Is the 60/40 portfolio allocation strategy being killed?

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goblue100
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by goblue100 » Wed Sep 18, 2019 11:04 am

willthrill81 wrote:
Wed Sep 18, 2019 11:00 am
goblue100 wrote:
Wed Sep 18, 2019 10:53 am
Based on the scare articles I see, if we have fewer and fewer stocks available to buy, and more and more index money chasing the ones that are available. Wouldn't it make sense that valuations are higher?
What publicly available stocks are not available to buy? :confused
None, but there aren't as many public companies as there used to be, according to the scare mongerers:
https://www.bloomberg.com/opinion/artic ... anies-gone
The people who supervise the U.S. stock market are grappling with what they see as a troubling trend: One of the great innovations of Western capitalism -- the public company -- appears to be losing ground.
...
About 3,600 firms were listed on U.S. stock exchanges at the end of 2017, down more than half from 1997.
Financial planners are savers. They want us to be 95 percent confident we can finance a 30-year retirement even though there is an 82 percent probability of being dead by then. - Scott Burns

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willthrill81
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Wed Sep 18, 2019 11:07 am

goblue100 wrote:
Wed Sep 18, 2019 11:04 am
willthrill81 wrote:
Wed Sep 18, 2019 11:00 am
goblue100 wrote:
Wed Sep 18, 2019 10:53 am
Based on the scare articles I see, if we have fewer and fewer stocks available to buy, and more and more index money chasing the ones that are available. Wouldn't it make sense that valuations are higher?
What publicly available stocks are not available to buy? :confused
None, but there aren't as many public companies as there used to be, according to the scare mongerers:
https://www.bloomberg.com/opinion/artic ... anies-gone
The people who supervise the U.S. stock market are grappling with what they see as a troubling trend: One of the great innovations of Western capitalism -- the public company -- appears to be losing ground.
...
About 3,600 firms were listed on U.S. stock exchanges at the end of 2017, down more than half from 1997.
I don't see the problem with there 'only' being 3,600 firms to invest in. And that doesn't seem to have any relationship with valuations.

As you've noted, it's just fear mongering, and I ignore it.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Tyler Aspect
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Tyler Aspect » Wed Sep 18, 2019 11:09 am

willthrill81 wrote:
Wed Sep 18, 2019 10:27 am
Tyler Aspect wrote:
Wed Sep 18, 2019 10:15 am
willthrill81 wrote:
Tue Sep 17, 2019 11:42 pm
Tyler Aspect wrote:
Tue Sep 17, 2019 10:56 pm
No. The 60% stock / 40% bond strategy will live on until the end of the earth.
You're probably right, although I still don't see why 60/40 is such a seemingly popular AA. It's arguably not the best at anything, and I don't really believe that there's an 'all purpose' AA as some (e.g. Ferri) have suggested.
60% stock / 40% bond is popular because this allocation covers two demographics. It includes investors transitioning to retirement, and aggressive retired investors.
Even if that is true, those combined groups are a relatively small portion of all investors.
If we look at the asset under management of all LifeStrategy funds as of Spring 2019, we see:

LifeStrategy Growth (80% stock / 20% bond) : $15.4 B

LifeStrategy Moderate Growth (60% stock / 40% bond) : $16.5 B

LifeStrategy Conservative Growth (40% stock / 60% bond) : $9.9 B

LifeStrategy Income (20% stock / 80% bond) : $4.3 B

The 60% stock / 40% bond allocation has the greatest share of asset under management (for balanced funds).
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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willthrill81
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Wed Sep 18, 2019 11:14 am

Tyler Aspect wrote:
Wed Sep 18, 2019 11:09 am
willthrill81 wrote:
Wed Sep 18, 2019 10:27 am
Tyler Aspect wrote:
Wed Sep 18, 2019 10:15 am
willthrill81 wrote:
Tue Sep 17, 2019 11:42 pm
Tyler Aspect wrote:
Tue Sep 17, 2019 10:56 pm
No. The 60% stock / 40% bond strategy will live on until the end of the earth.
You're probably right, although I still don't see why 60/40 is such a seemingly popular AA. It's arguably not the best at anything, and I don't really believe that there's an 'all purpose' AA as some (e.g. Ferri) have suggested.
60% stock / 40% bond is popular because this allocation covers two demographics. It includes investors transitioning to retirement, and aggressive retired investors.
Even if that is true, those combined groups are a relatively small portion of all investors.
If we look at the asset under management of all LifeStrategy funds as of Spring 2019, we see:

LifeStrategy Growth (80% stock / 20% bond) : $15.4 B

LifeStrategy Moderate Growth (60% stock / 40% bond) : $16.5 B

LifeStrategy Conservative Growth (40% stock / 60% bond) : $9.9 B

LifeStrategy Income (20% stock / 80% bond) : $4.3 B

The 60% stock / 40% bond allocation has the greatest share of asset under management (for balanced funds).
You're using circular logic (i.e. it's popular because it's popular).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rkhusky
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by rkhusky » Wed Sep 18, 2019 11:16 am

willthrill81 wrote:
Tue Sep 17, 2019 11:42 pm
Tyler Aspect wrote:
Tue Sep 17, 2019 10:56 pm
No. The 60% stock / 40% bond strategy will live on until the end of the earth.
You're probably right, although I still don't see why 60/40 is such a seemingly popular AA. It's arguably not the best at anything, and I don't really believe that there's an 'all purpose' AA as some (e.g. Ferri) have suggested.
Perhaps that's the point. If you are the best at something, you likely are the worst at something else. Perhaps 60/40 strikes the right balance of being good enough at most everything that matters.

