Growth & Stability, Not Equities & Fixed Income

A couple of months ago we looked at Total Portfolio Approach (TPA) as a "new" type of portfolio construction. If you read that post from November, it doesn't do a great job of dialing in what TPA actually is because the articles talking about it didn't really dial it in either. Jason Kephart from Morningstar managed to crack the code with a very useful article. Based on Jason's article, TPA fits right in with what have been doing/exploring for many years. 

Jason says that holdings are selected based on how they are expected to behave. We talk about expectations in this context all the time. For example, while a staples sector ETF will have equity beta, it's not a correct expectation to believe it will lead the way in a bull market for stocks. It might do that but it's an incorrect expectation. Client/personal holding BTAL can go up when stocks are going up but the reason to own it is that it has reliably gone up when stocks go down. It's reasonable to expect it to go up when stocks drop even if there is no guarantee.

Instead of stocks and fixed income, think instead of "growth and stability." That's useful.

He said the idea is not higher returns at all costs but instead to have a portfolio that "behaves more predictably" when markets get hit. He says this approach can make it easier for investors to hold on or as we say help avoid panic selling. 

Applying this idea in his article, Jason talked about high yield bonds going into the 60% (or whatever number) as part of the equity allocation in a traditional 60/40 because high yield bonds tend to have equity beta. The idea he came up with to build a TPA is 50% in equities, 10% in high yield bonds, 35% in core bond exposure (AGG or BND) and 5% in cash. 

After seeing that he put 35% in AGG he then said "correlations shift, regimes change, and assets that historically provided stability can behave very differently when the underlying drivers of markets evolve" which I found very odd in relation to 35% in AGG. My brother, the regime has changed. Duration is no longer stability. 

If we forget about the term fixed income entirely and replace the word with stability, the stability sleeve wouldn't have to include fixed income in the traditional sense. 

Portfolio 1 is proportional to Jason's 40% AGG/Cash sleeve and Portfolio 2 is built with strategies we use for blogging purposes all the time. It's hard to argue a lot of AGG and a little cash is all that stable. 

A quote from a Barron's article this weekend that says bond investors want "safety, certainty and frugality." Frugality probably doesn't fit in that well in our conversation but safety and certainty do. In terms of TPA, I word it all the time to talk about alts behaving the way I think people want bonds to behave and Portfolio 1 above doesn't do that. It would not be a black swan if a move higher in intermediate and longer term rates were a contributing factor to the next large decline in equities. If so, then AGG which is intermediate duration would again disappoint like in 2022 even if the magnitude wasn't as severe as 2022. 

Kind of related, TheItalianLeatherSofa blog took up our discussion from this week about our all weather portfolio that tried to allocate based on equal weighting standard deviation and excess kurtosis. The author's name is Nicola. Nicola is far more willing to hold duration. True to the Dalio all weather, Nicola models in TLT which tracks 20 year and longer treasuries. He believes that my thoughts about avoiding duration are a shorter term "macro narrative." 

Since I've never held duration in the modern era (my 20+ years as an advisor), it's not clear to me I am expressing a macro narrative but maybe. The way I've described it here is assessing whether or not the compensation for the volatility is adequate or not. TLT is currently in a 40% drawdown that started in late 2021. Circling back to TPA, that is not stability. The investor who bought in 2021 and is still holding will never get back to even on a price basis. 

Anyone buying TLT today at $88 might face a similar dilemma, never making it back if rates take another meaningful leg higher. If you believe four point whatever percent is adequate compensation for 20 years, buy an individual issue instead of TLT. If rates do go up, you'll at least get par back at maturity versus never getting back to even on the ETF. Waiting 20 years to get back to par seems like a terrible position to put yourself into. Different story if the compensation is adequate. If 7% for an individual treasury ever happens, that might be interesting for being at the low end of a normal equity return distribution. I'm not saying we'll see 7%, just saying that if we do....

Jason Buck frequently uses the word ensemble to describe a portfolio as opposed to a list of stocks that you hope will all go up. The cliche response is if they all go up together then they will all go down together. Building an ensemble, maybe in a TPA framework, by combining growth and stability in an effective manner can help mitigate the all go down together portion of the cliche.

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.

