Multi-Asset vs. Simple Portfolio, 1970-2017

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SimpleGift
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Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sat Jun 09, 2018 5:33 pm

Besides being a perennial Forum topic, a family member of the Millenial generation recently asked about the multi-asset vs. simple portfolio decision. After pointing her to the standard Boglehead texts, it occurred to me that we now have nearly 5 decades of asset return data (thanks to the Simba spreadsheet) from which to make some historical observations.

The Two Test Portfolios
The two portfolios chosen below are based more on the asset classes for which we have historical returns over the full 1970-2017 period, and not necessarily on index funds available to investors at the time (which means using some backdated data). The simple 60/40 portfolio includes broad-market U.S. stocks and bonds, while the multi-asset 60/40 portfolio adds some riskier assets on the equity side plus credit and term risk on the bond side (list below).
  • Image
Outperformance Over Time
Clearly, whether choosing a simple or a multi-asset portfolio, one needs to be prepared for "tracking error" between the two. Over the 1970-2017 period, the simple portfolio outperformed at times (in green, usually when large growth stocks dominated), and in other stretches the multi-asset mix won out (chart below).
Risk and Return
Over the full 48-year period, the extra risk of the multi-asset portfolio was clearly rewarded (table below). Not only was the geometric return higher by 0.43% per year, but the standard deviation of returns was lower, leading to a higher Sharpe ratio.
  • Image
DISCUSSION: Theoretically, over an investor's long career, a multi-asset portfolio of risky assets with less than perfect correlations should marginally outperform with less volatility. My big concern for the future, however, is that as the number of public companies declines, and the fewer large remaining firms grow in size and profitability due to increasing globalization, the simple portfolio may prove harder and harder to beat.

Your thoughts?
Last edited by SimpleGift on Sat Jun 09, 2018 9:36 pm, edited 1 time in total.
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Rick Ferri » Sat Jun 09, 2018 5:56 pm

In theory, you’re correct. In real life, you're not. There were no commodity funds, REIT funds or even small cap index funds in the 1970s. Today they do exist, but the costs for those funds are higher. And which commodity index do you use? They’re all very different. What happens if you pick the wrong one? Plus, what’s the probability an investor is going to remain disciplined in those terrible years of multi-asset class investing? We’re not mindless robots, although it might help if we were.
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sat Jun 09, 2018 6:16 pm

Rick Ferri wrote:
Sat Jun 09, 2018 5:56 pm
Plus, what’s the probability an investor is going to remain disciplined in those terrible years of multi-asset class investing? We’re not mindless robots, although it might help if we were.
Ha, I worry equally as much about simple portfolio investors remaining disciplined during their long periods of underperformance. The recent "lost decade" for large cap stocks (2000-2009) comes to mind, when other risky assets had healthy returns. :wink:

PS. One of the books I recommended to my family member was All About Asset Allocation, by Rick Ferri. An excellent read!
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Rick Ferri » Sat Jun 09, 2018 6:32 pm

:sharebeer

The best strategy for each investor is the one that keeps them in the game long-term. That strategy could be different for each of us, and, one could argue, should be different.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Taylor Larimore » Sat Jun 09, 2018 6:43 pm

SimpleGift:

This is what experts say about using Past Performance to select funds:
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstar Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author of 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the world's largest and most successful mutual fund, is now (Feb. 9, 2018) in the bottom 11% of its category for 15-year annualized return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "Over the long term, there is no meaningful relationship between past and future fund performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
A better approach: viewtopic.php?f=10&t=156579

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by snarlyjack » Sat Jun 09, 2018 6:45 pm

I started studying Paul Merriman & his investment tables.
I consider a simple portfolio 2 or 3 funds.


Now, that we have the long term data of different asset classes
it could be a game changer. As Paul Merriman said this could
change your life...

https://paulmerriman.com/wp-content/upl ... Update.pdf

https://paulmerriman.com/decade-returns/

I understand what your saying Taylor & I agree....but....

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Rick Ferri » Sat Jun 09, 2018 6:55 pm

I can’t guarantee much, but I can guarantee that nothing in those tables is going to change my life or my portfolio. There is no silver bullet to slay the markets. There is no such thing as a free lunch on Wall Street.