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Tyler Aspect
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Tyler Aspect » Wed Sep 18, 2019 11:25 am

willthrill81 wrote:
Wed Sep 18, 2019 11:14 am
Tyler Aspect wrote:
Wed Sep 18, 2019 11:09 am
willthrill81 wrote:
Wed Sep 18, 2019 10:27 am
Tyler Aspect wrote:
Wed Sep 18, 2019 10:15 am
willthrill81 wrote:
Tue Sep 17, 2019 11:42 pm


You're probably right, although I still don't see why 60/40 is such a seemingly popular AA. It's arguably not the best at anything, and I don't really believe that there's an 'all purpose' AA as some (e.g. Ferri) have suggested.
60% stock / 40% bond is popular because this allocation covers two demographics. It includes investors transitioning to retirement, and aggressive retired investors.
Even if that is true, those combined groups are a relatively small portion of all investors.
If we look at the asset under management of all LifeStrategy funds as of Spring 2019, we see:

LifeStrategy Growth (80% stock / 20% bond) : $15.4 B

LifeStrategy Moderate Growth (60% stock / 40% bond) : $16.5 B

LifeStrategy Conservative Growth (40% stock / 60% bond) : $9.9 B

LifeStrategy Income (20% stock / 80% bond) : $4.3 B

The 60% stock / 40% bond allocation has the greatest share of asset under management (for balanced funds).
You're using circular logic (i.e. it's popular because it's popular).
Why is this circular logic? This is physical evidence that 60% stock / 40% bond is one of the most significant dollar weighted allocations out there.

Although young investors will probably invest more aggressively than 60% stock / 40% bond, they just do not have accumulated that much money yet. When an investor reaches age 50 that could be the peak earning years at 60% stock / 40% bond. Some of these investors will retire still holding 60% stock / 40% bond indefinitely.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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willthrill81
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Wed Sep 18, 2019 11:30 am

Tyler Aspect wrote:
Wed Sep 18, 2019 11:25 am
willthrill81 wrote:
Wed Sep 18, 2019 11:14 am
Tyler Aspect wrote:
Wed Sep 18, 2019 11:09 am
willthrill81 wrote:
Wed Sep 18, 2019 10:27 am
Tyler Aspect wrote:
Wed Sep 18, 2019 10:15 am

60% stock / 40% bond is popular because this allocation covers two demographics. It includes investors transitioning to retirement, and aggressive retired investors.
Even if that is true, those combined groups are a relatively small portion of all investors.
If we look at the asset under management of all LifeStrategy funds as of Spring 2019, we see:

LifeStrategy Growth (80% stock / 20% bond) : $15.4 B

LifeStrategy Moderate Growth (60% stock / 40% bond) : $16.5 B

LifeStrategy Conservative Growth (40% stock / 60% bond) : $9.9 B

LifeStrategy Income (20% stock / 80% bond) : $4.3 B

The 60% stock / 40% bond allocation has the greatest share of asset under management (for balanced funds).
You're using circular logic (i.e. it's popular because it's popular).
Why is this circular logic? This is physical evidence that 60% stock / 40% bond is one of the most significant dollar weighted allocations out there.
I never disputed that. I questioned why it's so popular. nisiprius has as well. It's a bit of a mystery.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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HomerJ
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by HomerJ » Wed Sep 18, 2019 12:35 pm

Muffin Master wrote:
Wed Sep 18, 2019 10:49 am
I am more inclined to a dynamic AA.

A fixed AA like 60/40 is not poured in concrete for me and I feel it is itself based on historical patterns and norms. If you measure portfolio risk simple by the AA , harvesting if done correctly, would loosely follow the business cycle. It would help reduce some equity exposure at market tops and increasing it at drawdowns.

The point to me is harvesting will probably create a more natural AA for the times we live in and your comfort level. IMHO harvesting becomes the most important after following a simple bogle portfolio. It should return a better than the average managed portfolio in the long term.
You are talking about market-timing.

On average, one will do worse with a "dynamic AA" than a "buy and hold, stay the course fixed AA".

But maybe you are smarter than the average bear. But probably not.
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CULater
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by CULater » Wed Sep 18, 2019 1:02 pm

But maybe you are smarter than the average bear. But probably not.
The Average Bear May be Smarter than you Thought:
Yogi Bear always claimed that he was smarter than the average bear, but the average bear appears to be smarter than once thought. Psychologists Jennifer Vonk of Oakland University and Michael J. Beran of Georgia State University have taken a testing methodology commonly used for primates and shown not only that the methodology can be more widely used, but also that bears can distinguish among differing numerosities.
https://blogs.scientificamerican.com/th ... u-thought/
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Independent George
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Independent George » Wed Sep 18, 2019 3:52 pm

So... I would actually agree that we shouldn't expect the 7% real return we've seen in the past, but the relevant questions are (1) whether active managers can be expect to outperform a 60/40 portfolio in the future, net of fees, and (2) whether we can identify which active managers will be able to do it. I see no indication that the answer to either of those questions is "yes".

Regardless, I see most Bogleheads plan around a far more conservative set of assumptions (anecdotally, I think 4% real is the most common base projection I've seen on the forum). My own spreadsheet is based on 3.5% real appreciation, and no further contributions past the current year. For that matter, CPI typically overstates the rate of inflation, but we use it anyway because it's the best tool we have despite the known flaw.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Muffin Master » Wed Sep 18, 2019 6:49 pm

nisiprius wrote:
Wed Sep 18, 2019 10:54 am
Muffin Master wrote:
Wed Sep 18, 2019 10:49 am

Vanguard's LifeStrategy funds did that for a long time; the allocations of the funds were merely "neutral points" and they would adjust stock allocation up and down according to a "proprietary quantitative model."
I think you misunderstood me a bit. I am not suggesting setting the AA to some formula. MF might of tried to guess at timing in that way. In fact I do not care at all about it other then at the beginning. I let the AA float so to speak. Maintain the original equity $ amount and prune it and build the bond side. To be clear this is only for a dispersement portfolio not an accumulation portfolio. I do make a distinction here. Harvesting to secure future income rather than maintain a fix AA to protect the growth. If a dispersement portfolio runs out of bonds during an extended downturn that can be devastating. Accumulation portfolios are the opposite for the most part, if you miss the growth it can be devastating.

