Global Asset Allocation – Description
With all of our focus on assets – and how much and when to allocate them – are we missing the bigger picture?
Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies begins by reviewing the historical performance record of popular assets like stocks, bonds, and cash. We look at the impact inflation has on our money. We then start to examine how diversification through combining assets, in this case a simple stock and bond mix, works to mitigate the extreme drawdowns of risky asset classes.
But we go beyond a limited stock/bond portfolio to consider a more global allocation that also takes into account real assets. We track 13 assets and their returns since 1973, with particular attention to a number of well-known portfolios, like Ray Dalio’s All Weather portfolio, the Endowment portfolio, Warren Buffett’s suggestion, and others. And what we find is that, with a few notable exceptions, many of the allocations have similar exposures.
And yet, while we are all busy paying close attention to our portfolio’s particular allocation of assets, the greatest impact on our portfolios may be something we fail to notice altogether…
Global Asset Allocation – Review
For everyone who is interested in Asset Allocation – Global or not By GeraldM
Format:Kindle Edition|Verified Purchase
I do not personally know the author and I have never met him. I have not communicated with him regarding either Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies or any of his other books. My only association with Meb Faber is from me reading his blog and his books. I was privileged to get a pre-print of this book for review because I responded to an email solicitation. Even though I have a pre-print, I will purchase the book.
I thoroughly enjoyed this short book. Below are a few brief points about what I consider the highlights from each of the chapters. My personal commentary is at the end of this review.
Why it’s a bad idea to hold cash long term.
There is a pretty amusing (and correct) take down of Zerohedge’s dollar crash charts.
A great look across major countries returns on bills, bonds and equity vs inflation.
Nominal returns vs real returns. This is important to understand for wealth preservation.
The importance of understanding the length of time spent in drawdown.
Understanding future returns (they won’t be stellar at the time of this writing).
The importance of going Global.
Why Market Cap and GDP suggest holding only 50% (or less) of your portfolio in US assets.
The Global 60/40 portfolio – increases returns and reduces volatility (by a bit).
But why just Stocks and bonds?
13 assets classes examined since 1973.
Interestingly, Gold and Commodities had by far the worst Sharpe ratio over this time.
“It is a sad fact that as an investor, you are either at an all-time high with your portfolio or in a drawdown – there is no middle ground – and the largest drawdown will always be in your future.”
Figure 24 of the 13 assest class returns in different regimes is excellent and valuable.
It is now time for portfolio construction.
Chapter 4 – Risk Parity and All Seasons – Ray Dalio (Bridgewater)
Real returns in the inflationary 70’s were negative (73-81).
Risk parity worked during the Bond Bull Market post 81 – what about going forward?
Bridgewater’s All Weather is the largest fund in the world but you can’t get in. Faber shows you how to clone it yourself (via a link to his blog).
Terrific links to background reading.
Chapter 5 – Permanent Portfolio – Harry Brown
Low real returns during the inflationary 70’s and then about 5% post 81.
Consistent, low volatility performance.
Chapter 6 – Global Asset Allocation
A portfolio constructed along the lines of a global market cap weighted portfolio. Check links to research paper for more info on construction.
Positive returns post 1981.
The portfolio was altered to include commodities to the benefit of an extra 1% per annum with not much more volatility. This is an example of how diversification and back testing may improve a portfolio.
Chapters 7-10 Lots more portfolios:
These chapters show portfolios from Rob Arnott, Marc Faber (no relation to the author), Warren Buffet, Mohammad El-Arian, David Swensen, The Ivy Portfolio (Meb Faber)
Much like the previous chapters, Chapters 7-10 show nominal and real returns from 1973-2014. Over the long term, real returns are similar with the Buffett portfolio mimicking stock returns and the attendant volatility that comes with it. Not surprising considering it’s 90% stocks making it the most non-diversified of the portfolios studied.
According to the author, the Marc Faber portfolio was the most consistent portfolio reported in Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies.
Chapter 11 – Summary of Strategies
Make sure you read and understand this summary chapter. Indeed, the conclusion reached by the author surprised even him. At one point he states: “To me, that is astonishing”. What is so astonishing? In brief, it doesn’t really matter which allocation you pick. The *real* returns are nearly the same. If you take out the permanent portfolio which technically had the worst returns, the remaining portfolios are within oh, about 1/2 of 1%. And since you can’t predict which portfolio will do what in the coming years, just pick one and get on with your life. An equally (if not more) important fact is costs, costs, and costs. If you pay an advisor 1-2%, you will turn the very best performing portfolio into the very worst performing portfolio. It’s a simple as that. So keep your costs under control and pick a portfolio you like.
Chapter 12 – Implementation
This is a good chapter for those not familiar with what assets to actually use – or even those who do. What I like about this chapter is that it directs you to the things needed to actually build your portfolio (this is done throughout Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies – also see Appendix A for pre-built portfolios from some well-known robo-advisor’s). You already know the weights (and even that isn’t all that significant). The other thing the author talks about is taxes. Lots of authors talk about investing or trading but they don’t get into discussing the impact of taxes nearly enough. Taxes are a vital area to know about as they will take by far the biggest chunk of your earnings. If you were surprised by the impact of advisor fees (also discussed in this chapter), then you really need to understand the impact of taxes. I really appreciate it when authors use their knowledge in very specific ways. This chapter as well as other chapters in the book demonstrates that.
Chapter 13 – Summary
The author’s opinions and wisdom are distilled down to 10 brief points. They are:
1. Any asset by itself can experience catastrophic losses.
2. Diversifying your portfolio by including uncorrelated assets is truly the only free lunch.
3. 60/40 has been a decent benchmark, but due to current valuations, it is unlikely to deliver strong returns going forward.
4. At a minimum, an investor should consider moving to a global 60/40 portfolio to reflect the global market capitalization, and especially now due to lower valuations in