The elegance of numbers is everywhere if you just know where to look. From the spiral of a seashell to the scales of a pinecone, a surprising number of natural objects exhibit a remarkable affinity for a special quantity. An irrational number approximately equal to 1.618 may seem like a strange fixation for thousands of years of mathematicians, but it appears so often that it has earned its own name — the golden ratio.
The golden ratio is everywhere. And not just in the world around us but arguably in our very essence. Long considered an example of the perfect divine proportion, it remains a mainstay for artists and designers seeking to appeal to humanity’s desire for order and beauty. You’ll find it in the composition of Da Vinci’s “The Last Supper” and maybe even the dimensions of computer monitor you’re reading this on. Math, nature, and beauty are more intertwined than you realize.
With that type of history, it seems appropriate that an insightful individual would apply the same universal concept to finance. So today I’m honored to add a new portfolio to the site.
It’s called the Golden Ratio Portfolio by Frank Vasquez. And make no mistake — the classic name serves as a reference for a decidedly modern investing philosophy.
About the Author
Frank Vasquez is an interesting person in the finance space who follows in the footsteps of other brilliant but nontraditional portfolio authors like Harry Browne (libertarian presidential candidate and author of the Permanent Portfolio) and Bill Bernstein (accomplished neurologist and author of the No-Brainer Portfolio) who demonstrate that there’s more to smartly managing investments than being a full time financial adviser.
Frank is a good example of a polymath with degrees in economics, engineering, and law, but I know him most for his contributions in the financial independence scene. Frank was an OG poster on FI message boards like Early Retirement Extreme, and he is also a regular contributor to communities like ChooseFI today. So I can vouch for the fact that he doesn’t just talk the talk with topics like safe withdrawal rates, but he also walks the walk.
As part of his own retirement walk, Frank is best known today for his podcast Risk Parity Radio. Between audio drops from various movie scenes that he enjoyed with his family, he answers questions about portfolio theory in a genuine and practical style that sadly all too rare today. Frank is one of my favorite voices in explaining risk parity concepts to everyday people.
So if you want to expand your investing knowledge, definitely add Frank’s podcast to your list. And for a good sampling of his thought process, let’s talk about one of his signature model portfolios — the Golden Ratio Portfolio.
The Golden Ratio Asset Allocation
The Golden Ratio Portfolio consists of 6 different asset classes.
- 21% Large Cap Growth
- 21% Small Cap Value
- 26% Long Term Bonds
- 16% Gold
- 10% Commodities
- 6% Cash
Before we get to the assets themselves, I want to share one more view of the allocation that simply reorders the assets a bit to explain the name in the way my default image doesn’t fully convey.
- 42% Stocks
- 26% Bonds
- 16% Gold
- 10% Commodities
- 6% Cash
Here you can see a passing resemblance to the title image seashell, and if you look at the percentages you can see where the Golden Ratio name comes from. Every number above is approximately 1.618 times the one below. That’s the golden ratio in action.
As for the allocation itself, the two assets that are most noteworthy are large cap growth and commodities.
I’m excited to finally have a good example portfolio with large cap growth, as that’s a rare asset in portfolio recommendations especially with a common fixation with value in the finance space. Not only does large cap growth represent the biggest and most popular names in business, but it’s also the ultimate complement to the small cap value slice in the portfolio. So seeing the results of that combination could be educational.
As for the commodities, that’s actually just my own approximation for modeling purposes. Frank specifically recommends managed futures, which is an asset I don’t have data for. I chose commodities as a stand-in because they’re a common subset of managed futures funds and are similarly uncorrelated to both stocks and bonds. But be sure to listen to Frank’s reasoning for why he specifically recommends managed futures.
For those interested in an alternative version of the Golden Ratio Portfolio with something other than managed futures, I also recommend trying REITs in this slot. That’s actually what Frank previously suggested in older versions of the Golden Ratio Portfolio, and he has talked about that variation with guests on his show. So I believe it’s still very much within his overall investing philosophy.
If you’re looking for similar portfolio alternatives, the obvious comparison is the Golden Butterfly. With a similar allocation to stocks, and the same secret ingredients of SCV, long term treasuries, and gold, you’re already in the same ballpark. Just allocate the commodities to additional cash and you’re right there.
Frank also tracks his Golden Ratio Portfolio against the All Seasons Portfolio, perhaps the most famous risk parity asset allocation out there due to Ray Dalio’s close association with the concept. The All Seasons Portfolio leans more heavily on bonds, but if you expand the stocks and real assets while adding small cap value to the mix, you can see the resemblance.
So in summary, the Golden Ratio Portfolio is a risk parity allocation in the mold of the Golden Butterfly or All Seasons Portfolio. It utilizes heavier tilts to alternative assets, a unique allocation to large cap growth, and percentages inspired by the golden ratio to add its own unique spin to the concept.
Portfolio Performance
With the basics out of the way, I know what you’re really here for. Let’s talk numbers.
The best place to start with a discussion of performance is often the Portfolio Matrix that compares every tracked portfolio option on 8 different metrics all at once. Here’s what the results look like in the US when sorted by the baseline long term return.
Beyond the second place rank in that one metric, check out the solid blue horizontal row of high scores across the board. Now that’s the type of performance with minimum tradeoffs that could make a lot of investors happy.
Another reference point that jumps out to me is the Financial Independence chart. Coming from a guy so involved in the FI community, that seems only fitting.