My initial AA would be derived from expected long term returns, desired income and my safety buffer (bonds) mainly. Not from some excepted norm. 70/30 initial works for me.

Accumulation portfolios I use fixed AA although it has change since I was younger. I am currently near 60/40

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fortyofforty
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by fortyofforty » Wed Sep 18, 2019 8:35 pm

There are discussions worth having here, such as if a total bond market portfolio will be better going forward than intermediate term Treasuries, or if value stocks will outperform growth stocks over the coming decade. The debate over active versus passive management of stock portfolios is over. It's been over for a long time. I am glad active managers and stock pickers still do their thing, since that helps keep my passive portfolio efficient, but I feel bad for their clients.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

jdilla1107
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by jdilla1107 » Thu Sep 19, 2019 9:49 am

I am 70/30 which allows me to ignore all of the debates and articles about 60/40. :twisted:

rich126
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by rich126 » Thu Sep 19, 2019 9:54 am

Independent George wrote:
Wed Sep 18, 2019 3:52 pm
So... I would actually agree that we shouldn't expect the 7% real return we've seen in the past, but the relevant questions are (1) whether active managers can be expect to outperform a 60/40 portfolio in the future, net of fees, and (2) whether we can identify which active managers will be able to do it. I see no indication that the answer to either of those questions is "yes".

Regardless, I see most Bogleheads plan around a far more conservative set of assumptions (anecdotally, I think 4% real is the most common base projection I've seen on the forum). My own spreadsheet is based on 3.5% real appreciation, and no further contributions past the current year. For that matter, CPI typically overstates the rate of inflation, but we use it anyway because it's the best tool we have despite the known flaw.
For retirees a 4% or even a 3.5% real return means you are unlikely to run out of money with a 4% SWR unless you have a really bad sequence of returns.

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willthrill81
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Thu Sep 19, 2019 10:04 am

rich126 wrote:
Thu Sep 19, 2019 9:54 am
Independent George wrote:
Wed Sep 18, 2019 3:52 pm
So... I would actually agree that we shouldn't expect the 7% real return we've seen in the past, but the relevant questions are (1) whether active managers can be expect to outperform a 60/40 portfolio in the future, net of fees, and (2) whether we can identify which active managers will be able to do it. I see no indication that the answer to either of those questions is "yes".

Regardless, I see most Bogleheads plan around a far more conservative set of assumptions (anecdotally, I think 4% real is the most common base projection I've seen on the forum). My own spreadsheet is based on 3.5% real appreciation, and no further contributions past the current year. For that matter, CPI typically overstates the rate of inflation, but we use it anyway because it's the best tool we have despite the known flaw.
For retirees a 4% or even a 3.5% real return means you are unlikely to run out of money with a 4% SWR unless you have a really bad sequence of returns.
Since we know that the historic 30 year SWR was very strongly correlated with the first 15 years of returns, bonds would have to return 0% real for the next 15 years and stocks less than 1% real over the next 15 years to be worse than the historic scenarios that led to the '4% rule'. Right now, a portfolio of all TIPS can be guaranteed to have a 3.5% SWR over the next 30 years.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

LittleD
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by LittleD » Thu Sep 19, 2019 10:51 am

We all should know the Social Security is essentially a Tips bond portfolio and for most folks a
pretty substantial pot of future money. With that in mind, you should be able to allocate a bit more money
to equities, commodities & gold to round out an entire portfolio for the coming lean years.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by fortyofforty » Thu Sep 19, 2019 9:06 pm

jdilla1107 wrote:
Thu Sep 19, 2019 9:49 am
I am 70/30 which allows me to ignore all of the debates and articles about 60/40. :twisted:
After the next correction you'll be 60/40. :P
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

trueblueky
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by trueblueky » Fri Oct 18, 2019 12:03 pm


Dink2018
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Dink2018 » Fri Oct 18, 2019 8:30 pm

I know that a large portion of bogleheads dislike gold but I see it as the other side of 60/40. Its just hard for me to imagine that buying a ton of bonds for the next 30-50 years and ignoring the central banks buying gold and printing the $$ for bonds is wise.

Sure bonds have beat gold in many cases, but holding a broad range of stocks, bonds, and hard assets makes sense as well.

If you don't like gold ask yourself this. If the value of it was really ZERO when why are the people printing all the money holding it and buying it?

Meaning, if 60/40 doesn't work (which I think it will to the tune of 3-5% range but not to the tune of 7-12% like some dave ramsey people say) then what's your other option?

Basically real estate and gold as I see it.

My current port is 35% global stocks, 35% us bonds, 15 cash (needed for sure given business and short term needs) and 15% gold. I don't own real estate (now, but I have in the past).

Here's my take on all this:

Cash: the amount you need for the next 6-12 months, or the amount you can't mentally tolerate moving around.

Bonds: the amount you want to make sure isn't too volatile, the biggest risk here is inflation not really default. Remember before you put down bonds there are tons of cases where bonds out perform stocks over 5-10 and even 15 years.