The only “alpha” in all this is the revenue generated in fees charged by those managers and advisers who rely on complex strategies to attract clients. I’ve been there. I’ve done that. It’s all there is.
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by snarlyjack » Sat Jun 09, 2018 7:15 pm

Nice meeting you Rick.

Ok...The fee difference between TSM (.04) & SCV (.07)
is not much. Not a deal breaker in my book.

For a young guy like myself I see no harm or very little
risk to add a SCV (tilt) to my portfolio. I look for it
to be the "after burner" to my LCV fund.

I' am more of a value investor. I like (Exxon, Boeing,
J & J, Microsoft, etc.). SCV add another 880 companies
to my portfolio & diversifies me out further. They are
all large index funds, with Vanguard.

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Past Performance ?

Post by Taylor Larimore » Sat Jun 09, 2018 7:21 pm

SnarleyJack wrote:Now, that we have the long term data of different asset classes it could be a game changer.
snarley Jack:

Please take another look at what experts say about Past Performance.
When I find new information I change my mind; What do you do, sir" - - John Maynard Keynes
Best wishes.
Taylor
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sat Jun 09, 2018 8:13 pm

Taylor Larimore wrote:
Sat Jun 09, 2018 6:43 pm
This is what experts say about using Past Performance to select funds:
To my mind, the question addressed by the portfolio comparison in the OP is not "what assets have outperformed in the past," but rather "has portfolio risk been rewarded?" Portfolio theory suggests that combining risky assets that have less than perfect correlations and comparable returns should lead to marginal outperformance and increased efficiency. Over the past 5 decades, with the limited data that we have, it appears the extra risk has been rewarded.

Actually, it would be quite surprising and newsworthy if the lower risk portfolio outperformed and was more efficient.

Regarding future performance: In 50 years, I expect there will be a similar Forum post entitled "Multi-factor vs. Simple Portfolio, 2010-2057" — which will offer a further test of portfolio theory.
Last edited by SimpleGift on Sat Jun 09, 2018 10:47 pm, edited 1 time in total.
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by nisiprius » Sat Jun 09, 2018 8:41 pm

1926-1998, 1922-2007, 1926-2009, 1929-2008. Four periods of time. The shortest is 73 years long, and they have 70 years of overlap. And yet the average return of the US stock market over those four periods of time varied from 9% to 11%, depending on just a few years' change in endpoints.

We shouldn't say "the historic return of the US stock market was 10%," we should say "as best we can tell, it was somewhere in the range 10%±1%."

If someone says to me "portfolio X had a 9% return over about eighty years, while portfolio Y had an 11% return over about eighty," my reaction is "I'm not impressed, because there's that much difference in the eighty-year return of the stock market itself, with just a small difference in endpoints."

Now, making a boatload of assumptions that we know are invalid... but just to get an idea... if the CAGR of the stock market is uncertain by ±1% over eighty years, then if you cut the time period by a factor of 4, you might expect the uncertainty to increase by √4, i.e. you might expect it to be double.

In other words, if, over a twenty-year period, portfolios X and Y differ in CAGR by as much as 4%, I'm not ready to be convinced. Even that big a difference could just be the normal noise and uncertainty of financial data.

Now, for your 3-year rolling returns, well, we ought to multiply again by √(80/3) = about 5. I say that if CAGR over 80 years is only good to ±1%, then CAGR over 3 years is only good to about ±5%. In other words, in your chart, I'm not even sure that we're really looking at leapfrogging. We might just be looking at the ordinary variability of financial data.

I know this is heresy, because if you say "well, the difference between a CAGR of 9.88% and one of 9.45% isn't much," someone is bound to say "it's huge of you compound it out for 30 years." Well, it would be if you knew those numbers were correct in the first place (and wouldn't flip around or do handsprings if you slipped the endpoints a few years), and if you knew that the same difference in CAGR were all but guaranteed for the next thirty years. But it isn't. Heck, we can't even "predict" the past, to better than ±1%
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Rick Ferri » Sat Jun 09, 2018 9:38 pm

snarky jack,

The problem with complexity isn’t the strategy, it’s the lack of long-term commitment by an investor. No harm in adding small value as long as it’s a 25 year commitment.

