Great article from Portfolio Charts on most efficient portfolios

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willthrill81
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Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

As many know, Tyler9000, one of our posters here, runs PortfolioCharts.com, which is a fantastic resource for investors. He has recently written a fantastic article in which he examines what combinations of assets have been most efficient in terms of 15 year baseline returns and the Ulcer index, a much better metric of 'portfolio pain' than the standard deviation so often used in these types of analyses.

After examining 42,504 different combinations of 20 different assets using data going back to 1970, he found that the most efficient portfolios usually included small-cap value stocks, long-term Treasuries, and gold, though some portfolios that didn't include all or even any of these assets also performed well.

Many here are quick to point out potential problems with all three of these assets, especially gold, but Tyler makes some great points, one of which I'm quoting below.
So two things can be true at the same time:

1. An asset is a critical component in many of the most desirable portfolios.
2. The same asset is disastrously undesirable when studied only in isolation.

Do you like salt on your food? Can you eat an entire box of it in one sitting without getting extremely sick? Same concept.
The above is difficult for many to realize. Humans are not well equipped to comprehend how multiple divergent assets can work together to create a desirable outcome when one (or more) by itself produces a very undesirable outcome.

Tyler also showed that it was far from necessary to go 'all-in' with the 'three secret ingredients' to substantially improve portfolio efficiency. For instance, he showed that a portfolio with 70% large-cap blend (i.e., S&P 500 or TSM), 10% SCV, 10% LTT, and 10% gold had significantly higher 15 year baseline returns and a significantly lower Ulcer index.

Another great point Tyler made was below.
But it’s also possible you’re resistant to certain portfolio ideas simply because they don’t match your expectations about how investing is supposed to work. There’s nothing inherently wrong with that, and there are all types of asset allocations suitable for different types of people. But by opening your mind to ideas that don’t always make sense on the surface, perhaps you’ll stumble into a new paradigm that changes the way you think about investing altogether.
Thoughts?
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by muffins14 »

willthrill81 wrote: Thu Dec 16, 2021 10:46 pm As many know, Tyler9000, one of our posters here, runs PortfolioCharts.com, which is a fantastic resource for investors. He has recently written a fantastic article in which he examines what combinations of assets have been most efficient in terms of 15 year baseline returns and the Ulcer index, a much better metric of 'portfolio pain' than the standard deviation so often used in these types of analyses.

After examining 42,504 different combinations of 20 different assets using data going back to 1970, he found that the most efficient portfolios usually included small-cap value stocks, long-term Treasuries, and gold, though some portfolios that didn't include all or even any of these assets also performed well.

Many here are quick to point out potential problems with all three of these assets, especially gold, but Tyler makes some great points, one of which I'm quoting below.
So two things can be true at the same time:

1. An asset is a critical component in many of the most desirable portfolios.
2. The same asset is disastrously undesirable when studied only in isolation.

Do you like salt on your food? Can you eat an entire box of it in one sitting without getting extremely sick? Same concept.
The above is difficult for many to realize. Humans are not well equipped to comprehend how multiple divergent assets can work together to create a desirable outcome when one (or more) by itself produces a very undesirable outcome.

Tyler also showed that it was far from necessary to go 'all-in' with the 'three secret ingredients' to substantially improve portfolio efficiency. For instance, he showed that a portfolio with 70% large-cap blend (i.e., S&P 500 or TSM), 10% SCV, 10% LTT, and 10% gold had significantly higher 15 year baseline returns and a significantly lower Ulcer index.

Another great point Tyler made was below.
But it’s also possible you’re resistant to certain portfolio ideas simply because they don’t match your expectations about how investing is supposed to work. There’s nothing inherently wrong with that, and there are all types of asset allocations suitable for different types of people. But by opening your mind to ideas that don’t always make sense on the surface, perhaps you’ll stumble into a new paradigm that changes the way you think about investing altogether.
Thoughts?
People tend to dislike things that are non-intuitive, and they prefer simple explanations to complex ones.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

muffins14 wrote: Thu Dec 16, 2021 10:49 pm People tend to dislike things that are non-intuitive, and they prefer simple explanations to complex ones.
Absolutely. Humans like black-and-white explanations. Nuance does not come naturally to most. It's far easier to say 'X asset is bad and should be completely avoided'.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
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Re: Great article from Portfolio Charts on most efficient portfolios

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Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
1. Yes, the future can always be different from the past. That's true for all assets.

2. Many let theoretical concerns drive their thinking in spite empirical evidence to the contrary (e.g., 'gold just sits there and doesn't produce anything, so it can't be useful in a portfolio').
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

willthrill81 wrote: Thu Dec 16, 2021 11:13 pm
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
1. Yes, the future can always be different from the past. That's true for all assets.