Stocks: the amount you want to bet on capitalism expanding in general, be ready for drops anywhere between 10-50+ percent and you NEED to not bail when that happens

Gold: Don't be against 4k years of track record, and all the people printing the cash hold it anyway so do as they DO and not do as they say "buy bonds" its the best protection against hyper inflation. Expect it can / will be volatile but that's okay, it just means that major shifts are happening in the market and you have a position.

RealEstate: get your own house in order first, keep between 5-25% of monthly nut, if you can't afford to buy that's fine, just rent and work on your income / job skills. It's far easier to shift those than shift real estate prices. before you buy ask yourself if you'd rent at the same price.

I've sold hundreds (actually thousands if I think about it) of houses and I've never seen people rent nearly as stupidly as they buy. Nearly all are stupidly in debt when they buy on leverage and very few rent "too high" than they can afford, they don't trick themselves into mental accounting BS when renting but they do it nearly every time when they buy.

Real estate you sleep in works like this:

Rent from Opportunity Cost (Buy in Cash)
Rent from Bank (what most people call buying)
Rent from Landlord (invest the rest and limit your exposure while keeping your flexibility up and dramatically limiting your risk to single asset fluctuations) my first house had 3 meth houses burn down during the time I was trying to sell.

Only add real estate to your port after you have figured out where you are with all the above and aren't lying to yourself about residential real estate vs commercial or multi family or reits. Those are all wildly different things. Your personal house is far more likely to be a liability than an asset.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Grt2bOutdoors » Fri Oct 18, 2019 9:24 pm

Dink2018 wrote:
Fri Oct 18, 2019 8:30 pm
I know that a large portion of bogleheads dislike gold but I see it as the other side of 60/40. Its just hard for me to imagine that buying a ton of bonds for the next 30-50 years and ignoring the central banks buying gold and printing the $$ for bonds is wise.

Sure bonds have beat gold in many cases, but holding a broad range of stocks, bonds, and hard assets makes sense as well.

If you don't like gold ask yourself this. If the value of it was really ZERO when why are the people printing all the money holding it and buying it?

Meaning, if 60/40 doesn't work (which I think it will to the tune of 3-5% range but not to the tune of 7-12% like some dave ramsey people say) then what's your other option?
Ramsey doesn’t believe in bonds. His securities portfolio is 75% domestic and 25% international equities. It’s not 60/40. It’s 100/0 high octane.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Northern Flicker
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Northern Flicker » Fri Oct 18, 2019 10:29 pm

My first thought was that Mr. Mauldin has a product to sell that offers an alternative to a 60/40 portfolio. I was not disappointed. You can read about his investment newsletter “Yield Shark” here:

https://www.mauldineconomics.com/about- ... -economics

It is true that if stocks fall because of accelerating inflation, nominal bonds will hurt, not help. We don’t know which way inflation is headed, so the following:

45% US stocks
15% non-US stocks
20% nominal treasuries
20% TIPS

would be one way to address Mr. Mauldin’s concerns with a 60/40 balanced portfolio.
Index fund investor since 1987.

sf_tech_saver
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by sf_tech_saver » Fri Oct 18, 2019 11:21 pm

The only interesting counter-play to these observations is to observe that 'human' capital in select industries has never been at a higher premium.

My friend just signed a $2M/year offer at a traditional tech company throwing everything they can at it to hire talent. 5/5 of my close friends have made multi-M$ paydays over the last 3 years. Anyone with 15 years' experience is routinely making 700k+ in my industry right now.

VCs are offering my tech friends $2-4M to go start something.

There has never been a better time to have human capital in technology. The smart investors are ramping up their focus there IMHO.

The counter to the virtues of passive investing is active investing in your own human capital. To me, that's the defining growth driver over the next 100 years.

My contrarian view: it is even more important than savings rate to some extent! Its a lot easier to save making $2M a year.
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Uncorrelated
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Uncorrelated » Sat Oct 19, 2019 5:46 am

Dink2018 wrote:
Fri Oct 18, 2019 8:30 pm
Gold: Don't be against 4k years of track record, and all the people printing the cash hold it anyway so do as they DO and not do as they say "buy bonds" its the best protection against hyper inflation. Expect it can / will be volatile but that's okay, it just means that major shifts are happening in the market and you have a position.
Why buy an asset with a 4000 year of track record of zero returns, when you can buy stocks and TIPS? Even during the hyperinflation period in Germany after WW2, real local stock returns were essentially uncorrelated with inflation.

The real return of gold, measured over centuries, has been essentially zero. The correlation between gold and CPI is inflation is generally zero, except in the time period 1880-1913 where it was -0.0007 (p < 0.05).

The usual assets are just a better deal:
TIPS, Also a correlation of zero with CPI, but much lower risk (standard deviation near zero, instead of 20% annually)
Stocks, Correlation close to zero with CPI, slightly lower risk than gold and higher expected returns (~7% vs 0%)

There are reasons to buy gold, but protection from hyperinflation is not one of them.


Sources:
http://www.eief.it/files/2013/03/robert-barro.pdf real gold returns since 1800, covariances.
https://www.up.ac.za/media/shared/61/WP ... p77509.pdf correlation between real stock returns and inflation is -0.23 in the period 1791-2015

If you don't like gold ask yourself this. If the value of it was really ZERO when why are the people printing all the money holding it and buying it?
The value of gold isn't zero. The expected return of gold is zero.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by WoodSpinner » Sat Oct 19, 2019 10:16 am

sf_tech_saver wrote:
Fri Oct 18, 2019 11:21 pm
The only interesting counter-play to these observations is to observe that 'human' capital in select industries has never been at a higher premium.