ETF Slop

That phrase, ETF slop, was the focal point of an episode of the Rational Reminder podcast. It's a long one but the key point was to question whether newer ETFs actually benefit customers or not. Things like crazy high yielders and 2x single stock ETFs would be part of the ETF slop discussion. 

I'm willing to learn about any ETF or strategy, slop or not. If you read these posts regularly, you probably know what sorts of things I think of as being slop, like the two above, but I think it is time well spent trying to challenge my belief of what is slop or the other way around, study ETFs that maybe people would not consider slop but actually is.

There are some derivative income funds that offer utility without "yielding" 80% and I believe in the idea of capital efficiency even though I am very skeptical about bundling it into an ETF. There are quite a few levered equity/managed futures products either coming or recently listed. Simplify just listed one with symbol CTAP and I believe Man Financial and JP Morgan each have one coming if they're not out already. The capital efficient (levered) space is going to proliferate. 

I believe PIMCO is the first in the space with its Stocks PLUS Long Duration (PSLDX) which is 100% equities/100% long bonds. PIMCO just launched something similar in an ETF wrapper. SPLS looks like 100% equities/100% various PIMCO bond funds. 

Are any of these for the customer's benefit or are they just slop. It depends who you ask but I would encourage skepticism when assessing complex funds. 

Reading the description of SPLS, it almost reads like it is stocks plus carry. It certainly does not appear to be stocks plus duration. Carry can be several different things. It can refer to long backwardation/short contango, it can also refer to the income stream kicked off by a investment like a dividend from a stock or a coupon from a bond. RSSY from ReturnStacked does both.  

While no one suggests putting the entire equity allocation into RSSY, I have no idea why someone would want to own it. But that doesn't mean there isn't something to the idea of stocks plus some version of carry. Stretching beyond the typical definition of carry, the description of SPLS got me wondering about adding arbitrage on top of equities. SPLS seems to want to add fixed income yield on top of stocks without a lot of fixed income volatility and maybe that will work but arbitrage is usually a very low vol, absolute sort of return strategy.

Portfolio 3 might replicate what SPLS is trying to do but I believe SPLS will be active in owning different PIMCO fixed income fund but that model was down 35% in 2022. These are clearly no picnic where it comes to volatility and drawdowns. Portfolio 1 was surprisingly volatile and was down more than just the S&P 500 to varying degrees in 2002, 2008 and 2022. 

There's certainly no magic bullet with this idea but it's time I will continue to spend. 

Closing out, we knew these were coming at some point. GraniteShares filed for a single stock autocallable ETF on Robinhood. CAIE from Calamos has been wildly successful in terms of AUM and having a very high yield but without an eroding NAV. A very high level on how these work is they pay out very high yields unless there's some sort of very large, predetermined decline in the underlying security. CAIE yields 14%. I didn't see any mention of the yield in the GraniteShares filing but if you figure we are in a 4% world then one way or another, getting a 14% yield means you're taking a lot of risk. That's not a bad thing so long as you understand the risk being taken. A diversified portfolio includes holdings with various risk profiles, that really is not problematic when sized correctly. 

For now though, I do not have the risk to autocallables dialed in. I'll get there but for now, it's hard to figure that nothing bad happens with CAIE until the S&P 500 drops 40%.

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. 

Hold On And Just Relax

We throw around the word ergodicity here quite a bit. The big idea is that the market will go up by some amount in the future either with you or without you so it might as well be with you along for the ride. The idea of never doing anything doesn't really fly as occasionally changes need to be made because of something different with the stock or fund or some sort of change in life circumstances where the asset allocation needs to change. 

The following is from a client who has been with me about 20 years. 

The column with the bigger numbers is the current value and the other column is the cost basis. A couple of the holdings are individual stocks and several are sector ETFs. The one in the middle that is flat is a fixed income ETF. This isn't a brag about picking what to own. One of them is a broad tech sector fund, there's no skill or even luck in choosing to own the tech sector. Anyone with a diversified portfolio has the tech sector in there one way or another. 

The client's account is a diversified portfolio so of course there are things in there that have not gone up anywhere near as much as the broad market.

The point is understanding the value of knowing when not to get in the way. Quite obviously none of them went up in a straight line. And while I did shave a couple down here in there to rebalance, this sort of thing is mostly a function of understanding ergodicity. 

