The January release of CPI inflation data is usually only marginally newsworthy and certainly not something to celebrate, but on a website dedicated to portfolio theory it’s a really big event. It marks the day that the portfolios and calculators can all be updated with 2015 data!
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.
One of the most common sayings about the stock market is that it always “makes money in the long run.” While based in truth, I find that line of thinking shortsighted because it suffers from one major assumption that too many people gloss over:
How exactly do you define “long run”?
After publishing a few tools and articles based on safe withdrawal rates, one of the most common questions I’ve seen so far is some iteration of this:
Obviously higher returns support higher withdrawal rates. That’s why I invest in 100% stocks! How can a lower-return portfolio possibly support higher withdrawal rates than a higher-return portfolio?
I admit the answer is fairly unintuitive, and explaining this without getting too deep into the weeds is a bit of a challenge. I’ve touched on it here and there around the site, but this is an important concept that deserves a thorough explanation.
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!
Financial independence – the concept of establishing a sustainable system where your investments can cover your expenses, making work optional – is an issue of particular interest to me, and from the popularity of the Withdrawal Rates calculator I gather that it is for many others as well. Of all the things money can buy, I have a difficult time imagining something more valuable than the freedom to live on your own terms free of financial worry. While I’ve previously discussed the effect of asset allocation on the retirement half of the FI equation, the natural next question is:
What’s the fastest path to early retirement?
For those interested in a little more discussion than an article allows, I recently had the pleasure of doing a podcast with Jake Desyllas at The Voluntary Life. We talked for a while about passive investing, withdrawal rates, and a bit of my high-level philosophy about asset allocation in general. Check it out.
While you’re there, be sure to take the time to browse Jake’s site. It’s a wonderful collection of different ways of thinking about life, work, and money. There’s so much more to a good life than asset allocation, and this kind of information is tremendously helpful for keeping investments in the proper perspective.
One of the great things about sharing tools publicly is that you get lots of great feedback about things you never considered. For example, I’ve received a few emails from readers who point out that the Pixel chart in particular is difficult to interpret for colorblind users.
That’s an excellent point!
After a bit of research, I’ve created a new version of the Pixel chart specifically for people with red-green color sensitivity issues. I’m not colorblind myself, so I consider this an experiment and am absolutely open to additional suggestions. If any colorblind readers have recommendations for this (or any other) chart, please contact me.
For now, the charts in the various portfolio summaries will remain with the classic red/green combinations. But the new tool will allow people to duplicate them in a readable format, and it’s possible I may eventually transition the overall color schemes after further feedback and refinement. My goal is to make the site as helpful as possible to a wide variety of investors, and I certainly don’t intend to let something as simple as color get in the way.
Happy portfolio hunting!
I’m always thankful for the feedback I receive on the site and tools, as it’s a critical part of making sure they are as accurate and helpful as possible. One such bit of feedback today identified some special situations with the Withdrawal Rates calculator where the mathematical accuracy perhaps could lead investors to inappropriate conclusions. That was a great catch and a nice bit of insight, and I’ve updated the calculator to address this issue.
When browsing portfolio options, investors rarely study them in isolation. Whether it’s the S&P500, a second lazy portfolio, or their own current asset allocation, it’s natural to compare a prospective portfolio to a relevant benchmark. In fact, one of the primary goals of Portfolio Charts is to collect as much information as possible about various strategies in one place to aid in the learning process.
Each of the charts and tools here can be used to study differences in portfolios, but it feels like there’s room for one to do that more directly. I’ve been experimenting with a few ideas, and have come up with something that I think approaches the problem from a new angle without overlapping the other calculators too much. I call it the Benchmark calculator. As a nod to human nature and a reminder to those who use it, you can also think of it as an Envy chart.