My friend just signed a $2M/year offer at a traditional tech company throwing everything they can at it to hire talent. 5/5 of my close friends have made multi-M$ paydays over the last 3 years. Anyone with 15 years' experience is routinely making 700k+ in my industry right now.

VCs are offering my tech friends $2-4M to go start something.

There has never been a better time to have human capital in technology. The smart investors are ramping up their focus there IMHO.

The counter to the virtues of passive investing is active investing in your own human capital. To me, that's the defining growth driver over the next 100 years.

My contrarian view: it is even more important than savings rate to some extent! Its a lot easier to save making $2M a year.
Have to say that this post SCARES me! Reminds me of the ramp-up of the Tech Bubble and subsequent crash. Way too much money chasing too few money making opportunities.

WoodSpinner

Dink2018
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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Dink2018 » Sat Oct 19, 2019 10:22 am

Uncorrelated wrote:
Sat Oct 19, 2019 5:46 am
Dink2018 wrote:
Fri Oct 18, 2019 8:30 pm
Gold: Don't be against 4k years of track record, and all the people printing the cash hold it anyway so do as they DO and not do as they say "buy bonds" its the best protection against hyper inflation. Expect it can / will be volatile but that's okay, it just means that major shifts are happening in the market and you have a position.
Why buy an asset with a 4000 year of track record of zero returns, when you can buy stocks and TIPS? Even during the hyperinflation period in Germany after WW2, real local stock returns were essentially uncorrelated with inflation.

The real return of gold, measured over centuries, has been essentially zero. The correlation between gold and CPI is inflation is generally zero, except in the time period 1880-1913 where it was -0.0007 (p < 0.05).

The usual assets are just a better deal:
TIPS, Also a correlation of zero with CPI, but much lower risk (standard deviation near zero, instead of 20% annually)
Stocks, Correlation close to zero with CPI, slightly lower risk than gold and higher expected returns (~7% vs 0%)

There are reasons to buy gold, but protection from hyperinflation is not one of them.


Sources:
http://www.eief.it/files/2013/03/robert-barro.pdf real gold returns since 1800, covariances.
https://www.up.ac.za/media/shared/61/WP ... p77509.pdf correlation between real stock returns and inflation is -0.23 in the period 1791-2015

If you don't like gold ask yourself this. If the value of it was really ZERO when why are the people printing all the money holding it and buying it?
The value of gold isn't zero. The expected return of gold is zero.
It would be interesting for you to read Harry Browne and the new book about the permanent portfolio and see it that changes some of your opinions or beliefs. I found it really interesting and it changed my views on what diversification really is, there are lots of levels even diversification between institutions which I never really considered but it makes sense to not keep your entire net worth in one institution.

Expected vs what happens can be very different. People in Japan expected stocks to grow. People in Germany didn't expect Hitler.

Hasn't every fiat currency failed? Yes...aren't the people printing the fiat holding gold? Yes... Can you really trust what the govt says about inflation and buy TIPS, seems crazy to me to trust the people creating the inflation to report it accurately.

Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.

I'm not talking about holding gold in isolation, but holding a specific percentage in a portfolio.

Doesn't protect against hyper inflation? Yes it does for sure. Look at Argentina, or some African countries, you'd be nuts to hold bonds there vs gold. Show me a currency that hyper inflated vs gold and then ask yourself which one you'd rather hold?

I think people who don't consider holding at LEAST 5% gold are guilty of recency bias. The entire planet has only been off the standard since the 70's that's a minor blip.

I realize that gold is pretty much a hated asset class around here but hey I'm just putting out my .02

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Forester » Sat Oct 19, 2019 10:28 am

Dink2018 wrote:
Sat Oct 19, 2019 10:22 am

I think people who don't consider holding at LEAST 5% gold are guilty of recency bias. The entire planet has only been off the standard since the 70's that's a minor blip.
It's complacency, they only see the last few decades. In any case gold was more useful to a portfolio than bonds in the 1970s & 2000s. Two decades out of five isn't bad! 5% gold & 5% gold equities through thick & thin for me.

Who is enthusiastic about 40% megacap US stocks (at nosebleed value multiples), 20% megacap foreign stocks, 40% US government paper (deficit ballooning and we're not in a recession) ? Maybe it will be fine, or it could stink. This is the most popular advice on here and financial blogs. A lot of people would also argue it's an unnecessarily risky portfolio.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by goodenyou » Sat Oct 19, 2019 10:36 am

WoodSpinner wrote:
Sat Oct 19, 2019 10:16 am
sf_tech_saver wrote:
Fri Oct 18, 2019 11:21 pm
The only interesting counter-play to these observations is to observe that 'human' capital in select industries has never been at a higher premium.

My friend just signed a $2M/year offer at a traditional tech company throwing everything they can at it to hire talent. 5/5 of my close friends have made multi-M$ paydays over the last 3 years. Anyone with 15 years' experience is routinely making 700k+ in my industry right now.

VCs are offering my tech friends $2-4M to go start something.

There has never been a better time to have human capital in technology. The smart investors are ramping up their focus there IMHO.

The counter to the virtues of passive investing is active investing in your own human capital. To me, that's the defining growth driver over the next 100 years.

My contrarian view: it is even more important than savings rate to some extent! Its a lot easier to save making $2M a year.
Have to say that this post SCARES me! Reminds me of the ramp-up of the Tech Bubble and subsequent crash. Way too much money chasing too few money making opportunities.

WoodSpinner
If “you” ask why “we” didn’t see “it” coming, “you” had your eyes closed.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Uncorrelated » Sat Oct 19, 2019 11:04 am

Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty. There are better options. You might as well hold a small amount of bitcoin or other uncorrelated assets. Why not buy a commodities ETF. Surely a diversified basket of commodities is better than one?