A very specific memory for learning about this came from when I was working a Schwab in the 90's. I helped out with some issue on an account that had a little over $1 million which was less common back then, and about 80% of it was Dell Computer. He bought and never sold it and it made him wealthy. 

Whatever the best performing stock of the last 20 years is, there have been long stretches where it traded terribly. Microsoft in this century is up 1219% per testfol.io versus 657% for the S&P 500 yet it lagged badly from 2000-2014. Since its IPO, Microsoft is up 790,000% versus 6841% for the S&P 500.

While I doubt too many people would have held through 14 years of lagging, the point about ergodicity and doing less are still embedded in the result and certainly selling a stock based on a bad quarter is very short sighted. Your "favorite" stock or fund will at times lag badly. 

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. 

All Weather Portfolio Lab

Larry Swedroe had an interesting article at FA Mag about how to size alternatives. The interesting part was the talk of equal weighting various factors including kurtosis (a measure of tail risk) and standard deviation. Larry listed out more but I think those two cover a lot of ground. 

I started at Copilot and then also brought in Claude using Invesco Momentum (SPMO), SPDR Gold (GLD), Saba CEF ETF (CEFS), AQR Managed Futures (AQMIX), Convertible Arbitrage (ARBIX) Stoneridge Catastrophe Bonds (SHRIX). I ask both Copilot and Claude to "build a portfolio with the following funds by equal weighting standard deviation and kurtosis. Do the best you can if its not possible to do it exactly." Here are the weightings they each gave;

The next step was to ask each one to grade the concept for "all-weather robustness" because the results are interesting and the time is not so short as to be useless.

Copilot gave it an A- thinking it would benefit from more explicit inflation and deflation hedges than what I used. Claude was a little tougher, it gave a me a B- with a lot of color that led me to believe it thought Dalio's All-Weather was better. This made no sense to me so I pushed back, "the portfolio I asked you to build and then evaluate outperformed Dalio's all weather allocation by more that 400 bp compounded, had smaller drawdowns than Dalio's all weather allocation and a lower volatility. How do you figure that Dalio's all weather allocation is superior? That doesn't make sense to me, what am I missing?" 

The reply to that was very interesting. Claude said I was right to "call me out" and gave the following;

I think I see this sort of thing frequently where people overly rely on the "conventional wisdom" of bonds and get hung up on how things should work. Claude bumped the grade up to A. As a follow up, Claude asked how I backtested and I told it that I just used testfol.io, compared it a version from Copilot and Dalio and how similar its results were to Copilot. It replied to that saying that fund selection matters more than weightings which is interesting up to a point. 5% in everything and the rest all in ARBIX obviously would have been far inferior to the final result. 

One interesting item from the interaction with Copilot. I plugged in the symbols and then asked to figure the weightings. I made a typo on one of the funds. I typed AQRIX which is sort of risk parity instead of AQMIX which is managed futures. I told it I made a mistake and asked it to rerun with AQMIX which it did. It also told me that AQMIX made much more sense than AQRIX which I thought was funny. 

This was fun and productive. I don't really have the mathematical chops to have figured this myself and tweaking weightings over and over to get close would have taken a long time versus a couple of minutes of both AIs "thinking." 

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.

Ok, But That's A Lot Of Bitcoin

From Twitter;

I am not familiar with this person but maybe their portfolio is interesting. I'm not sure how "broad based indexes" differs from just plain "indexes" in the third slot but I replicated his idea as follows

I used materials and staples for the sectors. If he allocates that much to the Mag 7 and that much to indexes then adding more tech would just compound the duplication. I pretty much equal weighted the Mag 7 names and I used managed futures for the "other" category. I used BTCFX instead of the Grayscale product because going back too far with Bitcoin would yield some results that I don't think are repeatable. 

The results are pretty good. The growth rate is better than the S&P 500 and while the volatility checks in a little lower per testfol.io, Portfoliovisualizer shows the profiled portfolio with a higher standard deviation. The drawdowns for the portfolio have usually been larger than for the S&P 500. With that much in Bitcoin, I am surprised the volatility isn't higher. 

Interesting that the large weighting to SCHD didn't spare the portfolio in 2022 but it and Bitcoin probably held it back in 2025.