2. Many let theoretical concerns drive their thinking in spite empirical evidence to the contrary (e.g., 'gold just sits there and doesn't produce anything, so it can't be useful in a portfolio').
I don't think it's theoretical that the intrinsic value of gold isn't going to change.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

Triple digit golfer wrote: Thu Dec 16, 2021 11:17 pm
willthrill81 wrote: Thu Dec 16, 2021 11:13 pm
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
1. Yes, the future can always be different from the past. That's true for all assets.

2. Many let theoretical concerns drive their thinking in spite empirical evidence to the contrary (e.g., 'gold just sits there and doesn't produce anything, so it can't be useful in a portfolio').
I don't think it's theoretical that the intrinsic value of gold isn't going to change.
That's true, but it's irrelevant to whether gold is useful in a portfolio with other assets.

If you read Tyler's article, you'll see that gold by itself was indeed a horrible 'portfolio'. But in small 'doses', it's been remarkably useful, hence, Tyler's salt analogy.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by 000 »

I love gold but have a hard time with SCV and LTT from a forward looking perspective. I just don't see why SCV should work and I am really starting to think that all these nominal bonds are being held for purposes other than mine (not a life insurer, not matching other nominal liabilities, not trying to maintain daily liquidity, not trying to manipulate interest rates).
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Re: Great article from Portfolio Charts on most efficient portfolios

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000 wrote: Thu Dec 16, 2021 11:20 pm I love gold but have a hard time with SCV and LTT from a forward looking perspective. I just don't see why SCV should work and I am really starting to think that all these nominal bonds are being held for purposes other than mine (not a life insurer, not matching other nominal liabilities, not trying to maintain daily liquidity, not trying to manipulate interest rates).
Regarding SCV, I'm reminded of a quote from Oliver Heaviside: "“Shall I refuse my dinner because I do not fully understand the process of digestion?”

These days, I would prefer long-term TIPS to long-term nominals, but they obviously cannot be backtested for a meaningfully lengthy period of time.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by 000 »

willthrill81 wrote: Thu Dec 16, 2021 11:24 pm Regarding SCV, I'm reminded of a quote from Oliver Heaviside: "“Shall I refuse my dinner because I do not fully understand the process of digestion?”
When it comes to investing, probably.
What goes up must come down 😎
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by impatientInv »

Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
Gold has been considered an asset for thousands of years. That's the one reason why I hold it.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Fat Tails »

Thank you for sharing! That may be the most comprehensive portfolio analysis that I have seen. I especially like the “ulcer” index concept which more accurately represents the battle that our lizard brains must fight than standard deviation does.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Nathan Drake »

000 wrote: Thu Dec 16, 2021 11:32 pm
willthrill81 wrote: Thu Dec 16, 2021 11:24 pm Regarding SCV, I'm reminded of a quote from Oliver Heaviside: "“Shall I refuse my dinner because I do not fully understand the process of digestion?”
When it comes to investing, probably.
Most do not understand the vast majority of how even a basic index fund works, let alone all of the details of every company that comprises of it

SCV is fairly easy to understand - it’s a riskier, diversified bet, with higher expected returns, and where cash flows are more immediate. They are shorter duration equities. These types of companies are quite a bit different from those that represent the overall market, and provide good diversification benefits through additional risk premiums.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Dale_G »

Great article. I am not about to change anything but "confirmation bias" makes me feel better about what I do own. :P

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Re: Great article from Portfolio Charts on most efficient portfolios

Post by UsualLine »

Great article, thanks for that link! Lots to think about in there.

My hesitation about Gold is that I think it earns its place in a lot of these historical analyses because of the unique circumstance when in 1971 the dollar was unpegged from gold. That set off a 10 year inflationary period that benefited gold and hurt stocks and bonds. So when gold had its big run it was also uncorrelated and that makes it shine in these analyses. That unpegging obviously cannot be repeated.

The fact that this analysis looks at the 15th percentile return probably drives a lot of the portfolios to 15 year periods that include the 70's. Unfortunately that time dimension is one aspect that is not analyzed in the article.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by heyyou »

In the category of "better to ask, than to remain ignorant", what is done with the 10% Cash in Tyler's Pinwheel portfolio, and 25% cash in the Permanent Portfolio?
Where on his site do I read about the function of that particular asset?
Is it for withdrawals for retirees?
Is it for re-balancing as needed if some asset falls, but others have not gained?
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by dogagility »

willthrill81 wrote: Thu Dec 16, 2021 10:46 pm ...in which he examines what combinations of assets have been most efficient in terms of 15 year baseline returns and the Ulcer index...
Thanks for posting this, Willthrill81.

