where Larry Swedroe and Rick Ferri went back and forth on Commodities. Swedroe liked them as part of a portfolio and Ferri did not. It wasn't a cage fight match but it was fun.

I am open minded. If you look through my posts, I have entertained such ideas as Precious Metals Funds, Commodity funds, Gold, etc. I have thought about them but never pulled the trigger. I wish I had bought precious metals funds back in 2015. :D But I didn't.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 12:27 am

nedsaid wrote:
azanon wrote:Having said all of that, investors should be mindful of valuations. We should have an idea of the future expected returns of asset classes as that helps us with asset allocations. Valuations are the big factor that drives expected future returns. Who talks about this more than Larry Swedroe?
I can actually be brief on your post here. Dalio himself has said that future return expectations are low, regardless of what portfolio you're deploying. In that sense, I agree with you, and most everyone else does too.

What I was trying to suggest indirectly earlier, is that bond valuations are no worse than stocks. Case and point, do you realize US stock P/E 10 valuation is something like an eye-popping 27? That's higher than the 07 peak, and as high as the 29' peak.

Risk Parity is neutral with respect to valuations. Really think about that. Neutral doesn't mean it's contrarian to valuations. It's just neutral to it. It's designed to be positioned right in the middle. there's supposed to be a 50% chance of higher vs. lower inflation, and 50% chance of higher vs. lower growth. Now if you believe the actual design is incorrect, that's an entirely different matter. Of course reject it if you think the design is flawed.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by taguscove » Sun Dec 25, 2016 12:30 am

General theoretical banter:
This is turning into a larger discussion of EMH (Efficient Market Hypothesis).
The core tenets of all weather are that:
1. assets are fairly priced by the market*
2. you are compensated for accepting systematic risk
3. Inflation and growth expectations are the core factors driving the asset classes

*Asset bubbles based on human psychology is a counter example. On the whole though, the academic literature is strongly in support of a largely efficient market that's difficult to make an easy profit from mis-pricing.

Regarding nedsaid's caution towards bonds: Japan and Switzerland are strong examples where bond yields could continue to drop. US 10 year treasury yield is currently 2.53% with a record low of 1.4% back in July 2016. Japan's 10 year treasury record low was -0.28% in July 2016. A view that bonds aren't going to perform as well or a reversion to the mean is a market mis-pricing (an alpha position in industry speak).

I have seen first-hand that it's possible to beat the market. Somebody has to have the insight to find mis-priced assets, and trade to bring the market pricing to fair pricing. That insight can come from market front-running, insider information, high frequency market making, reading company annual reports, etc. Beating the market is simply far harder than most normal people would expect. They are fooled by the volatile random walk exhibited by investment assets. I believe that the vast majority of people are best served with a diversified passive portfolio that gains returns by accepting systemic risk.

Specific actionable advice if you want to tilt your mostly stock portfolio to be more like All Weather:
EDV or LTPZ is definitely the way to go if you want to increase bond exposure without leveraging the portfolio. Just chart the returns between each fund and the shorter duration Vanguard counterpart, and you'll see the returns in near lockstep, but with different amplitudes.

I would be careful with VGPMX. The production companies are not an appropriate proxy for the underlying commodities. Their fortunes are driven by macro economic factors (e.g. China demand) and credit availability (many producers are highly leveraged)

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 12:43 am

For the record, I completely defer to Tag by comparison. I'm a hobbyist when it comes to investing, and a biologist by occupation. I certainly couldn't get any job at Bridgewater.

Thanks tag for the input, I really appreciate it. If you think those longer durations are critical, including on the TIPS, I'll probably go with the PIMCO 15+ year instead, and maybe EDV for LT bonds. Ultimately, I'm just one of those guys Robbins talked about in his book - that common guy that just wants to put together a reasonably strong portfolio, but will never be able (or willing) to invest with sophisticated technique such as leveraging.

