When you hear about something weird, that’s usually an indicator that it doesn’t follow the crowd. But whether that’s a good or a bad thing is a matter of perspective. So when a fellow blogger named Value Stock Geek first approached me a few years ago about referencing a few charts in an upcoming book about what he called the Weird Portfolio, I had an open mind. After all, sometimes the most compelling ideas are the ones that stand out from the sea of similar mainstream opinions passing as common knowledge.
Fast forward to today, and not only have the ideas behind the Weird Portfolio held up quite well but I’ve also found myself frequently thinking about them as answers to common questions. For example, what if you added international stocks to a portfolio like the Golden Butterfly? And how might other assets like real estate fit into the equation? Well, it turns out that someone has indeed thought about these things and documented it all quite well.
So in honor of a weird idea that I’m confident will speak to many interested investors, I’m happy to introduce a new portfolio on the site — the Weird Portfolio.
- 20% Small Cap Value
- 20% International Small Caps
- 20% Long Term Bonds
- 20% REITs
- 20% Gold
Consistent with his Value Stock Geek moniker, it’s not too surprising that one of the first features that stands out is a strong affinity for small and value stocks. While traditional portfolio recommendations usually start with a large cap or total market foundation and perhaps add a small cap value fund on the side, the Weird Portfolio commits to the idea and focuses exclusively on stock factors. Originally I wondered why the international slice left out the value tilt, but VSG helpfully clarifies in the book that the choice is mostly about fund availability — a refreshingly practical mindset that I think lends credence to the application of the concept beyond spreadsheets and academic papers.
Many volumes have been written on the topic of the value premium, but personally I find VSG’s own explanation especially clear and concise:
“The idea behind a portfolio of cheap stocks is simple. For some of the companies, the market will be right in assigning at a low price. However, for a majority of them, the market will have overreacted. By buying a basket of these stocks, an investor is taking advantage of market mispricings. The bad ones (also known as “value traps”) will go down. Meanwhile, many of the stocks in the portfolio will go up when their situation improves. In a portfolio, the net result is a gain for the investor.”Value Stock Geek, The Weird Portfolio
So if you’re also interested in value stocks, the Weird Portfolio could be a good option for consideration on that basis alone. But it goes way beyond that.
If left to his own primary investing instincts, I imagine Value Stock Geek would keep researching individual companies and looking for good deals just like any dedicated value investor and Warren Buffett fan who enjoys digging into company fundamentals and looking for bargains. Or perhaps thinking a little bigger and looking at the macroeconomic environment, he’d think like Ray Dalio and look to select assets appropriate for the upcoming economic cycle.
But here’s the thing. Even though he’s a very smart and well-educated investor that might put a lot of the rest of us to shame, he’s no Buffett or Dalio. And he knows that. In his own words:
“If great investors like Warren Buffett and Ray Dalio make mistakes and everyone (including experts) are terrible at predicting the future, then what are the odds that you and I are going to get things right? … For this reason, I set out to design a portfolio that keeps prediction to a minimum. My goal was to create a portfolio with different asset classes that would perform well in different economic environments without attempting to predict which economic environments will arrive.”
Long-time readers of Portfolio Charts may recognize that mindset, as the idea of designing a portfolio to work in all kinds of economic environments is a staple of a few strategies like the Permanent Portfolio, Golden Butterfly, and Dalio’s own All Seasons Portfolio. And the extra ingredients to accomplish that goal may also look familiar, as all of these portfolios (including the Weird Portfolio) include conspicuous allocations to somewhat unique assets like long term bonds and gold.
Just how effective those two particular assets are at complementing stocks is worthy of its own discussion, and if you really want to follow the rabbit hole I wrote about it at length:
If you read that article in full and let it sink in, you’ll start to see the appeal of the Weird Portfolio in terms of overall efficiency. By combining small cap value, long term bonds, and gold, the data indicates that it’s rather uniquely positioned to generate desirable returns with minimum risk.