It might come as no surprise that commodities are also almost universally hated.

I'm not talking about holding gold in isolation, but holding a specific percentage in a portfolio.
That's exactly the use case I'm talking about.
Doesn't protect against hyper inflation? Yes it does for sure. Look at Argentina, or some African countries, you'd be nuts to hold bonds there vs gold. Show me a currency that hyper inflated vs gold and then ask yourself which one you'd rather hold?
You're moving the goalposts. The question isn't whether I would rather hold gold instead of bonds. The question is whether an allocation to gold improves your overall portfolio.

The only reason why I would want to hold gold in Argentina is to bribe the border guards. If I wanted something to protect against hyperinflation, I would buy stocks, foreign bonds or income producing hard assets such as farmland. Farmland, like gold, has an expected return of zero. But in addition to the appreciation of the land, you can produce crops on it to produce income.

I think people who don't consider holding at LEAST 5% gold are guilty of recency bias. The entire planet has only been off the standard since the 70's that's a minor blip.
That's funny, because that's exactly how I think about people that recommend gold. If you look at recent history, you see an asset with positive returns that is a good addition to your portfolio. But if you use long-term numbers, gold does not have positive expected returns and a portfolio that includes gold is not efficient (according to my calculations). An excellent case study of survivorship bias.

If you believe that gold has a positive real return, you can use it as a diversifier in your portfolio. But if you look at very long timescales, gold does not have statistically significant positive expected returns.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Sat Oct 19, 2019 11:16 am

Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by vineviz » Sat Oct 19, 2019 11:22 am

willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I rarely get 20% allocation in my models, especially if the investor is willing to hold long term nominal Treasuries or TIPS, but I agree that replacing some bonds with gold can improve diversification for bond-heavy portfolios.

If I ever get to less than 60% equities then I expect a 5-10% to gold and/or commodities will be part of my allocation .
"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: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Sat Oct 19, 2019 12:01 pm

vineviz wrote:
Sat Oct 19, 2019 11:22 am
willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I rarely get 20% allocation in my models, especially if the investor is willing to hold long term nominal Treasuries or TIPS, but I agree that replacing some bonds with gold can improve diversification for bond-heavy portfolios.

If I ever get to less than 60% equities then I expect a 5-10% to gold and/or commodities will be part of my allocation .
I agree that a smaller than 20% allocation to gold, perhaps around 10%, would have historically reaped most of its diversification benefit.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Uncorrelated » Sat Oct 19, 2019 12:17 pm

willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I used a simple efficient frontier calculation with my assumptions about future gold returns. Portfolio's with gold are either not efficient, or just barely in very specific quantities.

I don't believe in backtests. When calculating the SWR over a period of 45 years there are only a handful of important data points. The risk of portfolio overfitting is extremely large. I believe you should determine your portfolio based on the best possible expectations of future assets. Those expectations for gold are (in my opinion) stddev 20% per year, real return 0% per year, and correlation with other assets zero. If you use different assumptions you might come to different conclusions, but please don't use backtests to determine your portfolio.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Sat Oct 19, 2019 12:28 pm

Uncorrelated wrote:
Sat Oct 19, 2019 12:17 pm
willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I used a simple efficient frontier calculation with my assumptions about future gold returns. Portfolio's with gold are either not efficient, or just barely in very specific quantities.

I don't believe in backtests. When calculating the SWR over a period of 45 years there are only a handful of important data points. The risk of portfolio overfitting is extremely large. I believe you should determine your portfolio based on the best possible expectations of future assets. Those expectations for gold are (in my opinion) stddev 20% per year, real return 0% per year, and correlation with other assets zero. If you use different assumptions you might come to different conclusions, but please don't use backtests to determine your portfolio.
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by BalancedJCB19 » Sat Oct 19, 2019 12:33 pm

I will stick with my Balanced Index Fund and when I let the noise get to me, I will go back and read The Little Book of Common Sense Investing (updated edition) by John Bogle. He has a chapter entitled when the good times no longer roll and at the end he praises the Balanced Index Fund as a low cost fund which is like having all your money overseen by a fiduciary.

When I see people saying this strategy or that asset allocation is dead, the only thing they are telling us is that we need to hire people smarter than us to make decisions in this ever changing world and charge us high fees to do so or start looking at other assets like real estate, commodities, gold, etc.

As Jack used to say investing is a zero sum game! If you are selling, someone else is buying.

Stay the course with stocks and bonds and ignore the noise. We can only control a few things and high fees are one of them. No sense in worrying about the things we can't control. My personal strategy is to save more and spend less and hold the balanced index fund for life.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Uncorrelated » Sat Oct 19, 2019 12:37 pm

willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
Uncorrelated wrote:
Sat Oct 19, 2019 12:17 pm
willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am
Dink2018 wrote:
Sat Oct 19, 2019 10:22 am
Take a look at what a solid 5-15 slug of gold does to safe withdrawal rates.
I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I used a simple efficient frontier calculation with my assumptions about future gold returns. Portfolio's with gold are either not efficient, or just barely in very specific quantities.

I don't believe in backtests. When calculating the SWR over a period of 45 years there are only a handful of important data points. The risk of portfolio overfitting is extremely large. I believe you should determine your portfolio based on the best possible expectations of future assets. Those expectations for gold are (in my opinion) stddev 20% per year, real return 0% per year, and correlation with other assets zero. If you use different assumptions you might come to different conclusions, but please don't use backtests to determine your portfolio.
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
My assumptions are based on centuries of data. Your tests are based on 45 years of data. They are both based on data, it's just different data.

Would you accept a backtest of Microsoft as evidence that 20% Microsoft in your portfolio is a good idea? No of course not. Why is the case for gold any different?