My frustration with the commodities are also the costs. I've got a lot of boglehead in me, so it's hard for me to accept I'm going to need to pay 60+ basis points to include them.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sun Dec 25, 2016 12:45 am

azanon wrote:
nedsaid wrote:
azanon wrote:Having said all of that, investors should be mindful of valuations. We should have an idea of the future expected returns of asset classes as that helps us with asset allocations. Valuations are the big factor that drives expected future returns. Who talks about this more than Larry Swedroe?
I can actually be brief on your post here. Dalio himself has said that future return expectations are low, regardless of what portfolio you're deploying. In that sense, I agree with you, and most everyone else does too.

Nedsaid: Thanks for acknowledging the point I was trying to make.

What I was trying to suggest indirectly earlier, is that bond valuations are no worse than stocks. Case and point, do you realize US stock P/E 10 valuation is something like an eye-popping 27? That's higher than the 07 peak, and as high as the 29' peak.

Nedsaid: Yes, as Alan Greenspan would say, we are in a conundrum. Both stocks and bonds are expensive at least here in the United States.


Risk Parity is neutral with respect to valuations. Really think about that. Neutral doesn't mean it's contrarian to valuations. It's just neutral to it. It's designed to be positioned right in the middle. there's supposed to be a 50% chance of higher vs. lower inflation, and 50% chance of higher vs. lower growth. Now if you believe the actual design is incorrect, that's an entirely different matter. Of course reject it if you think the design is flawed.

Nedsaid: The trick is to get right in the middle as you said above. The trouble is we don't know exactly where the middle is but I believe it possible to get close enough. If we settle upon the correct asset classes to include in such a risk-parity portfolio (and that is hard enough), then we have to decide the proper proportions of those asset classes. But again, we can get close enough and we have to admit that this is not precise.

Pretty much, I have thrown asset classes at the problem probably not 100% knowing what I was doing. A lot of eyeballing, looking at Target Date and Target Risk Portfolios as a guide, closing my eyes, clicking my heels, and hoping for a return to Kansas. I am admitting that my process, though rational, is not particularly scientific or precise.

Your ideas have merit.
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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sun Dec 25, 2016 12:54 am

taguscove wrote:General theoretical banter:
This is turning into a larger discussion of EMH (Efficient Market Hypothesis).
The core tenets of all weather are that:
1. assets are fairly priced by the market*
2. you are compensated for accepting systematic risk
3. Inflation and growth expectations are the core factors driving the asset classes

*Asset bubbles based on human psychology is a counter example. On the whole though, the academic literature is strongly in support of a largely efficient market that's difficult to make an easy profit from mis-pricing.

Nedsaid: This is an excellent summary of our discussion. Thanks for the summary as it helps clarify the issues and makes the discussion more understandable to an investing novice.

Regarding nedsaid's caution towards bonds: Japan and Switzerland are strong examples where bond yields could continue to drop. US 10 year treasury yield is currently 2.53% with a record low of 1.4% back in July 2016. Japan's 10 year treasury record low was -0.28% in July 2016. A view that bonds aren't going to perform as well or a reversion to the mean is a market mis-pricing (an alpha position in industry speak).

Nedsaid: I get your point. I would say that negative bond yields suggest outright deflation and sluggish economic growth at best. This is particularly true in Japan. But I don't expect -10% yields. At some point, the bond bull market will end if it hasn't already.

I have seen first-hand that it's possible to beat the market. Somebody has to have the insight to find mis-priced assets, and trade to bring the market pricing to fair pricing. That insight can come from market front-running, insider information, high frequency market making, reading company annual reports, etc. Beating the market is simply far harder than most normal people would expect. They are fooled by the volatile random walk exhibited by investment assets. I believe that the vast majority of people are best served with a diversified passive portfolio that gains returns by accepting systemic risk.

Nedsaid: I believe it possible too. Low cost factor investing gives you the best shot at this in my opinion. Over my investment career, I have seen greater and greater competition and faster and better computers. You are competing with smarter and smarter people and smarter and smarter robots.