On top of including international stock diversification in the special 3-ingredient mix, the Weird Portfolio also includes a healthy 20% slice of REITs similar to endowment-style allocations such as the Ivy Portfolio and Swensen Portfolio. Following the same pattern of domestic and international stocks, Value Stock Geek specifically recommends 10% domestic and 10% international REITs. I simplified that to 20% US REITs simply because of data availability, but the results are still quite nice.
How nice? Let’s find out!
There are so many ways to look at the Weird Portfolio that I encourage you to explore all of the charts for yourself. But as a quick start, allow me to point out a few notable highlights.
Two of Value Stock Geek’s stated goals with the portfolio are to 1) not endure long lost periods of not earning money, and 2) avoid stressful money fluctuations. Judging by the sea of blue in the Heat Map, I’d say he succeeded.
Next, here’s a Risk and Return chart that illustrates how the Weird Portfolio fares in terms of long-term baseline returns and ulcer index relative to the other options. Note that in this image, “My Portfolio” is at the same point as the Weird Portfolio to help you find it. With a coveted spot at the top-left of the cloud, that’s an impressive profile sure to attract attention.
And finally, let’s look at the Portfolio Matrix. But rather than just approaching it from a typical US perspective, let’s think globally and try the same concept in Italy while translating the portfolio idea to appropriate European and International fund options.
I mean, you can call that “weird” if you want. But another appropriate word might be “wonderful”. Play with the same idea in different countries, and the metrics for the Weird Portfolio are near the top from almost every perspective. Beyond simply indicating that it’s a nice option for people everywhere, I think that speaks very well of the underlying concepts. Rather than simply being an artifact of local data biases, the Weird Portfolio is durable across a wide variety of economic situations.
Who May Like It
Of course, just because a portfolio posts nice historical numbers doesn’t mean it’s a no-brainer (well, unless it’s the No-Brainer). Everyone is different! But based on everything I know about investor preferences, there are a few groups that I think might be especially drawn to the idea:
- Factor investing enthusiasts who are looking for a way to incorporate small cap value investing into a cohesive portfolio structure can benefit from mixing in the modern portfolio theory concept of balancing multiple volatile assets.
- Fans of the Golden Butterfly who desire international diversification and an alternative asset option to cash may be attracted to a close cousin with a similar mindset.
- Followers of Meb Faber’s Ivy Portfolio who are interested in a souped-up version of the same portfolio structure should also pay close attention. After all, the donut chart image is the same! Tilt the Ivy Portfolio stocks towards small cap value, the bonds towards long term, and the commodities towards gold and you’re right there.
But no matter how you choose to invest, the final group that I’d like to highlight transcends portfolio ideas.
Perhaps the one thing I appreciate the most about Value Stock Geek is his approach to risk mitigation. I mean the guy has an entire website dedicated to stock picking, and his primary interest is right there in his name. But he recognizes his own limitations. And rather than just ignoring them on one end or giving up on his passion on the other, he found a wonderful balance that we can all learn from.
The Weird Portfolio is his solution for investing most of his money in a productive but laid-back way so that he can chase ideas in what he calls his “speculative” portfolio without worry. Regardless of if his personal company bets win or lose, because he designed a strong and dependable foundation he’ll never have to stress about money.
So if you similarly have your own investing convictions, do you also have a plan to cover your bases if you’re wrong? If not, even if the Weird Portfolio is not for you, perhaps this is your chance to find your own backstop.
To decide if the Weird Portfolio can also be that steady investing partner you didn’t realize you needed, there are two steps that I encourage you to take.
First, head over to the new Weird Portfolio page and read through all of the details including the thorough set of historical data. And second, take the time to read Value Stock Geek’s book on the topic for the full explanation in his own words. It’s concise, easy to read, and completely free.
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Look beyond the self-deprecating name to truly understand the underlying insights, and the Weird Portfolio really isn’t so strange. It’s a smart, modern, and grounded approach to responsibly manage your investments. And while I agree that those characteristics are sadly all too rare today, I believe we should all strive to be so weird.
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