Rick Ferri
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sat Jun 09, 2018 10:10 pm

nisiprius wrote:
Sat Jun 09, 2018 8:41 pm
Now, for your 3-year rolling returns...We might just be looking at the ordinary variability of financial data.
In any comparison where one portfolio (the simple 60/40 portfolio, in this case) has something like 75% of its long-term risk and returns coming from large cap stocks, it's no mystery why it would outperform during periods when large cap stocks significantly outperform — and vice versa.

Looking ahead, the simple 60/40 cap-weighted portfolio is plainly a future bet on large cap stocks. Perhaps, with the trend toward fewer U.S. public companies, and the increasing concentration of these larger, more profitable firms in many industries (due largely to globalization, I believe), a bet on large cap stocks may be a clear winner in the decades ahead. Personally, I certainly wouldn't exclude them from any multi-asset portfolio mix of risky assets!
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by zaboomafoozarg » Sat Jun 09, 2018 11:24 pm

Rick Ferri wrote:
Sat Jun 09, 2018 9:38 pm
No harm in adding small value as long as it’s a 25 year commitment.
That's the reason I limited my tilt to 20% small value and 10% REITs. It satisfies my urge to slice and dice, but keeps me close enough to the total market to stick with it at least until retirement.

I have to admit, All About Asset Allocation was a big influence in my planning. Thanks for a great guide! I've probably read it more than any other financial book.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by snarlyjack » Sat Jun 09, 2018 11:26 pm

No one knows the future.

It seems to me that we want to try to put the statistic's
in our favor. And, we do have some long term trends
over 80 years that seem to hold on over time.

The other thing I have noticed is: Large companies have
a lot of money. When a small company is making cutting
edge products/information they seem to get acquired.

I think it's interesting how large companies & small companies
boost each other. For their own different reasons. It
seems one out performs one year then the other out performs
the next year. I think it's a interesting combination.

Were talking long term investing using index funds with
hundreds if not thousands of companies. In a very
simple strategy.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sat Jun 09, 2018 11:59 pm

While the portfolio comparison data was in a spreadsheet, it seemed worthwhile to calculate the Sharpe ratios of the two portfolios for each of the 5 decades:
  • Image
    Note: The 2010s includes the eight-years from 2010-2017.
The Sharpe ratio of the multi-asset portfolio was a bit higher in 4 of the 5 time periods — with the exception of the 1990s when the returns of large cap stocks mostly dominated the index investing universe.
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by protagonist » Sun Jun 10, 2018 7:57 am

nisiprius wrote:
Sat Jun 09, 2018 8:41 pm
1926-1998, 1922-2007, 1926-2009, 1929-2008. Four periods of time. The shortest is 73 years long, and they have 70 years of overlap. And yet the average return of the US stock market over those four periods of time varied from 9% to 11%, depending on just a few years' change in endpoints.

We shouldn't say "the historic return of the US stock market was 10%," we should say "as best we can tell, it was somewhere in the range 10%±1%."

If someone says to me "portfolio X had a 9% return over about eighty years, while portfolio Y had an 11% return over about eighty," my reaction is "I'm not impressed, because there's that much difference in the eighty-year return of the stock market itself, with just a small difference in endpoints."

Now, making a boatload of assumptions that we know are invalid... but just to get an idea... if the CAGR of the stock market is uncertain by ±1% over eighty years, then if you cut the time period by a factor of 4, you might expect the uncertainty to increase by √4, i.e. you might expect it to be double.

In other words, if, over a twenty-year period, portfolios X and Y differ in CAGR by as much as 4%, I'm not ready to be convinced. Even that big a difference could just be the normal noise and uncertainty of financial data.

Now, for your 3-year rolling returns, well, we ought to multiply again by √(80/3) = about 5. I say that if CAGR over 80 years is only good to ±1%, then CAGR over 3 years is only good to about ±5%. In other words, in your chart, I'm not even sure that we're really looking at leapfrogging. We might just be looking at the ordinary variability of financial data.