Specific actionable advice if you want to tilt your mostly stock portfolio to be more like All Weather:
EDV or LTPZ is definitely the way to go if you want to increase bond exposure without leveraging the portfolio. Just chart the returns between each fund and the shorter duration Vanguard counterpart, and you'll see the returns in near lockstep, but with different amplitudes.

I would be careful with VGPMX. The production companies are not an appropriate proxy for the underlying commodities. Their fortunes are driven by macro economic factors (e.g. China demand) and credit availability (many producers are highly leveraged)

Nedsaid: Other knowledgeable posters have made similar comments.

You wrote an excellent post and I want to thank you for your contribution to this thread.
A fool and his money are good for business.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 12:58 am

Another portfolio revision (inspired by Tag :mrgreen: )

15% Vanguard Selected Value Fund (VASVX) 0.39%
15% Vanguard International Explorer Fund (VINEX) 0.42%
10% Vanguard Emerging Markets Government Bond ETF (VWOB) 0.34%
15% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
30% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.20%
7.5% PowerShares Optimum Yield Diversified Commodity Strategy (PDBC) 0.60%
7.5% iShares Gold Trust (IAU) 0.25%

> Swapped LTPZ and EDV for VAIPX and VLGSX, but dropped total bond exposure by 5% (to use on commodities). Despite the 5% drop, that's much longer composite duration exposure compared to what I had.

> Dropped VGPMX per tag's comments, and reinserted commodities (same 7.5% mix of commodities and gold as Dalio gave Robbins). I need more raw commodities (15% vs. 10%) since VGPMX is quasi leveraged. Using PDBC instead of USCI for lower cost, and some very high early reviews/endorsements of PDBC. Again, I imagine it really is a crapshoot which commodities ETF is best though. Just pick one.
Last edited by azanon on Sun Dec 25, 2016 1:06 am, edited 1 time in total.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 1:00 am

nedsaid wrote:The trick is to get right in the middle as you said above.
Risk-parity believes the middle is today's price for every asset class. The design assumes the current price is accurate or as close to accurate as can be known. That's the bottom line.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by nedsaid » Sun Dec 25, 2016 1:03 am

azanon wrote:Another portfolio revision (inspired by Tag :mrgreen: )

15% Vanguard Selected Value Fund (VASVX) 0.39%
15% Vanguard International Explorer Fund (VINEX) 0.42%
10% Vanguard Emerging Markets Government Bond ETF (VWOB) 0.34%
15% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
30% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.10%
7.5% PowerShares Optimum Yield Diversified Commodity Strategy (PDBC) 0.60%
7.5% iShares Gold Trust (IAU) 0.25%

> Swapped LTPZ and EDV for VAIPX and VLGSX, but dropped total bond exposure by 5% (to use on commodities). Despite the 5% drop, that's much longer composite duration exposure compared to what I had.

> Dropped VGPMX per tag's comments, and reinserted commodities (same 7.5% mix of commodities and gold as Dalio gave Robbins). I need more raw commodities (15% vs. 10%) since VGPMX is quasi leveraged. Using PDBC instead of USCI for lower cost, and some very high early reviews/endorsements of PDBC. Again, I imagine it really is a crapshoot which commodities ETF is best though. Just pick one.
By golly, that looks pretty darned good. Also check out BobK's (Bobcat2) thread on his three fund portfolio. Bob is an economist and he is using Long Term TIPS in his portfolio but for different reasons. He is using a duration matching strategy another discussion. Not hijacking the thread but suggesting something for you to check out.

I think Tag, Tony Robbins, and Ray Dalio would be proud.
A fool and his money are good for business.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 1:03 am

nedsaid wrote:Nedsaid: Other knowledgeable posters have made similar comments.

You wrote an excellent post and I want to thank you for your contribution to this thread.
It isn't hard for me to deduce I'm in no position to argue with Tag on this item. The adjustments have been made. ;)

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Sun Dec 25, 2016 1:05 am

nedsaid wrote:
azanon wrote:By golly, that looks pretty darned good. Also check out BobK's (Bobcat2) thread on his three fund portfolio. Bob is an economist and he is using Long Term TIPS in his portfolio but for different reasons. He is using a duration matching strategy another discussion. Not hijacking the thread but suggesting something for you to check out.