My first reaction is this. Of course there is a correlation between "baseline" returns and the Ulcer index.

The baseline return is defined as a low return (the 15th percentile return) on the spectrum of all observed returns. Seems to me that portfolios with larger variation in outcomes (and therefore a lower 15 year "baseline" return) are inherently more likely to have a higher Ulcer index.

It would be interesting to see this same comparison chart in which a higher percentile value is used to define the 15 year baseline return.
willthrill81 wrote: Thu Dec 16, 2021 10:46 pm Many here are quick to point out potential problems with all three of these assets, especially gold, but Tyler makes some great points, one of which I'm quoting below.
So two things can be true at the same time:

1. An asset is a critical component in many of the most desirable portfolios.
2. The same asset is disastrously undesirable when studied only in isolation.

Do you like salt on your food? Can you eat an entire box of it in one sitting without getting extremely sick? Same concept.
As an aside, there is a similar maxim in toxicology developed by Paracelsus in the 1500s which still stands the test of time: "All things are poison, and nothing is without poison; the dosage alone makes it so a thing is not a poison."

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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

impatientInv wrote: Fri Dec 17, 2021 12:15 am
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
Gold has been considered an asset for thousands of years. That's the one reason why I hold it.
Lots of things are assets. I don't include artwork or coins in my portfolio either.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by theorist »

This is a really great article. Presumably it is very important — when adding the spicing of SCV and gold and LTT to the vanilla but right-corner (on the ulcer index vs return chart) large blend straw man — to rebalance! Otherwise I can’t see how adding gold (a horrible performer in isolation at the 15 percentile level) can help. So implementing this in a taxable portfolio, or for people who don’t like to monitor their portfolio (especially in times of volatility), could be challenging.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Booogle »

Every time SCV is advocated for, they use ancient data.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by aegywn »

The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside. I could see maybe optimizing for (a) the 15th percentile return on a 40-year horizon or (b) the 33rd potential return on a shorter horizon, but managing to minimize risk in the short term is of course going to massively reduce your returns.

Obviously I’m speaking now after a massive stock market run-up — wait until a big drawdown :-)
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Stubbie »

willthrill81 wrote: Thu Dec 16, 2021 10:54 pm
muffins14 wrote: Thu Dec 16, 2021 10:49 pm People tend to dislike things that are non-intuitive, and they prefer simple explanations to complex ones.
Absolutely. Humans like black-and-white explanations. Nuance does not come naturally to most. It's far easier to say 'X asset is bad and should be completely avoided'.
Agree. Rebalancing is key to adding these three assets to a portfolio. If you are unwilling to buy more gold when it is down 30%, then don't mess with it. Some of my skepticism regarding gold was alleviated by none other than Bill Bernstein when I heard him talking about its usefulness in a portfolio if you are willing to keep buying it through long periods of dismal performance. You've got to really believe in its value as a part of the overall picture or you're going to bail out at exactly the wrong time. Same with SCV and LTT. If you already hate gold for all the usual reasons, don't even think about it.
Of course, Bernstein also says only about 10% of investors should be managing their own portfolios. He's probably right about that too. 8-)
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by dcabler »

aegywn wrote: Fri Dec 17, 2021 7:44 am The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside. I could see maybe optimizing for (a) the 15th percentile return on a 40-year horizon or (b) the 33rd potential return on a shorter horizon, but managing to minimize risk in the short term is of course going to massively reduce your returns.

Obviously I’m speaking now after a massive stock market run-up — wait until a big drawdown :-)
As you say "wait until a big drawdown". That is what the ulcer index part of the analysis is attempting to do - quantifying some gut churning that some may experience during those times. Of course there are many on this forum who claim to have remained dispassionate and steely eyed when those times have happened, so maybe not a good metric for everybody... :D
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

UsualLine wrote: Fri Dec 17, 2021 2:41 am Great article, thanks for that link! Lots to think about in there.

My hesitation about Gold is that I think it earns its place in a lot of these historical analyses because of the unique circumstance when in 1971 the dollar was unpegged from gold. That set off a 10 year inflationary period that benefited gold and hurt stocks and bonds. So when gold had its big run it was also uncorrelated and that makes it shine in these analyses. That unpegging obviously cannot be repeated.