I know this is heresy, because if you say "well, the difference between a CAGR of 9.88% and one of 9.45% isn't much," someone is bound to say "it's huge of you compound it out for 30 years." Well, it would be if you knew those numbers were correct in the first place (and wouldn't flip around or do handsprings if you slipped the endpoints a few years), and if you knew that the same difference in CAGR were all but guaranteed for the next thirty years. But it isn't. Heck, we can't even "predict" the past, to better than ±1%
+!. Exactly correct!

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sun Jun 10, 2018 12:54 pm

Just to add the chart below, showing how the addition of riskier, more volatile assets boosted the efficiency of the multi-asset portfolio over the simple portfolio during the 1970-2017 period. Adding exposures to small caps, REITs, EAFE stocks and commodities on the equity side, plus adding credit and term risk on the bond side improved overall portfolio efficiency (i.e., marginally better return with a bit less risk).
Even with the limitations and period dependency of the historical data that we have, the results of this exercise appear to conform nicely with Mr. Markowitz's foundational portfolio selection theory from the 1950s. A happy circumstance when theory and empirical results agree!
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by garlandwhizzer » Sun Jun 10, 2018 3:23 pm

nisi wrote:
I know this is heresy, because if you say "well, the difference between a CAGR of 9.88% and one of 9.45% isn't much," someone is bound to say "it's huge of you compound it out for 30 years." Well, it would be if you knew those numbers were correct in the first place (and wouldn't flip around or do handsprings if you slipped the endpoints a few years), and if you knew that the same difference in CAGR were all but guaranteed for the next thirty years. But it isn't. Heck, we can't even "predict" the past, to better than ±1%
1+

It is entirely possible that the multi-asset portfolio will in fact outperform the simple 2 fund portfolio over the next 5 decades as it did in the past 50 years. It is also entirely possible that the opposite will happen and the 2, 3, or 4 fund simple portfolio will outperform. The example doesn't tell how a 3 fund (adding INTL) or 4 fund (adding REIT plus INTL) would have performed. REITS were a stellar performer over the 50 year period with the highest returns relative to risk. Likewise SC risk was well rewarded over those 5 decades. Will REITS and SC be thusly rewarded over the next 5 decades? I don't know but I don't believe it's a certainty. There are real limits on the ability of past portfolio construction to divine with accuracy what is going to happen in the future even if the past backtesting period is 50 years. I think it is highly probable that stocks will outperform bonds over the next 50 years, since stocks are inherently more risky. However to postulate that a given portfolio is going to produce higher returns with lower risk over the long term is IMO too much of stretch. It may well produce lower risk or higher returns but the combo together is hard to come by. In theory, theory always works. In practice it doesn't always work.

I think the main take home point is that the loser in this comparison, the 2 fund portfolio, returned 9.45% over 50 years. That means for every dollar invested 50 years ago in this loser portfolio produced about 100 dollars at the end. Most of us would be ecstatic to get that over the next 50 years. As Rick points out, it's more important to stick to your choice of portfolio than to endlessly buy and sell assets trying to perfect the portfolio. IMO investing magic is not to be found in the elusive search for the perfect portfolio but instead in the immense and reliable power of compounding over long periods of time.

Garland Whizzer

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by staythecourse » Sun Jun 10, 2018 3:52 pm

Rick Ferri wrote:
Sat Jun 09, 2018 5:56 pm
We’re not mindless robots, although it might help if we were.
A bit tongue and cheek, but actually has a powerful punch. That is the BIGGEST issue of all backtesting. It is not what is possible to achieve, but what is more common. There are very few investors who can go from date x to date y with portfolio z and NOT change it along the way. Sometimes that is for legitimate reasons, i.e. change in ability, willingness, or need to take risk or behavioral. Interesting is I have seen a NEW behavioral issue pop up where person A changes their allocation to due talking themselves it is because of the former above and it actually is due to the latter. The issue of Financial Rationalization (as I call it) is a serious threat to even the most advanced investor. It shows in SO MANY posts on this board each day.

Backtesting eliminates this risk which I would say is the BIGGEST risk of all of investing. It is a much bigger impact on an investor then whatever asset allocation is chosen. Keeping this in mind keeps the answer VERY SIMPLE in how to allocate one's $$. Do it in a manner that will NOT cause you to jump ship.

