This foolproof portfolio has beaten traditional stocks and bonds for 50 years

Do you have the right portfolio for your retirement savings?

When it comes to investing for the long term, the biggest issue – by far – is overall asset allocation: how many stocks, sectors, assets, etc. Choosing individual securities within these asset classes – individual stocks or bonds, for example – generally proves to be much less important.

The most closely followed benchmark is the so-called “balanced” portfolio, known as 60/40: 60% equities, 40% bonds. This is the model followed by pension fund managers around the world. The theory is that equities will provide superior long-term growth, while bonds will provide some stability.

And it has done pretty well overall, especially since the early 1980s, when inflation and interest rates fell and stocks and bonds both rose. But what about other periods?

Doug Ramsey, chief investment officer at Leuthold Group in Minneapolis, is also tracking something different. As mentioned earlier, he calls it the “All Asset, No Authority” portfolio and consists of equal investments in 7 asset classes: stocks of large US companies, namely the S&P 500 SPX index,
+2.39%,
US small company stocks, via the Russell 2000 RUT Index,
+3.06%,
developed international market equities in Europe and Asia, via the so-called EAFE index, 10-year treasury bills, gold, commodities and US real estate investment trusts.

Anyone who wanted to track this portfolio – this is not a recommendation, just an observation – could easily do so using 7 low-cost exchange-traded funds, such as the SPDR S&P 500 SPY,
+2.39%,
iShares Russell 2000 IWM,
+3.17%,
Vanguard FTSE Developed Markets VEA,
+2.81%,
iShares 7-10 Year Treasury Bond IEF,
-0.52%,
SPDR Gold Shares GLD,
-0.81%,
Invesco DB Commodity Index Tracking Fund DBC,
+1.37%
and Vanguard Real Estate VNQ,
+2.64%.

It’s a clever idea. He tries to step out of our present time, on the grounds that the future may not look like the last 40 years. And it’s foolproof, because it takes control out of the hands of individuals. It allocates equal amounts to all major asset classes, while betting hugely on none.

Ramsey looked at how this portfolio has worked (or would have worked) since the early 1970s. You can see the results above, compared to a 60/40 portfolio of 60% invested in the S&P 500 and 40% invested in 10-year US treasury bills. Both portfolios are rebalanced at the end of each year. Note: Figures have been adjusted for inflation, showing ‘real’ returns in constant US dollars.

Several things stand out.

First, All Asset No Authority has produced higher total returns over the past half century than 60/40. (It tracked the much more volatile S&P 500, but by much less than you might think.)

Second, this outperformance (as you can imagine) was actually due to the 1970s when gold, commodities and real estate did well.

Third, even though the AANA did better in the 1970s, it still performed well even in the days of rising stocks and bonds. Since 1982, it has earned an average real return of 5.7% per year, compared to just under 7% for the 60/40 portfolio (and just over 8% for the S&P 500).

But fourth, and probably most interesting: the AANA wallet has been less risky, at least measured in some way. Instead of looking at the standard deviation of returns, I looked at actual 10-year returns because that’s what matters to real people. If I own a portfolio, how much better off will I be in 10 years – and most importantly, how likely am I to end up losing ground?

Maybe that’s too gloomy a way of looking at it. This may be a reflection of the current sale.

Nonetheless, I have found that in nearly half a century, AANA has never produced a negative real return once in 10 years. The worst performance was 2.6% per year above inflation – that was within 10 years to 2016. It still generated a 30% increase in your purchasing power over the of a decade. Meanwhile, a 60/40 fund (and a 100% allocation to the S&P 500) caused you to lose money in real terms over two 10-year periods, and on a few other occasions made you less than 1% per year above inflation. . (Not including fees and taxes, of course.)

Ramsey points out that over this entire period, this All Asset No Authority portfolio has generated average annual returns half a percentage point lower than the S&P 500, with barely half the annual volatility. By my calculations, average returns beat a 60/40 portfolio by more than half a percentage point per year.

As usual, this is not a recommendation, just information. Do what you want with it.

About Mary Moser

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