The fact that this analysis looks at the 15th percentile return probably drives a lot of the portfolios to 15 year periods that include the 70's. Unfortunately that time dimension is one aspect that is not analyzed in the article.
If you look at heat maps of portfolio returns at Portfolio Charts, you'll see that the portfolios Tyler identified had consistent performance outside the 1970s. Gold was a big boost to portfolios in the 2000s, when TSM went backward for a decade.
Last edited by willthrill81 on Fri Dec 17, 2021 10:22 am, edited 1 time in total.
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Re: Great article from Portfolio Charts on most efficient portfolios

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heyyou wrote: Fri Dec 17, 2021 3:17 am In the category of "better to ask, than to remain ignorant", what is done with the 10% Cash in Tyler's Pinwheel portfolio, and 25% cash in the Permanent Portfolio?
Where on his site do I read about the function of that particular asset?
Is it for withdrawals for retirees?
Is it for re-balancing as needed if some asset falls, but others have not gained?
He has articles, under 'insights', at the linked site. Most take 'cash' in this context to be T-bills.
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Re: Great article from Portfolio Charts on most efficient portfolios

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Booogle wrote: Fri Dec 17, 2021 7:24 am Every time SCV is advocated for, they use ancient data.
Nope. SCV, LTT, and gold all did well in the 2000s with live funds when TSM went backward.

Since 2000, a 60/20/20 AA of these three assets, respectively, returned 7.40% real with a maximum monthly drawdown of -29% while TSM returned 5.14% real with a maximum monthly drawdown of -51%.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

aegywn wrote: Fri Dec 17, 2021 7:44 am The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside.
See my post above. Since the year 2000, the 60 % SCV / 20% LTT / 20% gold portfolio Tyler identified has had 2% higher real returns than 100% TSM and with a maximum monthly drawdown a little over half as deep. More upside and less downside.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

dcabler wrote: Fri Dec 17, 2021 7:59 am
aegywn wrote: Fri Dec 17, 2021 7:44 am The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside. I could see maybe optimizing for (a) the 15th percentile return on a 40-year horizon or (b) the 33rd potential return on a shorter horizon, but managing to minimize risk in the short term is of course going to massively reduce your returns.

Obviously I’m speaking now after a massive stock market run-up — wait until a big drawdown :-)
As you say "wait until a big drawdown". That is what the ulcer index part of the analysis is attempting to do - quantifying some gut churning that some may experience during those times. Of course there are many on this forum who claim to have remained dispassionate and steely eyed when those times have happened, so maybe not a good metric for everybody... :D
I have real doubts about those who make such claims. If you look back to the posts on this forum in 2008, you'll see that many 'die-hard' BHs were panicking and talking about 'plan B' and 'maximum tolerable loss'.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by NoRegret »

willthrill81 wrote: Thu Dec 16, 2021 10:46 pm As many know, Tyler9000, one of our posters here, runs PortfolioCharts.com, which is a fantastic resource for investors. He has recently written a fantastic article in which he examines what combinations of assets have been most efficient in terms of 15 year baseline returns and the Ulcer index, a much better metric of 'portfolio pain' than the standard deviation so often used in these types of analyses.

After examining 42,504 different combinations of 20 different assets using data going back to 1970, he found that the most efficient portfolios usually included small-cap value stocks, long-term Treasuries, and gold, though some portfolios that didn't include all or even any of these assets also performed well.

Many here are quick to point out potential problems with all three of these assets, especially gold, but Tyler makes some great points, one of which I'm quoting below.
So two things can be true at the same time:

1. An asset is a critical component in many of the most desirable portfolios.
2. The same asset is disastrously undesirable when studied only in isolation.

Do you like salt on your food? Can you eat an entire box of it in one sitting without getting extremely sick? Same concept.
The above is difficult for many to realize. Humans are not well equipped to comprehend how multiple divergent assets can work together to create a desirable outcome when one (or more) by itself produces a very undesirable outcome.

Tyler also showed that it was far from necessary to go 'all-in' with the 'three secret ingredients' to substantially improve portfolio efficiency. For instance, he showed that a portfolio with 70% large-cap blend (i.e., S&P 500 or TSM), 10% SCV, 10% LTT, and 10% gold had significantly higher 15 year baseline returns and a significantly lower Ulcer index.

Another great point Tyler made was below.
But it’s also possible you’re resistant to certain portfolio ideas simply because they don’t match your expectations about how investing is supposed to work. There’s nothing inherently wrong with that, and there are all types of asset allocations suitable for different types of people. But by opening your mind to ideas that don’t always make sense on the surface, perhaps you’ll stumble into a new paradigm that changes the way you think about investing altogether.
Thoughts?
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Three Secret Ingredients of the Most Efficient Portfolios

Post by Kevin K »

[merged into existing topic - moderator prudent]

Very interesting new post on the Porfolio Charts site that attempts to answer the question "What do the most efficient portfolios in history have in common?"