Good luck.
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"Don't search for the needle. Buy the haystack."

Post by Taylor Larimore » Sun Jun 10, 2018 6:09 pm

garlandwhizzer wrote:IMO investing magic is not to be found in the elusive search for the perfect portfolio but instead in the immense and reliable power of compounding over long periods of time.
I agree. More important, so does our great mentor:
Don't look for the needle in the haystack. Just buy the haystack. -- Jack Bogle
Best wishes.
Taylor
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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by SimpleGift » Sun Jun 10, 2018 9:36 pm

garlandwhizzer wrote:
Sun Jun 10, 2018 3:23 pm
IMO investing magic is not to be found in the elusive search for the perfect portfolio but instead in the immense and reliable power of compounding over long periods of time.
A good perspective that deserves special emphasis in this thread. While generating high risk-adjusted returns might be a nice benefit of a well-designed portfolio plan, the pursuit of excess return is certainly not an essential financial goal — i.e., in most cases, the simple market portfolio, held patiently and faithfully for decades, will prove more than adequate for success.
Cordially, Todd

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Random Walker » Sun Jun 10, 2018 9:37 pm

garlandwhizzer wrote:
Sun Jun 10, 2018 3:23 pm
There are real limits on the ability of past portfolio construction to divine with accuracy what is going to happen in the future even if the past backtesting period is 50 years. I think it is highly probable that stocks will outperform bonds over the next 50 years, since stocks are inherently more risky. However to postulate that a given portfolio is going to produce higher returns with lower risk over the long term is IMO too much of stretch. It may well produce lower risk or higher returns but the combo together is hard to come by. In theory, theory always works. In practice it doesn't always work.
Garland Whizzer
How do you feel about correlations? I realize correlations change over time, but nonetheless feel that anything less than a correlation of 1 between portfolio components is beneficial. So I tend to err on the side of diversification across factors, styles, asset classes.

Dave

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Top99% » Mon Jun 11, 2018 7:43 am

Random Walker wrote:
Sun Jun 10, 2018 9:37 pm
garlandwhizzer wrote:
Sun Jun 10, 2018 3:23 pm
There are real limits on the ability of past portfolio construction to divine with accuracy what is going to happen in the future even if the past backtesting period is 50 years. I think it is highly probable that stocks will outperform bonds over the next 50 years, since stocks are inherently more risky. However to postulate that a given portfolio is going to produce higher returns with lower risk over the long term is IMO too much of stretch. It may well produce lower risk or higher returns but the combo together is hard to come by. In theory, theory always works. In practice it doesn't always work.
Garland Whizzer
How do you feel about correlations? I realize correlations change over time, but nonetheless feel that anything less than a correlation of 1 between portfolio components is beneficial. So I tend to err on the side of diversification across factors, styles, asset classes.

Dave
+1 especially at today's US large cap equity valuations. Looking at one of my favorite sources http://www.retireearlyhomepage.com/reallife18.html which shows portfolio balances over time with the 4% (rule or guideline) for retirees applied starting in 1999 (table all the way at the bottom) is enlightening:
1) Multi-asset portfolios definitely did better in this time period (mirrors Simplegift's charts)
2) If one retired in 1994 US large cap centric portfolios did better but multi-asset did well too
I think today's starting conditions are more like 1999 than 1994 let alone 1982.
Adapt or perish

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Random Walker » Mon Jun 11, 2018 9:02 am

Top99,
I believe we think alike. When a portfolio diversified across sources of return outperforms, it’s significant. When it underperforms, the shortfall tends to be pretty small.

