Why Use Two Funds When You Can Use 18 Instead?

In the last few days, I've had the opportunity to look at a couple of different model portfolios from different places and providers that I would describe as being overly complex. I'm not going to call them out publicly or anything but I think we can learn some things. 

As you can see, there are 18 ETFs in the model and it outperformed by a hair, nothing wrong with that, but it clearly looks identical to the basic two index fund portfolio I used. Managing and rebalancing an 18 fund portfolio for an extra $404.49 for a $10,000 starting point over 7 1/2 years may not be worth the effort. 

Having 50% in one broad equity index fund and 50% in an aggregate bond fund might be too simple but 18 funds to take the same path to the same result doesn't seem like a good tradeoff. A different path, like maybe a path with less volatility, to the same result would be a different story but that's not what's happening here obviously. 

The next one is a little more fun. 

It doesn't go back very far but here is the year by year.

Their allocation works, meaning how much they put into stocks, fixed income, commodities and alts. Even the unleveraged version has done well, about 4% better than VBAIX in just eight months with quite a bit less volatility. 

With their actual model, there seems like there's an element of being too clever by half. It's different than the first example where there are 18 funds to do the same job as two funds could do. The model only has eight funds, I built my versions with six funds which I don't think is a discernable difference but most of the funds they use very complex with a lot of different things going on. 

This is one reason to spend time looking at other people's, in this case, models. There are things to learn or reiterate. When possible, keep things simple. Not everything can be simple. Relative to plain vanilla equity and T-bills, managed futures are not simple. They can be understandable without being simple. 

This second model has way too much in alternatives for me. Yes it has worked, backtest with managed futures often look great, but the consequence of it going wrong would create a mess of anguish for clients, an unnecessary mess of anguish. In this context, we've talked a lot about my preference to hedge a lot of simplicity with a little complexity. If you read about this sort of portfolio construction you might read 60/20/20, stocks, fixed income and alts, or 50/30/20 and others. 

Is 20% in alts a little complexity? That's in the eye of the end user but it is very easy read about a lot of very smart and sophisticated strategies and sophisticated applications of those strategies and go overboard with allocations to these products. I would encourage learning a lot and doing a little. 

Stocks are going to be the thing that goes up the most, most of the time. Let them do the work, let limited exposure to alts smooth out the ride a little bit. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.