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Sat Oct 19, 2019 1:46 pm

Uncorrelated wrote:
Sat Oct 19, 2019 12:37 pm
willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
Uncorrelated wrote:
Sat Oct 19, 2019 12:17 pm
willthrill81 wrote:
Sat Oct 19, 2019 11:16 am
Uncorrelated wrote:
Sat Oct 19, 2019 11:04 am

I did. It's not pretty.
Would you please post the details of your analysis? Because with few exceptions, the data I've seen strongly indicate that a 10-20% allocation to gold, especially 'at the expense' of bonds, over the last ~45 years would have smoothed out returns and significantly improved safe withdrawal rates.
I used a simple efficient frontier calculation with my assumptions about future gold returns. Portfolio's with gold are either not efficient, or just barely in very specific quantities.

I don't believe in backtests. When calculating the SWR over a period of 45 years there are only a handful of important data points. The risk of portfolio overfitting is extremely large. I believe you should determine your portfolio based on the best possible expectations of future assets. Those expectations for gold are (in my opinion) stddev 20% per year, real return 0% per year, and correlation with other assets zero. If you use different assumptions you might come to different conclusions, but please don't use backtests to determine your portfolio.
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
My assumptions are based on centuries of data. Your tests are based on 45 years of data. They are both based on data, it's just different data.
So you are using historical data after all.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by dknightd » Sat Oct 19, 2019 2:18 pm

I've thought about buying gold, and burying it in my backyard. But I'm afraid I'd forget where I buried it. So I do not bother.

I've also thought about buying guns, and bullets, and canned food. But I would likely never use a gun on a human, and if I tried to sell them in times of duress, just having them could make me a target. And even canned food gets unsafe after many years. So, again, I do not bother.

The original article cited in this thread is in my mind marketing. Buy my services and I will tell you how to make money. Nothing wrong with advertising your services. It is done every day. Current society is apparently driven by media and marketing. I do not particularly like media and marketing.

Media and marketing, and historical returns, gave us the 60/40 portfolio. I agree with the article in the sense that it makes sense to expose ourselves to foreign and emerging markets, and to keep some money in "cash". Right now I have some in both. That might turn out to be a mistake, or perhaps not. Only time will tell ;)

All my "money" is basically stored as ones and zeros. If the ability to store ones and zeros goes away I'm not really sure what I would do.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by 305pelusa » Sat Oct 19, 2019 2:23 pm

Uncorrelated wrote:
Sat Oct 19, 2019 12:17 pm
I believe you should determine your portfolio based on the best possible expectations of future assets. Those expectations for gold are (in my opinion) stddev 20% per year, real return 0% per year, and correlation with other assets zero. If you use different assumptions you might come to different conclusions, but please don't use backtests to determine your portfolio.
Whoah agreed 1000%.
willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
I don't think he's saying use no data. I think he's saying "make sure it all makes sense and is theoretically sound. THEN backtest just to double-check yourself".
I think a lot of gold advocates do that^ the other way around. To me that's "using backtests to determine your portfolio" and I also disagree with the approach.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by willthrill81 » Sat Oct 19, 2019 2:40 pm

305pelusa wrote:
Sat Oct 19, 2019 2:23 pm
willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
I don't think he's saying use no data. I think he's saying "make sure it all makes sense and is theoretically sound. THEN backtest just to double-check yourself".
I think a lot of gold advocates do that^ the other way around. To me that's "using backtests to determine your portfolio" and I also disagree with the approach.
Yes, after clarification, that's what he seems to be advocating, and I have no problem with that approach. I've never berated anyone for not owning gold. But the theoretical lack of a real return should not automatically disqualify it as an investment or else most global bonds would be excluded as well right now. On the basis of MPT, having an asset whose performance is historically volatile and uncorrelated to stocks and bonds could be beneficial to a portfolio, even if its long-term real return is zero (which it hasn't been for the last ~45 years).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by 305pelusa » Sat Oct 19, 2019 3:18 pm

willthrill81 wrote:
Sat Oct 19, 2019 2:40 pm
305pelusa wrote:
Sat Oct 19, 2019 2:23 pm
willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
I don't think he's saying use no data. I think he's saying "make sure it all makes sense and is theoretically sound. THEN backtest just to double-check yourself".
I think a lot of gold advocates do that^ the other way around. To me that's "using backtests to determine your portfolio" and I also disagree with the approach.
Yes, after clarification, that's what he seems to be advocating, and I have no problem with that approach. I've never berated anyone for not owning gold. But the theoretical lack of a real return should not automatically disqualify it as an investment or else most global bonds would be excluded as well right now. On the basis of MPT, having an asset whose performance is historically volatile and uncorrelated to stocks and bonds could be beneficial to a portfolio, even if its long-term real return is zero (which it hasn't been for the last ~45 years).
Will I think there's plenty of merit in gold and commodities as a diversifying asset, especially when bonds are yielding so low. Unlike Uncorrolated, I do find a small allocation to commodities to exist in the mean-variant optimal portfolio, even using his assumptions. Perhaps he'll share his assumptions for stock and bond returns and I can run it independently on my Solver.