Dave

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by dkturner » Mon Jun 11, 2018 10:40 am

Random Walker wrote:
Mon Jun 11, 2018 9:02 am
When a portfolio diversified across sources of return outperforms, it’s significant. When it underperforms, the shortfall tends to be pretty small.
That’s an interesting point. Our portfolios have had a value tilt for most of the last 20 years. For the last 10 years (2008-2017) we outperformed our benchmark in 6 years (by an average of 198 basis points) and underperformed in 4 years (by an average of 106 basis points). In the 1998-2007 period we outperformed our benchmark in 9 years (by an average of 218 basis points) and underperformed in 1 year (by 78 basis points). Now, I have no idea what the next 10 years have in store, but I like the odds of tilting vs. following the “market” portfolio.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Random Walker » Mon Jun 11, 2018 10:53 am

dkturner wrote:
Mon Jun 11, 2018 10:40 am
Random Walker wrote:
Mon Jun 11, 2018 9:02 am
When a portfolio diversified across sources of return outperforms, it’s significant. When it underperforms, the shortfall tends to be pretty small.
That’s an interesting point. Our portfolios have had a value tilt for most of the last 20 years. For the last 10 years (2008-2017) we outperformed our benchmark in 6 years (by an average of 198 basis points) and underperformed in 4 years (by an average of 106 basis points). In the 1998-2007 period we outperformed our benchmark in 9 years (by an average of 218 basis points) and underperformed in 1 year (by 78 basis points). Now, I have no idea what the next 10 years have in store, but I like the odds of tilting vs. following the “market” portfolio.
Thanks, nice to have some specific data to back up my general assertion. What did you use as a benchmark?

Dave

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by dkturner » Mon Jun 11, 2018 11:09 am

Random Walker wrote:
Mon Jun 11, 2018 10:53 am
dkturner wrote:
Mon Jun 11, 2018 10:40 am
Random Walker wrote:
Mon Jun 11, 2018 9:02 am
When a portfolio diversified across sources of return outperforms, it’s significant. When it underperforms, the shortfall tends to be pretty small.
That’s an interesting point. Our portfolios have had a value tilt for most of the last 20 years. For the last 10 years (2008-2017) we outperformed our benchmark in 6 years (by an average of 198 basis points) and underperformed in 4 years (by an average of 106 basis points). In the 1998-2007 period we outperformed our benchmark in 9 years (by an average of 218 basis points) and underperformed in 1 year (by 78 basis points). Now, I have no idea what the next 10 years have in store, but I like the odds of tilting vs. following the “market” portfolio.
Thanks, nice to have some specific data to back up my general assertion. What did you use as a benchmark?

Dave
The benchmarks used by Vanguard for its total market portfolios (domestic and international equities and domestic fixed income). From 1998 through 2008 we used a 48/12/40 benchmark allocation. From 2009 to the present we used a 40/10/50 benchmark allocation, since we significantly reduced our equity exposure and have maintained that lower exposure.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by dcabler » Mon Jun 11, 2018 11:22 am

dkturner wrote:
Mon Jun 11, 2018 10:40 am
Random Walker wrote:
Mon Jun 11, 2018 9:02 am
When a portfolio diversified across sources of return outperforms, it’s significant. When it underperforms, the shortfall tends to be pretty small.
That’s an interesting point. Our portfolios have had a value tilt for most of the last 20 years. For the last 10 years (2008-2017) we outperformed our benchmark in 6 years (by an average of 198 basis points) and underperformed in 4 years (by an average of 106 basis points). In the 1998-2007 period we outperformed our benchmark in 9 years (by an average of 218 basis points) and underperformed in 1 year (by 78 basis points). Now, I have no idea what the next 10 years have in store, but I like the odds of tilting vs. following the “market” portfolio.
That's been my thinking as well, at least when it comes to size/value factors. They all still have a Beta pretty close to one and it's pretty difficult to imagine a scenario where size/value tilts, as part of the same universe as the total market, could get hammered for a very long period of time. In other worse, might help and if I'm wrong, most likely won't hurt much.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by Random Walker » Mon Jun 11, 2018 11:36 am

So you were comparing the value tilt results to the total market’s benchmarks. Your data does support the thesis that tilted portfolios underperform modestly when they underperform and outperform more significantly when they do that.