The Financial Independence chart tracks the working years historically required to save the amount of money that the same portfolio can permanently sustain in retirement. The image above shows the full range of accumulation paths for every worker since 1970 who diligently saved one paycheck a month and lived on the other. That grouping is about as tight as they come and is extra impressive with the short 12-14 year range. The only way a portfolio can accomplish that is to provide consistent growth AND effective downside protection. Think about that horizontal blue row of positive Portfolio Matrix metrics, and that checks out.
Finally, let’s take a look at my favorite chart for studying the big picture — the Heat Map.
The Heat Map looks at the inflation-adjusted compounded growth rates for every possible investing timeframe since 1970. Here you can see that the longest drawdown was just 3 years, and the rest is a sea of cool blue positive returns. That consistency is what we all hope for with our portfolios.
Of course, there’s more to portfolio design than just fixating on the United States. To see how translated versions performed in your own home market, go to the Golden Ratio performance section and change the home country. From a quick study of my own, the concept performed very well especially across Europe so it’s not just an artifact of US bias.
No matter how you look at it, the Golden Ratio portfolio is a beauty to behold.
How It Works
Without looking at the assets, some investors may look at the smooth consistency of the Golden Ratio portfolio and assume that it must be trading off good returns and loading up on safe assets in order to lower the volatility. But look at the Portfolio Matrix and you’ll notice that its returns are all near the top of the list. Study the assets as well, and you’ll see that 5 out of the 6 are highly volatile in their own right.
| Asset | Standard Deviation |
|---|---|
| Large Cap Growth | 21.4 |
| Small Cap Value | 19.2 |
| Long Term Bonds | 12.7 |
| Gold | 26.5 |
| Commodities | 24.5 |
| Cash | 3.7 |
Look at all of those standard deviation numbers and you might get the impression that this is a highly volatile portfolio. But what if I told you that the standard deviation of the Golden Ratio portfolio as a whole was only… (checks notes)… 9.0?
Wait — what?
Yes, everything but cash in the portfolio is highly risky and can swing up and down on a daily basis. But building a smart portfolio is more than about minimizing risk in each asset. Instead, there’s an alternative approach that thinks of portfolio construction in terms of balancing risk. It’s called risk parity, and it’s the key to unlocking portfolio performance you may not have believed possible.
While he didn’t use that term, Harry Browne first wrote about risk parity concepts back in the early 1980s when talking about his Permanent Portfolio. The basic idea is that while markets are unpredictable, money has to go somewhere and tends to flow to certain types of assets based on the economic condition. By always owning assets that cover the four corners of inflation, deflation, prosperity, and recession (or what Browne called “tight money”), you can rebalance regularly and sleep well no matter what happens.
In Browne’s framework, owning volatile assets is actually an important feature of a portfolio because it allows them to respond strongly when needed. The key is to choose the right assets that respond at different times to the proper risk condition. I refer to this as economic parity.
Other people have built on that idea over the years. The most notable is Ray Dalio who built his All Weather fund around the concept, and others like Larry Swedroe have expanded on the idea by studying how to tweak the percentages of each asset to better balance the volatility. I call this volatility parity. While it doesn’t go overboard with optimization, you can see a soft version of that approach in the Golden Ratio Portfolio when you weight the volatility of the assets by their percentage in the portfolio.
| Asset | Weighted Standard Deviation |
|---|---|
| Large Cap Growth | 4.5 |
| Small Cap Value | 4.0 |
| Long Term Bonds | 3.3 |
| Gold | 4.2 |
| Commodities | 2.5 |
| Cash | 0.2 |
Beyond simply selecting assets that respond to certain economic conditions in equal weights like the Permanent Portfolio, the Golden Ratio Portfolio also puts them in the right slot to better balance the volatility of each asset. So no matter if it’s large cap growth’s time to shine or gold’s time to save the day, they’ll both have a similar effect on portfolio performance. The thoughtful combination of economic and volatility parity is what makes the Golden Ratio Portfolio tick.
Who It’s For
Regardless of the admirable performance, I always feel it’s important to reiterate that there’s no such thing as one perfect portfolio suitable for all people. That’s why I track 20 portfolios and counting, and offer lots of tools to help you design your own. So let’s talk about who the Golden Ratio Portfolio is for, and who may not enjoy it so much.
If you’re the type of investor who watches their investments like a hawk and feels a major sense of FOMO any time one of your portfolio assets is going through a rough patch, then you’re probably going to struggle with risk parity options like the Golden Ratio Portfolio. Because it contains multiple volatile assets that all respond at different times, at any given moment at least one of them will probably be down. That’s by design, and it also allows the portfolio to put Shannon’s Demon to productive work generating returns through regular rebalancing. But it does make some people very uncomfortable watching things fall even if the portfolio as a whole is just fine.
Likewise, maybe you’re the type of investor who struggles with the concept of real assets like gold and commodities. After all, they don’t fit neatly into classic asset pricing theoretical models and are generally a lot less popular than traditional stocks and bonds. If that describes you, then there’s a good chance you won’t have the conviction to hold tight to assets you don’t understand or believe in. And a different portfolio option you’re willing to stick with through rough seas is likely the better choice.
But let’s say you’re the type of person who thinks like a chemist or a baker. You understand that while every ingredient can be uniquely volatile on its own, combinations of things can create new properties greater than a bowl full of individual items. You like the goal of generating consistent growth while balancing risk. Within stocks, you appreciate the idea of pairing giant high-growth companies with small value stocks in different industries that have room to grow. And beyond stocks and bonds, you are open to real assets that carry the day when traditional investments falter.
Does that sound like you?
If it does, then I’m excited to offer a new portfolio option for your consideration. It’s called the Golden Ratio Portfolio, and it may be just the asset allocation you’re looking for.
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