The Ideal Index Portfolio And The Many Paths To Perfection

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I went shoe shopping today for the first time in a while, and I forgot just how frustrating it can be.  Finding a nice pair of shoes seems like it should be a pretty simple task these days, but the number of options makes it much more difficult than you’d think! It’s kinda surreal to walk through aisles and aisles of shoes and immediately dislike about 90% of them for one reason or another, and even the ones you like may not be that comfortable once you try them on.  Buying shoes can be a real pain.

Well if you think about it, finding a good portfolio is a similar experience — there are lots of good options but very few easy answers.  I do my best to curate some of the best options to avoid the cheap knockoffs likely to wear a hole in the sole on the first walk, but just like there’s no one pair of shoes for every person there’a also no single best portfolio for every investor.  So you’ve gotta try them on for yourself.

Today I’m happy to add another option to that list, and at least judging by the name you’re going to want to check it out.  Frank Armstrong’s Ideal Index Portfolio is a new addition to the portfolios collection, and I encourage everyone to give the data a spin.

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On the surface, the Ideal Index Portfolio is most similar to Bill Bernstein’s Coward’s Portfolio with a slice & dice US stock portion, a healthy allocation to short term bonds, and a dash of REITs.  But it also brings a few notable new things to the table including one of the larger international stock allocations of any portfolio on the site as well as a somewhat rare allocation to Small Cap Growth.

From a portfolio construction perspective I appreciate the symmetry of that SCG allocation.  Many people don’t realize that large cap blend companies tend to skew pretty heavily to the growth side based on how the cap weighting works out, as the largest companies just keep growing until they’re no longer considered undervalued nor do they have a new size category to grow into.  So the very popular blend/value breakdown you see in many asset allocations is a bit more growth/value barbelled than you may realize, at least on the large cap side.

To extend that symmetry to small caps is a unique insight, and it’s nice to have an example of a portfolio putting small cap growth to good use.  I’ll also point out how the stock allocation is slightly biased towards value stocks overall which is somewhat unique as well.  So while the Ideal Index Portfolio definitely shares some similarities with other portfolios, Armstrong also refreshingly puts forth some new ideas.

But ideas are cheap.  How do the results stack up?  Pretty well!  In fact, it competes much more closely to other good options than you might expect.

 

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Not bad, right?  Now compare that to the Coward’s Portfolio:

 

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Having trouble seeing the difference?  On the one hand, this shouldn’t be all that surprising as they do share a lot in common.  But depending on your personal feelings towards international stocks, value tilts, or small cap growth, it’s possible you expected to see a lot more variation.

People sometimes get caught up in debating specific assets that they either love or hate for one reason or another, and in the process lose perspective that those assets are only relatively small percentages of a portfolio.  Doubling your international allocation, tilting a little more towards value, and choosing small cap growth over small cap blend may feel like massive changes in isolation, but in the end even all three changes together really didn’t make a significant difference in performance.

I think there are two good lessons to be learned from that.  First, don’t over-think things.  Once you get close to your target asset allocation, there’s really no reason to lose sleep over perfectly optimizing that last small slice of your portfolio.  And second, don’t allow a single problematic asset to turn you off to an entire portfolio.  Do you simply not like small cap growth?  Or do you really want more international exposure?  No problem! Run the numbers to see how much of a difference your preference really makes.  Selecting a portfolio you’re comfortable holding for the long run is one of the most important things you can do to be successful as an investor.

In any case, I personally find some of Armstrong’s asset allocation approaches really interesting and I see the performance similarity to other portfolios not as a negative but as a positive reinforcement that there’s more than one good way to invest. Different shoes, same road.

If the Ideal Index Portfolio interests you, I’d recommend reading Frank Armstrong’s book The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio.  I’m sure he can explain the details of his ideas in far more depth than I’ll ever do justice, so skip the middle man and go straight to the source.  

There are so many good portfolios out there, just like there are so many good shoes.  While shopping may feel overwhelming at times, the trick is not to stress over every detail nor to assume they’re all the same.  Try a few on for size, and I’m pretty sure that one will work out for you and you’ll be well-equipped for a long and comfortable journey.  

I’m happy to add the Ideal Index Portfolio to the shelf, and I hope that it serves you well.