Needless to say, the fact that the three "secret" ingredients are small-cap value, long-term Treasuries and gold guarantee that few Bogleheads are likely to choose recipes that include them, but both the data and the innovative tools (e.g. Ulcer Index) Tyler has developed for showing what it's actually like to live with portfolios through every market condition over the past 50 years are quite impressive, IMHO.

https://portfoliocharts.com/2021/12/16/ ... more-47643
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by iceport »

Tyler wrote:And I’m impressed by the 7Twelve and Swensen portfolios that each contain none of the three assets we discussed. There’s more than one good way to invest.
Phew! Glad to see my own portfolio — for practical purposes the Swensen portfolio — is among those that have performed reasonably well. And all done with none of the secret sauce ingredients (small cap value, long term treasuries, and gold)!


Tyler wrote:Long story short, keep an open mind but also know thyself. Theoretical optimization is only as good as your ability to stick with the plan. Choose a portfolio you believe in, and it will be so much easier to stay the course.
That's fantastic advice. I'm just glad to have already found such a portfolio. Otherwise, investigations like this would probably drive me to continually reassess my asset allocation, and churn it endlessly. :wink:
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
km91
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by km91 »

Triple digit golfer wrote: Fri Dec 17, 2021 6:42 am
impatientInv wrote: Fri Dec 17, 2021 12:15 am
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
Gold has been considered an asset for thousands of years. That's the one reason why I hold it.
Lots of things are assets. I don't include artwork or coins in my portfolio either.
Gold trades in a relatively liquid market, art and coins do not. I hold a gold allocation as part of an all weather / risk parity portfolio and I'll be honest, I don't fully understand what drives gold returns. What I do know is that gold tends to trend up over long period of time and down over long periods of time and seems to be uncorrelated with equity returns, which is exactly what you want in a diversifying asset; high volatility and low correlation with other return streams in the portfolio. And because gold has 1000s of years of history it seems likely to me that these properties will persist, at least for my lifetime
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by garlandwhizzer »

SCV, gold (or PME), and LTT are great diversifiers for a portfolio dominated by 70% LCB. Dollar for dollar I suspect those 3 are optimal diversifiers to LCB. Whether this degree of diversification is necessary is a value judgement up to the individual investor. I suspect that the described portfolio will very likely produce a smoother ride with lower volatility and lower risk over long time frames. Whether it will outperform other allocation choices that carry greater risk and greater volatility is another question. For those who strongly prioritize a low ulcer index while achieving good expected returns, this looks like an attractive allocation to consider. Basically it covers all serious risk sources: deflation/recession (LTT), inflation (80% equity good long term protection), disastrous geopolitical or currency event (gold). It does so with good expected long term concerns from 80% diversified equity so it doesn't waste a huge percentage of portfolio assets with questionable diversification benefit.

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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

km91 wrote: Fri Dec 17, 2021 1:43 pm
Triple digit golfer wrote: Fri Dec 17, 2021 6:42 am
impatientInv wrote: Fri Dec 17, 2021 12:15 am
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
Gold has been considered an asset for thousands of years. That's the one reason why I hold it.
Lots of things are assets. I don't include artwork or coins in my portfolio either.
Gold trades in a relatively liquid market, art and coins do not. I hold a gold allocation as part of an all weather / risk parity portfolio and I'll be honest, I don't fully understand what drives gold returns. What I do know is that gold tends to trend up over long period of time and down over long periods of time and seems to be uncorrelated with equity returns, which is exactly what you want in a diversifying asset; high volatility and low correlation with other return streams in the portfolio. And because gold has 1000s of years of history it seems likely to me that these properties will persist, at least for my lifetime
I'd rather use long term bonds, particularly Treasuries, as these have intrinsic value and have historically not been correlated with stock returns.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by km91 »

It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by km91 »

Triple digit golfer wrote: Fri Dec 17, 2021 1:46 pm
km91 wrote: Fri Dec 17, 2021 1:43 pm
Triple digit golfer wrote: Fri Dec 17, 2021 6:42 am
impatientInv wrote: Fri Dec 17, 2021 12:15 am
Triple digit golfer wrote: Thu Dec 16, 2021 11:00 pm Paying devil's advocate, two things:

1. Just because assets weren't correlated and worked well together in the past doesn't mean they will in the future.

2. Gold is a tough sell because its intrinsic value doesn't increase. That's what holds me back. Right or wrong, I think of it like cryptocurrency, a speculative asset.
Gold has been considered an asset for thousands of years. That's the one reason why I hold it.
Lots of things are assets. I don't include artwork or coins in my portfolio either.
Gold trades in a relatively liquid market, art and coins do not. I hold a gold allocation as part of an all weather / risk parity portfolio and I'll be honest, I don't fully understand what drives gold returns. What I do know is that gold tends to trend up over long period of time and down over long periods of time and seems to be uncorrelated with equity returns, which is exactly what you want in a diversifying asset; high volatility and low correlation with other return streams in the portfolio. And because gold has 1000s of years of history it seems likely to me that these properties will persist, at least for my lifetime
I'd rather use long term bonds, particularly Treasuries, as these have intrinsic value and have historically not been correlated with stock returns.
I fully agree, I think LTTs are a great diversifier and the ultimate flight to safety asset when the market tanks. I'm not saying replace LTTs with gold. I think its volatility profile makes it a great additional diversifying asset in a portfolio even if its long term returns tend to be 0%
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Nathan Drake »

km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
There is no risk premium for gold. Gold is not a good short term hedge for inflation. It's not even a particularly good long-term hedge within the horizon of most investors. It may be good over the extremely long-term, but it has actually lost value over the very long-term as well. It's the asset allocation equivalent of the "wild card".

Gold can have certain aspects that are desirable during moments where other asset classes do poorly, so while it may dampen volatility in those periods, it's quite unpredictable. There may be a case to include it in very small amounts. I prefer to simply hold more equity instead and weather downturns.

The case for outperformance of SCV is about risk factors and the data clearly shows a significantly larger return than the market over the long-term. It's not data mining. It's risk/behavior.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by muffins14 »

km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by km91 »

muffins14 wrote: Fri Dec 17, 2021 2:07 pm
km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by GaryA505 »

I couldn't find the "Top 10 Risk Adjusted" portfolios shown on the first graph.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Nathan Drake »

km91 wrote: Fri Dec 17, 2021 2:26 pm
muffins14 wrote: Fri Dec 17, 2021 2:07 pm
km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
It has generated a premium to the market. Even just 1% is significant when compounded

More importantly, it has done well during a period when the market did terribly. So in the end it was able to greatly improve outcomes over larger periods of time
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by TheoLeo »

aegywn wrote: Fri Dec 17, 2021 7:44 am The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside. I could see maybe optimizing for (a) the 15th percentile return on a 40-year horizon or (b) the 33rd potential return on a shorter horizon, but managing to minimize risk in the short term is of course going to massively reduce your returns.

Obviously I’m speaking now after a massive stock market run-up — wait until a big drawdown :-)
The 15th percentile return for 35 years of the golden butterfly portfolio has been 6 % roughly with barely any upside. The 15th percentile return for 100 % total US market has been 6,4 % roughly with a higher upside up to around 8 %.

If it were relatively certain that all the assets will repeat what they have done in the past, I would consider going for the golden butterfly portfolio and thereby willingly accept a potentially lower end result for a investing life with a lot less worries. But how certain are we that all these negative correlations will hold up in the future?
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

Nathan Drake wrote: Fri Dec 17, 2021 2:31 pm
km91 wrote: Fri Dec 17, 2021 2:26 pm
muffins14 wrote: Fri Dec 17, 2021 2:07 pm
km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
It has generated a premium to the market. Even just 1% is significant when compounded

More importantly, it has done well during a period when the market did terribly. So in the end it was able to greatly improve outcomes over larger periods of time
Further, as Tyler's analysis should make clear, looking at just returns and std. dev. doesn't come close to telling the whole story about the value that a given asset can bring to a portfolio.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

TheoLeo wrote: Fri Dec 17, 2021 2:51 pm
aegywn wrote: Fri Dec 17, 2021 7:44 am The key to all this is that he’s looking at the lowest 15% Ike of returns. Higher variance / higher return portfolios are thus heavily penalized. It’s also no surprise that bonds, gold etc get relatively heavy weight.

For me as a 38-year old, I’m uncomfortable giving up that much upside. I could see maybe optimizing for (a) the 15th percentile return on a 40-year horizon or (b) the 33rd potential return on a shorter horizon, but managing to minimize risk in the short term is of course going to massively reduce your returns.

