In the late first century, a Latin poet named Juvenal described something thought to be unlikely as “a rare bird in the lands and very much like a black swan”. At the time, black swans were thought to not exist at all and the idea was preposterous. The clever turn of phrase was both memorable and descriptive, and by the 16th century “black swan” was a common expression in London to describe the idea of impossibility. Of course there was a looming problem with this saying, and in 1697 Dutch explorers discovered that black swans really do exist in western Australia. What once was used to describe something impossible quickly changed meaning to connote ideas thought to be impossible that are later discovered to be real.
One of the most influential authors in modern financial theory is a man named Dr. William Bernstein. His background is particularly unique, as one might be surprised to learn that his Doctor title was earned in medicine rather than finance. I personally believe it’s precisely this outside perspective, intelligent but abstract, that uniquely prepared him to explore portfolio theory in such interesting new directions. I’ve long admired his work.
Regular readers will certainly recognize his name, as the Bernstein Portfolio has been a staple on the site since the beginning. His writings on Efficient Frontiers are also an inspiration for the Portfolio Finder, and I’m sure he will continue to provoke new thought in the future.
While I’ve always taken great pride in spreading the word about the Bernstein Portfolio, the difficult thing about reducing his nuanced insight into a single portfolio is that it does not necessarily represent the full breadth of his ideas. While a staunch advocate of simple, low-cost index investing, Dr. Bernstein is also a pioneer in factor investing that explores how different types of indices can work together to improve the risk-adjusted returns of a portfolio. There’s more to his story than the simple Bernstein Portfolio.
So in the spirit of spreading the word about Dr. Bernstein and his work, I’ve added a new portfolio of his to the site — the Coward’s Portfolio.
Perhaps because of how prominently it features in the Portfolio Finder, I’ve noticed a great deal of questions and conversations about the Golden Butterfly portfolio of late. Rather than scatter my thoughts around the internet, I realized it might be best to provide a centralized synopsis of how and why it works so that everyone can benefit.
I love perusing message boards, and a recent conversation on the All Seasons portfolio mentioned in Tony Robbins’ recent book naturally piqued my interest. It’s based on the highly respected work of Ray Dalio (of Bridgewater All Weather Fund fame), but pared down to a form that a normal non-institutional investor can easily implement themselves.
With a focus on wide diversification and risk parity for a variety of economic climates, the fundamental theory behind the All Weather Fund has always appealed to me. So it was refreshing to find a simplified version endorsed by Dalio to compare against other lazy portfolio options.
I’m an unabashed proponent of portfolio diversification, and enjoy sharing examples of how thinking beyond over-simplified “stocks” and “bonds” can create an asset allocation greater than the sum of its parts. Like a wall built of many smaller bricks, it’s the strength of the big picture that truly counts and no one individual brick tells the full story.
What, then, would happen if one really took diversification to heart and just bought a little bit of every asset? Judging by the numbers of the Merriman Ultimate Buy-and-Hold portfolio (new in the Portfolios section), apparently you get a really great asset allocation!
One of the most common mental hurdles to overcome when researching asset allocation is the siren call of maximum returns. Nobody likes the feeling of leaving potential money on the table. Combine that with a bit of accurate but out-of-context historical data, misinterpretation of assumptions, and “common knowledge” that glosses over the details, and you naturally see a strong bias towards the stock market in most investment circles. Raise your hand if you’ve heard these before:
The stock market has the highest returns over the long run.
Higher risk, higher reward.
The implied conclusions are that diluting your portfolio with non-stocks must also dilute the return, and that the accompanying stock volatility is the unavoidable price to pay for better long-term returns.
Both are simply inaccurate.
I’d like to offer special thanks to several Bogleheads regulars who contacted me recently to help steer the portfolios section in the right direction. I make every effort to accurately represent each portfolio here, and greatly appreciate when people provide constructive feedback. As a result of said feedback, I’ve renamed one portfolio and added another.
I’ve always had a personal affinity for portfolios with an equal weighting of diverse assets, as they tend to focus less on optimization and more on diversification. The Permanent Portfolio is one good example, and I’ve now added two more to the list: the Ivy Portfolio and the Bernstein Portfolio.
I made a quick correction to the Swensen Lazy Portfolio asset allocation in order to more accurately reflect the portfolio he discusses in his book Unconventional Success. The Total International index was split into International Developed and Emerging Markets, and the short term treasuries were replaced with 5-year Tbills to better represent his desire for intermediate treasuries. You can read more about his concept here.
You may note that his portfolio includes 10-year treasuries, which are not yet an option in the calculators. Adding new data sets in the public tools is on the roadmap but takes time. As an interim, a reasonable suggested alternative for modeling 10-year treasuries is to use half Tbills and half Long-term bonds. It’s not an exact replacement, but it’s close.
Try it for yourself to see how the charts differ from the ones in the Desert Portfolio summary!