The allocation to Bitcoin is way too large for me unless he started tiny and it grew into that amount and he's comfortable letting it blow up. That would be harnessing the asymmetry and I think that is ok but I don't know if that is the case. Whatever Mag 7 means to him and owning indexes, presumably the S&P 500 and maybe the NASDAQ 100, seems like a lot of overlap that I think can be captured with far fewer holdings. SCHD might be a good offset to all the tech, likewise the cash exposure and while I don't know what he uses for "other" the managed futures we used is probably helping too.

Fun exercise, short post.

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.

Don't Give Up On Dividend ETFs

Just some very quick hits today. I lost most of my Saturday, after our monthly fire board meeting, we had to put snow chains on one of the trucks and we discovered a boulder, seriously a boulder, between the dually on the passenger side that turned into a lengthy project. We deflated the outer tire and then used a hammer chisel (may not be the precise name) to break up the rock. It was granite and just the chiseling took 40 minutes. I've got a bunch a tabs open so this is the best way to catch up. 

Barron's wrote about dividend ETFs including SCHD for anyone wanting to be more defensive in 2026. SCHD is an excellent fund. Since inception its total return has compounded at 12.5% and its price only has compounded at 9% versus 15% for the S&P 500. Those are outstanding numbers and of course the drawdown in 2022 was much smaller than the S&P 500. 

The last three full years though, would you be impatient and throw in the towel? Yesterday's post was titled whatever you believe in will not always be optimal. SCHD is no less valid than its ever been but anything you believe in will at times lag. This example is the epitome of the patience required to succeed in markets. 

A quick snippet from a different Barron's article. "So, a 3% fed-funds rate could coexist with a 6.75% 30-year bond. Such a backup in yields would result in a 30% price plunge." Thirty percent?!? The compensation for the risk taken for intermediate and longer bonds at these levels is inadequate. I have no idea if the 30 year can ever get to 6.75% but at that level it starts to get into the lower end of equity returns which starts to become interesting/attractive. 

Panoptica which is kind of like Grantland, wrote about the 4% rule. To be blunt, I don't actually understand what the main point of the article was. The 4% rule is out of date because of some undefined signal says it is? But in the part of the conversation about sequence of return risk something that I've seen more than a couple of times with newly retired clients is they have their first two or three years of retirement somehow covered so they don't have to start withdrawing right away. One client got a separation package after some sort of corporate transaction. Another actually consulted part time for a while. I say "actually" because I think that gets written about far more often than it works out. 

One way to mitigate sequence of return risk is to set aside cash but another one is to figure out how to get by without pulling from an account if your retirement date turns out to be unlucky timing. Figuring out how to get by in this context obviously takes a lot of planning and a little bit of good luck.

The last one is again from Barron's about the withering away of the FIRE movement. The take here on FIRE has always been about pursuing independence as opposed to giving up work. The extreme of doing nothing at 35 seems wholly unfulfilling. Also not talked about enough elsewhere is undercutting your own Social Security if you really stop work at 35. Sixty years is an awfully long time to rely on a portfolio and nothing else, remember no Social Security. Or at least a tiny amount of Social Security. 

An observation I mentioned about FIRE very early in its existence is younger people not understanding what it means to be 50. It's not unreasonable for someone who is 25 or 30 to believe that 50 is very old, too old to enjoy "what little time is left." 50 can be old of course but doesn't have to be. Being 50 (or 60), having a little money in the bank and still being able to get it done can be a great time in our lives. The combination of health and experience is fantastic but I appreciate can be difficult to understand in our twenties.  

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.

Whatever Strategy You Believe In Will Not Always Be Optimal

Eric Balchunas Tweeted out the following.

Meb Faber who runs Cambria replied "I doubt this will happen again in my career, but at least for today, cheers!" While it was probably just an off the cuff reaction there is a useful point of understanding embedded in the comment.

The exposure that GVAL provides is certainly a valid way to go, no question, but it is not always going to be optimal. Whatever strategy you believe in will not always be optimal which is just fine.

Yes GVAL has lagged ACWX but in 13 full and partial years in the backtest, per Testfol.io GVAL has been the better performer six times which is almost a coin flip. If you look for yourself year to year, although they are both proxies for foreign equities, GVAL does differentiate quite a bit, in four out of 13 years, the spread between GVAL and ACWX was more than 1500 basis points. Differentiation is a positive attribute in my opinion but it can be difficult to endure. 

Short one, a lot going on...even on a Friday night!

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.