That said, the point I'm trying to make is that if I were to use them, it is purely from ^that analysis and not because I backtested it and found "it helped the withdrawal rate" or any other occurrence. That's a really fine distinction but I believe is very important. If gold had done absolutely terribly the past few decades, I would consider just as much of an allocation to it based on the above. In other words, the historical returns play no role in my portfolio construction.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by Uncorrelated » Sat Oct 19, 2019 4:03 pm

willthrill81 wrote:
Sat Oct 19, 2019 2:40 pm
305pelusa wrote:
Sat Oct 19, 2019 2:23 pm
willthrill81 wrote:
Sat Oct 19, 2019 12:28 pm
This is completely nonsensical. You're advocating that our assumptions are better than actual data. I agree that excessive reliance on historical data can be problematic, but to say that we should not use such data at all is a patently bad idea.
I don't think he's saying use no data. I think he's saying "make sure it all makes sense and is theoretically sound. THEN backtest just to double-check yourself".
I think a lot of gold advocates do that^ the other way around. To me that's "using backtests to determine your portfolio" and I also disagree with the approach.
Yes, after clarification, that's what he seems to be advocating, and I have no problem with that approach. I've never berated anyone for not owning gold. But the theoretical lack of a real return should not automatically disqualify it as an investment or else most global bonds would be excluded as well right now. On the basis of MPT, having an asset whose performance is historically volatile and uncorrelated to stocks and bonds could be beneficial to a portfolio, even if its long-term real return is zero (which it hasn't been for the last ~45 years).
The t statistic for gold returns in the last ~45 years is only 0.7. Around 400 years are needed to reach 95% confidence that gold has a return different from zero. There is more evidence for the size premium than for gold returns != 0.

Of course a return of 0 doesn't necessary imply that it's a worthless asset, but the combination of extremely high volatility, nonsignificant correlation with other assets and low return isn't good. Even with an expected return of 2% per year, the difference between no gold and the optimal amount of gold is so small that I can't even see the difference on a chart.
305pelusa wrote:
Sat Oct 19, 2019 3:18 pm
Will I think there's plenty of merit in gold and commodities as a diversifying asset, especially when bonds are yielding so low. Unlike Uncorrolated, I do find a small allocation to commodities to exist in the mean-variant optimal portfolio, even using his assumptions. Perhaps he'll share his assumptions for stock and bond returns and I can run it independently on my Solver.
My assumptions in this quick test are: gold 0% return 20% std, stocks: 7% return 16% std, bonds: 1% return 5% std. All returns real, correlations all zero. In the real world I would put more effort in choosing the right duration of bonds to match my equity exposure and use a small negative correlation between stocks and bonds, but this suffices for now.
That said, the point I'm trying to make is that if I were to use them, it is purely from ^that analysis and not because I backtested it and found "it helped the withdrawal rate" or any other occurrence. That's a really fine distinction but I believe is very important. If gold had done absolutely terribly the past few decades, I would consider just as much of an allocation to it based on the above. In other words, the historical returns play no role in my portfolio construction.
That's exactly what I do.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by 305pelusa » Sat Oct 19, 2019 4:21 pm

Uncorrelated wrote:
Sat Oct 19, 2019 4:03 pm
My assumptions in this quick test are: gold 0% return 20% std, stocks: 7% return 16% std, bonds: 1% return 5% std. All returns real, correlations all zero. In the real world I would put more effort in choosing the right duration of bonds to match my equity exposure and use a small negative correlation between stocks and bonds, but this suffices for now.
Yeah I take back what I said. Had a really dumb moment back there.
Let me remedy:
willthrill81 wrote:
Sat Oct 19, 2019 2:40 pm
On the basis of MPT, having an asset whose performance is historically volatile and uncorrelated to stocks and bonds could be beneficial to a portfolio, even if its long-term real return is zero
It could but it's really, really unlikely. That's because mathematically, if your asset (gold) has lower returns and higher volatility (than stocks), the correlation actually needs to be negative to have the chance of increasing the Sharpe. We know portfolio variance is given by:
vp = ((x1^2)*(s1^2)) + (2*x1*x2*r12*s1*s2) + ((x2^2)*(s2^2))

Where x1 and x2 are weights of stocks and gold, s1 and s2 the St Dev of stocks and gold, and r12 their correlation. Adding gold will definitely decrease the expected return of the portfolio (diluting it with lower yielding assets). The only way the portfolio will have a higher Sharpe is via a lower variance. But in the equation above, if s2>s1 and r12 = 0, the variance will also be greater than the variance of the all-stock portfolio.

So not only does the correlation have to be negative. It needs to be negative enough to decrease the variance enough such that the final portfolio's variance got reduced by more than its return, leading to a higher Sharpe. If the return and volatility differential is large enough, maybe not even -1.00 correlation could do it.

This does NOT happen with zero-yielding bonds because their volatility is much, much lower. In other words, higher volatility in assets, given a certain expected return, is not typically a good thing. The only way higher volatility leads to higher Sharpe (as in, it's a "blessing" instead of a "curse") is if the correlation is negative enough.

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Re: Is the 60/40 portfolio allocation strategy being killed?

Post by international001 » Sun Oct 20, 2019 8:08 am

305pelusa wrote:
Sat Oct 19, 2019 4:21 pm

It could but it's really, really unlikely. That's because mathematically, if your asset (gold) has lower returns and higher volatility (than stocks), the correlation actually needs to be negative to have the chance of increasing the Sharpe. We know portfolio variance is given by:
vp = ((x1^2)*(s1^2)) + (2*x1*x2*r12*s1*s2) + ((x2^2)*(s2^2))
well.. imagine x1=x2=0.5, s1=s2, r12=0, then vp (with gold) is 1/2 of vp without gold
so std goes lower if correlations are lower than 0


You have backtested benefits also

LAst 50 years
https://www.portfoliovisualizer.com/eff ... e&total1=0

But if you pick the last 20 years, history may turn out different

My take is that gold benefit it's more than volatility (it's about some secular trends), but I think markets are efficient also in this way, so it's nearly impossible to figure it out. And it gold benefits have very long trends, so chances are that you can be wrong whatever you do.

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