I think Tag, Tony Robbins, and Ray Dalio would be proud.
Yeah I think so. What's that quote about the only enemy against a good strategy is a dream of a perfect one. I'm just trying to get close enough. I'm feeling like I'm just about there, if not already there. :sharebeer

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by unclescrooge » Sun Dec 25, 2016 1:56 pm

azanon wrote:
josh1130 wrote:
livesoft wrote:If you work your way up to 31 funds, then you can call it the Baskins/Robbins All-Flavors Portfolio.
8-)
Jokes aside, I bet we're no more than 5-10 years away from being able to "construct" our own custom portfolio with infinite amounts of very small allocations (fractional shares) to many asset classes, by using roboadvisor-like tools to do it with. So it'd work like a buffet of, say, 100 different ETFs and you could add whatever percentages of each to your own personal mix at, say, Betterment (for a small, nominal fee, of course).

Seriously, mark it down. This is coming. 10 years max.
It's already here. You just have to pay $30/month for it.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by steve roy » Mon Dec 26, 2016 12:43 am

If I may, the D/R All-Seasons Portfolio looks to be a kissing cousin of Harry Browne's Permanent Portfolio, profiled by William Bernstein several years ago:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

Nothing wrong with the similarities, as the PP has many strengths. (Note the asset classes). But as Dr. Bernstein notes in the article, when the Permanent Portfolio (or the ASP) heads south -- as every portfolio does, sooner or later -- many devotees will be bailing out.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by AlohaJoe » Mon Dec 26, 2016 1:28 am

taguscove wrote: If you want to venture into external leverage:
Look at e-mini futures S&P 500 futures contracts. The key insight is that you can exactly replicate S&P500 mutual fund returns by pairing cash with an emini futures contract. You can get your equity exposure through futures and buy low volatility assets with the remaining cash. This is a primary way that institutions get cheap external leverage.
I've always wondered how individual investors actually in practice, for reals, can get external leverage. In case anyone else also wondered that, I eventually found a good post on earlyretirementnow that shows how it works with equity futures contracts: https://earlyretirementnow.com/2016/06/ ... -roth-ira/

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by daffyd » Mon Dec 26, 2016 2:51 am

azanon wrote:Another portfolio revision (inspired by Tag :mrgreen: )

15% Vanguard Selected Value Fund (VASVX) 0.39%
15% Vanguard International Explorer Fund (VINEX) 0.42%
10% Vanguard Emerging Markets Government Bond ETF (VWOB) 0.34%
15% Vanguard Extended Duration Treasury ETF (EDV) 0.07%
30% PIMCO 15+ Year US TIPS ETF (LTPZ) 0.20%
7.5% PowerShares Optimum Yield Diversified Commodity Strategy (PDBC) 0.60%
7.5% iShares Gold Trust (IAU) 0.25%
A few thoughts.

Firstly, you've expressed conviction in relatively strong forms of the EMH. Then the inclusion of actively managed funds for your equities seems a bit out of place. You're then expressing conviction in Vanguard's ability to select active managers for you. I'd suggest revisiting VBR and VSS (VINEX looks far growth-ier in particular). On that note, you earlier mentioned using US mid-caps. However economic intuition (and longer history, according to Larry; I acknowledge I haven't checked myself) suggests that the smaller you go across different countries the less correlated the stocks should be. I wonder if US mid-caps outperforming during most of your investing lifetime has biased you in that direction? Nothing I know of wrong with them, though, if that's the way you want to go. But adding manager risk seems to be outside your framework, and the greater emphasis on (international) small growth stocks seems a little suspect in terms of expected returns (hopefully they are "quality" in the factor sense).

I also wonder if you are under-exposed to returns from deflationary environments? You've got substantial duration, however EM Bonds and Long TIPS may not behave the way you desire if US inflation falls.