Obviously I’m speaking now after a massive stock market run-up — wait until a big drawdown :-)
The 15th percentile return for 35 years of the golden butterfly portfolio has been 6 % roughly with barely any upside. The 15th percentile return for 100 % total US market has been 6,4 % roughly with a higher upside up to around 8 %.
Expecting a portfolio with 40% stocks to have similar returns to one with 100% stocks isn't realistic.
TheoLeo wrote: Fri Dec 17, 2021 2:51 pm If it were relatively certain that all the assets will repeat what they have done in the past, I would consider going for the golden butterfly portfolio and thereby willingly accept a potentially lower end result for a investing life with a lot less worries. But how certain are we that all these negative correlations will hold up in the future?
You won't find real certainty anywhere in the investing world. There is no guarantee that any asset class, including TSM, will meet any investor's goals. The best we can do is some combination of theory and history.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by burritoLover »

20% in gold which has no internal rate of return? That triggers my artificial ulcer index. I'm considering gold but no more than 5-10%.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

willthrill81 wrote: Fri Dec 17, 2021 2:54 pm
Nathan Drake wrote: Fri Dec 17, 2021 2:31 pm
km91 wrote: Fri Dec 17, 2021 2:26 pm
muffins14 wrote: Fri Dec 17, 2021 2:07 pm
km91 wrote: Fri Dec 17, 2021 1:53 pm It's really hard for me to wrap my head around why SCV and STT/Cash outperform. I'm pretty onboard with gold and LTTs as diversifiers as I think the evidence largely points to there being risk premiums for these two asset classes that are quite resilient and bound to persist in the future. I don't fully understand what economic rationale there would be to expect SCV and STT to perform so well going forward so I wonder if this is more the product of data mining than anything.
No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
It has generated a premium to the market. Even just 1% is significant when compounded

More importantly, it has done well during a period when the market did terribly. So in the end it was able to greatly improve outcomes over larger periods of time
Further, as Tyler's analysis should make clear, looking at just returns and std. dev. doesn't come close to telling the whole story about the value that a given asset can bring to a portfolio.
I agree, but that seems contradictory to your many posts about nominal bonds and not using them because of what you say is a guaranteed real negative return. What makes you think gold will have a positive real return?

Do you think that nominal bonds can bring value to a portfolio despite returns and/or standard deviation?

You talk about the "ulcer index." Can't a plain, vanilla, boring old bond fund like Total Bond reduce that for many investors?
Last edited by Triple digit golfer on Fri Dec 17, 2021 3:11 pm, edited 1 time in total.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

burritoLover wrote: Fri Dec 17, 2021 3:06 pm 20% in gold which has no internal rate of return? That triggers my artificial ulcer index. I'm considering gold but no more than 5-10%.
Marketable bonds don't have an expected positive real return these days. So are you keeping them to 5-10% also?

Tyler addressed this issue in his article. Did you read it?
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by aj76er »

willthrill81 wrote: Fri Dec 17, 2021 10:27 am
Booogle wrote: Fri Dec 17, 2021 7:24 am Every time SCV is advocated for, they use ancient data.
Nope. SCV, LTT, and gold all did well in the 2000s with live funds when TSM went backward.

Since 2000, a 60/20/20 AA of these three assets, respectively, returned 7.40% real with a maximum monthly drawdown of -29% while TSM returned 5.14% real with a maximum monthly drawdown of -51%.
Up until about 10yrs ago, it wasn’t really possible to buy a retail SCV index fund. Prior to that you’re relying on actively managed mutual funds or academic/theoretical data. Up until about 20yrs ago, purchasing SCV stocks incurred very high commissions with wide bid/ask spreads. Thus, I believe there is significant liquidity risk premiums and “discovery” premiums embedded in historical SCV data that no longer exist. Similar issues occur with backtesting international equities. Of course, U.S. large-cap stocks had some of this too (e.g. higher commissions, wider spreads) but not to the same degree as SCV. The (relatively recent) ability to purchase low cost, commission free index ETFs and mutual funds probably accounts for the recent higher correlations between SCV, international, and U.S. LCB. Therefore, I think backtesting with SCV and International equities is a exercise of garbage-in/garbage-out.

We are coming out of a 40 year bull market for long-term treasuries that was fueled by declining rates. In the foreseeable future, I expect much lower returns for LTT. However I do believe that term risk and market beta risk will have low correlation as long as the FED uses interest rate to moderate economic cycles. Thus you may get some portfolio efficiency from LTT, but you should expect to pay for it.

Cash (T-bills) has lost to inflation for the past 10 years. To mitigate negative returns from cash, I-bonds can be used as a substitute.

Finally, I do believe gold has merit and has meaningful backtesting (since the mid 70’s when it was unpegged from the U.S. dollar). It has a low correlation to U.S. denominated assets and has a low enough stddev to be useful as a rebalancing asset during normal times. During times of great uncertainty, it may provide a hedge against traditional assets (e.g, stocks and bonds). Thus, in low quantities (e.g 5% - 15%), it can be a reasonable portfolio diversifier.