Dave

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by aj76er » Mon Jun 11, 2018 12:37 pm

SimpleGift wrote:
Sat Jun 09, 2018 11:59 pm
While the portfolio comparison data was in a spreadsheet, it seemed worthwhile to calculate the Sharpe ratios of the two portfolios for each of the 5 decades:
  • Image
    Note: The 2010s includes the eight-years from 2010-2017.
The Sharpe ratio of the multi-asset portfolio was a bit higher in 4 of the 5 time periods — with the exception of the 1990s when the returns of large cap stocks mostly dominated the index investing universe.
What were the costs of buying international and small cap stocks over those time periods? And are those being reflected in these types of analyses? Note that cost includes E/R costs, bid-ask spreads, taxes, etc...

I don't have data in front of me, but my suspicion is that recency bias is making us all ignore the effect of these costs (which have all come down to low levels in recent decades). But in 70s, 80s, and even 90s I suspect that these costs were significant.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by garlandwhizzer » Mon Jun 11, 2018 12:44 pm

Random Walker wrote:
How do you feel about correlations? I realize correlations change over time, but nonetheless feel that anything less than a correlation of 1 between portfolio components is beneficial. So I tend to err on the side of diversification across factors, styles, asset classes.
I believe it is likely that such a widely diversified portfolio will have a lower volatility than the market/bond portfolio long term. Whether or not it will outperform long term after the increased costs is a different question. I have no certainty in either direction on that question. Investors who have a strong desire to reduce portfolio volatility should consider such a diversified portfolio. Volatility doesn't bother me so much. I've been investing a long time and have gotten used to the idea that stocks go up and down, tend to be more risky and volatile in the short run, but tend outperform more stable fixed income in the long run. For me, it is sufficient to set the proper mix of these two broad asset classes which in my case includes US and INTL (both DM and EM) equity with market beta plus small value exposure, and a broad variety of US fixed income including considerable MMF as an emergency fund so I can sleep at night through cyclical market collapses which tend to be scary but shorter in duration than the secular bull markets which typically follow those collapses. Others may see it differently. I do not believe that there is one single investing road that all must follow.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by vineviz » Mon Jun 11, 2018 1:15 pm

The difference in performance between these two portfolios seems to be almost entirely due to the longer duration of the bond portion of the multi-asset portfolio versus the simple portfolio.

The "U.S. Total Bond" data in the "Simple Portfolio" backtest seems to be a chain linked mixture of Barclays Global Aggregate Index and VBMFX, which generally have had a duration of between 4.5 and 6.5 years.

Image

Combining equal portions of intermediate corporate bonds and long term treasuries produces an average duration of something like 10 to 12 years, which is double the duration of the total bond fund over this time period. That makes them much riskier, as Rick pointed out.

In fact, the equity/commodity portion of the multi-asset portfolio only outperformed the simple portfolio's equities by 17 bps during this period whereas the bond portion of the multi-asset portfolio outperformed the simple portfolio's bonds by 45bps.

It's important to understand that the complexity of the five-fund equity/commodity portfolio didn't buy you very much return improvement OR risk reduction versus the single TSM fund. Most the extra diversification benefits could be equally well achieved with a simpler 50/25/25 ratio of US large cap/US small cap value/international blend.

As for the bonds, while I do tend to advocate the most pre-retirement investors should hold longer duration bonds than BND or AGG typically hold it is definitely worth pointing out that not only does 1970 to 2017 correspond to a period in which long-term treasuries out-returned intermediate treasuries (something that was NOT true from 1930 to 1969, for instance) but bond returns have generally been much higher in the past five decades than in the five decades prior to that on an absolute basis.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by midareff » Mon Jun 11, 2018 1:26 pm

From a guy who used to slice and dice to SV, S Int, REITs, HC and so forth. .... now it's TSM and TISM in taxable with IT Tax-Ex, in IRA it's S&P500, TISM and IG Bonds & a touch of VG HY. I benchmark against VFIAX and Admiral Total Bond in matching percentages. It's like having a couple of hundred bucks in your wallet and still picking up pennies when you find them. Does it feel good? Hell yeah, does it matter much... Hell No. @ 70 I'd rather be spending my time on the next travel itinerary and ca,era gear than spending my time seeing if a 17 fund portfolio needs rebalancing.

AND, a big Thank You to both Simple Gift and Ric Ferri for all the knowledge they have shared on this site, and U too Larry Swedroe..... Oops, and Bill Bernstein.