Finally, the key will be executing the strategy. Will this be in an IRA/401k with brokerage window? You won't want to hold most of the non-equity ETFs in taxable. Also, you will need to be comfortable rebalancing when one or more components underperform (which will be most years, by construction). Maybe look at when you would have had to rebalance with this asset allocation (or close-enough proxies) over the past decade? You should also prepare yourself for the transaction costs (spread at least), particularly if you will need to pay brokerage for some of the ETFs.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Mon Dec 26, 2016 10:39 am

steve roy wrote:If I may, the D/R All-Seasons Portfolio looks to be a kissing cousin of Harry Browne's Permanent Portfolio, profiled by William Bernstein several years ago:

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

Nothing wrong with the similarities, as the PP has many strengths. (Note the asset classes). But as Dr. Bernstein notes in the article, when the Permanent Portfolio (or the ASP) heads south -- as every portfolio does, sooner or later -- many devotees will be bailing out.
> Couple of quick comments. The "official" D/R All-Seasons Portfolio is mediocre at best, hence the reason for this thread. The one we're working on here is formidable.

> I've heard the risk parity strategy sometimes called a kissing cousin of PP. I think that's dead wrong, especially compared to what we're doing here. We don't have a 25% anchor weight of cash that 1. won't keep up with inflation and 2. doesn't have any volatility for MPT rebalancing bonus. The PP has no IL bonds. And the stock portion of PP is just 25% total stock market compared to the amped up stocks we're using here with tilts.

In short, yeah the PP is nothing to write home about. But this is something else entirely.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Mon Dec 26, 2016 10:54 am

daffyd wrote:Firstly, you've expressed conviction in relatively strong forms of the EMH. Then the inclusion of actively managed funds for your equities seems a bit out of place. You're then expressing conviction in Vanguard's ability to select active managers for you. I'd suggest revisiting VBR and VSS (VINEX looks far growth-ier in particular).
I already explained my reason for the low cost actives in my portfolio update notes. If you're interested in an active vs. passive debate, there are plenty of threads on that already. And if you do want to look that up, maybe find the recent discussion where VG actives were actually beating the passives where the debate trying to figure out why that was.

I also mentioned that you can substitute indexes here if that is your preference. It seems like that is your preference, so please do so at least in the sense of evaluating the portfolio. I consider them swappable. I also consider this particular discussion a distraction from the thread's objective.
daffyd wrote:On that note, you earlier mentioned using US mid-caps. However economic intuition (and longer history, according to Larry; I acknowledge I haven't checked myself) suggests that the smaller you go across different countries the less correlated the stocks should be. I wonder if US mid-caps outperforming during most of your investing lifetime has biased you in that direction?
Pure concidence. I've liked mid-caps for years, and if you go back about a decade, they weren't outperformers at that time. It is actually concerning to me that my preferred market cap weighting is now the top performer so I hope that isn't a headwind going forward.

I didn't mean for that to be a distraction though. The key components, I believe, to that stock portion are 1. Global and 2. Small (or, simply, not large caps)/Value tilting at low cost. I think if you adjust those holdings while retaining that theme, it will be just as good. I believe appianroad used a small cap index for US. So by all means, substitute to that if you like, or the infamous SC Value Index.
daffyd wrote:Nothing I know of wrong with them, though, if that's the way you want to go. But adding manager risk seems to be outside your framework, and the greater emphasis on (international) small growth stocks seems a little suspect in terms of expected returns (hopefully they are "quality" in the factor sense).
Though I have a response to your dubbing of "manager risk", again it immediately dawns on me that would lead into an active vs. passive debate. I've already stated if you want, just substitute indexes in there and it shouldn't hurt anything.
daffyd wrote:I also wonder if you are under-exposed to returns from deflationary environments? You've got substantial duration, however EM Bonds and Long TIPS may not behave the way you desire if US inflation falls.
If anything, I'm over exposed to deflation. That is a dream portfolio if we experience deflation. 50% with extreme LT duration. Seriously, the last thing I'm mulling over right now is that it may still be too tilted towards deflation protection which is why my 2nd portfolio revision lowered the duration. Those LT Tips are going to hold up in deflation because of that 15+ year duration.

