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Portfolio Theory

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A truly enduring financial home does not simply have strong backtested walls but also a solid intellectual foundation.  These articles get into the detailed origins of the various portfolios, explore the ideas behind modern portfolio theory, and generally delve into the nuts and bolts of how and why intelligent asset allocation really works.

Related Commentary

  • Catching a Golden Butterfly Catching a Golden Butterfly - 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…
  • How Safe Withdrawal Rates Work How Safe Withdrawal Rates Work - 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 if 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…
  • Investing for All Seasons Investing for All Seasons - 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…
  • How to Build a Portfolio One Brick at a Time How to Build a Portfolio One Asset at a Time - My single favorite toy as a child really wasn’t a single toy.  It was my giant bucket of LEGO accumulated over many years.  The beauty of LEGO is that the combinations are absolutely limitless and the things you can build with them are constrained only by your imagination.  Well… and access to all the right pieces. You see, when building…
  • The Theory Behind the Golden Butterfly - 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.
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  • Black Swans And The Larry Portfolio - 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…
  • The 7Twelve Portfolio And The Power Of Broad Diversification - I once knew a guy who was really into woodworking.  One of the more fascinating things about him was that he not only made his own furniture but also was quite proud of his collection of hand-made woodworking tools.  I once asked him why he preferred those tools to mass-produced alternatives.  Among several reasons, “They do…
  • The Ideal Index Portfolio And The Many Paths To Perfection - 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…
  • Unpack Financial Haystacks With The Updated Portfolio Finder - Asset allocation is a obviously passion of mine, and I’m always excited when I find a new metric to tinker with.  These new ideas are not only interesting in their own right, but they also allow me to go back and refine some older tools to make them even better.  And it’s hard to think…
  • Things We Can All Learn From The Yale vs. Buffett Debate - Yale University recently released their 2017 annual report for the Yale Endowment, and while normally this would pass without much notice they appear to have made a few waves by continuing an ongoing feud with Warren Buffett.  In his 2016 investor letter, Buffett criticized how university endowments pursue market-beating returns through active management and suggested they might…
  • Try A Modern Spin On A Classic Idea With The Pinwheel Portfolio - Generating accurate and intuitive charts to help you navigate the professional asset allocation landscape is pretty darned rewarding, and I take a lot of pride in contributing to everyday asset allocation discussions in my own data-driven way.  I also spend a lot of time reading those same discussions online, as not only does it help…

Recommended Reading

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk — Bill Bernstein’s thorough and insightful text on modern asset allocation concepts is both thoughtful and innovative and is guaranteed to change the way you think about investing.  His work on Efficient Frontiers is the inspiration for my own efforts with the Portfolio Finder.

Triumph of the Optimists: 101 Years of Global Investment Returns — Elroy Dimson, Paul Marsh, and Mike Staunton present a terrific history of stock markets around the world. Complete with diligent attention to detail and helpful charts, this is perhaps the single best guide to the history of global markets and skillfully illustrates the importance of diversification.  

Irrational Exuberance — Robert Shiller masterfully explains the many factors that influence market prices, while dismantling the common conception that markets are inherently rational.  While not directly about portfolios, the idea that markets are irrational may alter your perceptions towards diversification.

The Misbehavior of Markets: A Fractal View of Financial Turbulence — Beniot Mandelbrot does an amazing job of explaining the history of portfolio theory in terms both mathematicians and laymen can appreciate, debunks the mathematical underpinnings of many popular financial models, and in the process reshapes our modern understanding of investing risk.

Portfolio Explanations

7Twelve Portfolio — 7Twelve: A Diversified Investment Portfolio with a Plan by Craig Israelsen

All Seasons Portfolio — MONEY Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins

Coffeehouse Portfolio — The Coffeehouse Investor by Bill Schultheis

Golden Butterfly — The Theory Behind The Golden Butterfly

Ideal Index Portfolio — The Informed Investor: A Hype-Free Guide to Constructing a Sound Financial Portfolio by Frank Armstrong

Ivy Portfolio — The Ivy Portfolio by Mebane Faber

Larry Portfolio — Reducing The Risk of Black Swans by Larry Swedroe and Kevin Grogan

Merriman Ultimate — The Ultimate Buy and Hold Strategy by Paul Merriman

No-Brainer Portfolio — The Intelligent Asset Allocator by William Bernstein

Permanent Portfolio – The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy by Craig Rowland and J. M. Lawson

Pinwheel Portfolio — Take A Spin With The Pinwheel Portfolio

Rick Ferri Core Four — All About Asset Allocation by Rick Ferri

Sandwich Portfolio — Work Less, Live More: The Way to Semi-Retirement by Bob Clyatt

Swensen Portfolio — Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen

Three-Fund Portfolio — Bogleheads Wiki (also see this thread by Taylor Larimore)

Total Stock Market — He’s not exactly the originator, but JL Collins offers a detailed argument for just putting your money in a TSM fund

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