Full Disclosure: Our portfolio contains global equities, I-bonds, and some gold; but no SCV or LTT (outside of global market weighted index funds).
"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: Great article from Portfolio Charts on most efficient portfolios

Post by willthrill81 »

Triple digit golfer wrote: Fri Dec 17, 2021 3:09 pm
willthrill81 wrote: Fri Dec 17, 2021 2:54 pm
Nathan Drake wrote: Fri Dec 17, 2021 2:31 pm
km91 wrote: Fri Dec 17, 2021 2:26 pm
muffins14 wrote: Fri Dec 17, 2021 2:07 pm No risk premium for gold. There is one for SCV, so going forward you have a higher expected value for SCV than the market
SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
It has generated a premium to the market. Even just 1% is significant when compounded

More importantly, it has done well during a period when the market did terribly. So in the end it was able to greatly improve outcomes over larger periods of time
Further, as Tyler's analysis should make clear, looking at just returns and std. dev. doesn't come close to telling the whole story about the value that a given asset can bring to a portfolio.
I agree, but that seems contradictory to your many posts about nominal bonds and not using them because of what you say is a guaranteed real negative return. What makes you think gold will have a positive real return?

Do you think that nominal bonds can bring value to a portfolio despite returns and/or standard deviation?
I've repeatedly said that bonds' negative real returns is not in itself a reason to drop them and that those approaching or in retirement should continue to hold some.
Triple digit golfer wrote: Fri Dec 17, 2021 3:09 pm You talk about the "ulcer index." Can't plain, vanilla, boring old bond fund like Total Bond reduce that for many investors?
Sure, it can. But that's not what the article is about. It's about 'most efficient' portfolios. And intermediate-term Treasuries, very much akin to TBM, haven't done as good of a job in achieving that end as other asset classes have.

For instance, a portfolio with 20% U.S. TSM and 80% ITT had an Ulcer index of 7.6 since 1970, and that was about the smallest Ulcer index achievable with only those two assets. By comparison, a portfolio with 50% TSM, 10% SCV, 10% LTT, 20% ITT, and 10% gold had an Ulcer index of 6.0. And the latter had much higher returns as well.
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Re: Great article from Portfolio Charts on most efficient portfolios

Post by Triple digit golfer »

willthrill81 wrote: Fri Dec 17, 2021 3:18 pm
Triple digit golfer wrote: Fri Dec 17, 2021 3:09 pm
willthrill81 wrote: Fri Dec 17, 2021 2:54 pm
Nathan Drake wrote: Fri Dec 17, 2021 2:31 pm
km91 wrote: Fri Dec 17, 2021 2:26 pm

SCV has basically matched SPY on returns since the 90s but with a lot more volatility. What's the risk premium and can it really be expected to exist into the future?
It has generated a premium to the market. Even just 1% is significant when compounded

More importantly, it has done well during a period when the market did terribly. So in the end it was able to greatly improve outcomes over larger periods of time
Further, as Tyler's analysis should make clear, looking at just returns and std. dev. doesn't come close to telling the whole story about the value that a given asset can bring to a portfolio.
I agree, but that seems contradictory to your many posts about nominal bonds and not using them because of what you say is a guaranteed real negative return. What makes you think gold will have a positive real return?

Do you think that nominal bonds can bring value to a portfolio despite returns and/or standard deviation?
I've repeatedly said that bonds' negative real returns is not in itself a reason to drop them and that those approaching or in retirement should continue to hold some.
Triple digit golfer wrote: Fri Dec 17, 2021 3:09 pm You talk about the "ulcer index." Can't plain, vanilla, boring old bond fund like Total Bond reduce that for many investors?
Sure, it can. But that's not what the article is about. It's about 'most efficient' portfolios. And intermediate-term Treasuries, very much akin to TBM, haven't done as good of a job in achieving that end as other asset classes have.

For instance, a portfolio with 20% U.S. TSM and 80% ITT had an Ulcer index of 7.6 since 1970, and that was about the smallest Ulcer index achievable with only those two assets. By comparison, a portfolio with 50% TSM, 10% SCV, 10% LTT, 20% ITT, and 10% gold had an Ulcer index of 6.0. And the latter had much higher returns as well.
What about those accumulating who want to reduce volatility? Total Bond does a reasonable job. Maybe it hasn't done as a great a job as some of those other things, but those other things would cause me an ulcer.

I don't like the ulcer index because it doesn't take individual investors into account. Personally, holding any gold would cause me anxiety because it has no intrinsic value. My ulcer index would likely be off the charts. To have a low ulcer index, one has to have confidence in his portfolio.
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