Thanks for this comment. If that's the way you see it, then maybe I'm actually worrying about nothing.
Finally, the key will be executing the strategy. Will this be in an IRA/401k with brokerage window? You won't want to hold most of the non-equity ETFs in taxable.
I probably should have an asterisk from the start that this is for a tax-advantaged account. I'm not sure how this would work with a taxable (with TIPS and LT bonds in general). As far as how to do it, easy-peasy, i'll just buy the ETFs/Mutual funds through Vanguard Brokerage.
Also, you will need to be comfortable rebalancing when one or more components underperform (which will be most years, by construction). Maybe look at when you would have had to rebalance with this asset allocation (or close-enough proxies) over the past decade? You should also prepare yourself for the transaction costs (spread at least), particularly if you will need to pay brokerage for some of the ETFs.
Transactions for Vanguard funds in a vanguard account are free. For non-Vanguard with Voyager Select, it's dirt cheap.

The all-weather strategy virtually guarantees there'll always be an asset class in the portfolio that'll be an underperformer, and probably often with a great severity. That was true even for the back-test period i mentioned above since 2001, where the portfolio produces 6% real. This is not a portfolio for anyone that has to have good performance for the individual components. One has to realize "it's the portfolio stupid (saying)" that's important here.

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by daffyd » Mon Dec 26, 2016 4:25 pm

I saw your reasoning for low cost active funds. I have no problem in principle with those - I work for an institutional investor and my boss is surprisingly good at active fund selection within a low-cost framework (I have no clue as I'm just the quant/factor investing guy).

But manager risk is a real thing - active management requires active monitoring. You're choosing to outsource it mostly to Vanguard, who do have your interests in mind; so as long as this won't risk future doubt on your part it should be fine. I'm just suggesting minimising sources of risk/doubt outside the framework you have conviction in.

As long as you can retain that conviction, and your total portfolio focus, your implementation plan gives you broadly the economic exposures you are seeking and is low-cost (slightly below what reasonably large institutions pay for All Weather, albeit without the leverage).

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Re: Improving the Dalio/Robbins All-Seasons Portfolio

Post by azanon » Mon Dec 26, 2016 5:16 pm

daffyd wrote:But manager risk is a real thing - active management requires active monitoring. You're choosing to outsource it mostly to Vanguard, who do have your interests in mind; so as long as this won't risk future doubt on your part it should be fine. I'm just suggesting minimising sources of risk/doubt outside the framework you have conviction in.
I think it requires active monitoring only to the extent that I should just occasionally check to make sure that the fund objective hasn't changed. I think, in practice (at least with Vanguard), that is quite rare. I actually think it would be a mistake to "monitor" based on performance, at least in the short or mid-term run, because they could easily underperform in the near-term, which wouldn't be a good reason to bail.

Interestingly enough, I actually swapped it to those actives based on doubt. The original choices were purely based on boxing the selections to mid-cap value, and small international. Those actives, instead, have those base tilts but the respective fund managers are given the freedom to make selections outside of simply indexing, so I have that added peace of mind I'm not just randomly buying companies without regard to what's being bought. And in both cases, I'm paying about ~ 25 extra basis points for that for those funds, which I think is cheap enough. Personally, my main beef with active funds is the usually high costs (1% or higher still being standard). Those two aren't that expensive and add roughly 7.5 basis points cost to the composite portfolio.
daffyd wrote:As long as you can retain that conviction, and your total portfolio focus, your implementation plan gives you broadly the economic exposures you are seeking and is low-cost (slightly below what reasonably large institutions pay for All Weather, albeit without the leverage).
Seems like I read somewhere Bridgwater charges their institutional clients ~ 50 basis points management fee, plus underlying costs. If that's true, yeah this is definitely undercutting that.

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