A NF, while I'm at it... Longinvest, Simba, all the Admins and moderators, and of course Taylor and Mel. .. U too livesoft, sheepdog and the many others who I have not called by name who share great wisdom here..

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by garlandwhizzer » Mon Jun 11, 2018 1:43 pm

aj76er wrote:
What were the costs of buying international and small cap stocks over those time periods? And are those being reflected in these types of analyses? Note that cost includes E/R costs, bid-ask spreads, taxes, etc...

I don't have data in front of me, but my suspicion is that recency bias is making us all ignore the effect of these costs (which have all come down to low levels in recent decades). But in 70s, 80s, and even 90s I suspect that these costs were significant.
1+

This is an excellent point, aj76er. In the 70s and 80s bid/ask spreads were in fractions, usually 1/4 or more as I recall. Bid ask spreads were then and still are wider when trading in the more thinly traded illiquid small cap space. Both spreads and trade costs are now much smaller. It adds error into the final return calculations to assume that all spreads are at today's levels. Needless to say this may not the only increased cost that is involved in setting up a multi-asset portfolio. If it is done with an advisor, that fee also must be added. Finally, as vineviz has pointed out, the difference of the two portfolio returns is almost entirely due to the longer duration of the bond portfolio in the multi-asset version. That worked well in the 70s and 80s when long Treasuries crested at about 15% yield for 30 years. Essentially no one expects long bonds to be a winner going forward from where we are now, 30 year Treasuries yielding 3.1%. In sum, these results can be misleading guides to the future. If one looks carefully enough into in the questions of total cost, recency or time bias, and trading frictions/illiquidity, a great deal of investment research loses its shine.

Garland Whizzer

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by nedsaid » Mon Jun 11, 2018 2:04 pm

This argument boils down to a couple of things. First, your excess returns from multi-asset approach are likely to be 0.50% a year to maybe 1.00% a year. My personal expectation is 0.50%. The other thing that influences this are large growth stocks, during times where large growth outperforms, multi-asset strategies will trail the market. During my investment career, I have seen two such periods: the 1990's and from the 2008-2009 financial crisis to the present.

Simplegift shows that over 48 years, a multi-asset portfolio had an annual return of 0.43% a year better than a simple 60/40 balanced portfolio with slightly less volatility and slightly better return per unit of risk. This sounds about right. But again, this takes a long term commitment. If you added Value to the mix, particularly Small Value, my guess is that returns and portfolio efficiency would have been somewhat better. I am definitely a multi-asset investor who has factor tilted for many years.
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Re: "Don't search for the needle. Buy the haystack."

Post by 2015 » Mon Jun 11, 2018 2:24 pm

Taylor Larimore wrote:
Sun Jun 10, 2018 6:09 pm
garlandwhizzer wrote:IMO investing magic is not to be found in the elusive search for the perfect portfolio but instead in the immense and reliable power of compounding over long periods of time.
I agree. More important, so does our great mentor:
Don't look for the needle in the haystack. Just buy the haystack. -- Jack Bogle
Best wishes.
Taylor
Agreed.

Engaging in the elusive search for the most clever portfolio results in one missing the forest for the trees. Ask any of the famous people who committed suicide recently if they wish they'd spent any more of their precious lives pursuing that last dollar. The point isn't fame, the point isn't fortune. The point is life. You're either living it or pretending you are via some spreadsheet, chart, or graph. The opportunity cost is so large it's almost impossible to wrap your head around, considering you could be doing anything in this moment.

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Re: Multi-Asset vs. Simple Portfolio, 1970-2017

Post by heyyou » Mon Jun 11, 2018 3:07 pm

With respect to those on both sides, either allocation will be just fine if the worker is good at saving. Living within your means carries into and through retirement, so you won't know what you missed if one allocation outperforms the other one for some limited period. Both of them will take turns having better performance. It is not success vs. failure as the debaters here react like a bull to a matador's red cape.

Someone could calculate the difference in the historical annual spending for various decades of the two allocations. Yes, the lifetime difference would be good for winning a debate, but will the retiree notice some difference in her or his daily life? I doubt it will be enough to matter at that level.

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