Marrying All Weather & Simplicity

Tariq Dennison kicked off an interesting conversation on Twitter asking "one topic I'd still like to see a lot more discussion on from #ETFtwitter are ETFs that it wouldn't be crazy to have as the one and only ETF in a portfolio." A few people weighed in noting the new Discipline Fund ETF (DSCF) managed by Cullen Roche, Dave Nadig mentioned target date funds and there was also mention of the asset allocation funds offered by iShares. The iShares Core Growth Allocation ETF (AOR) targets a 60/40 portfolio and there are others with different percentages. 

I do not like target date funds or asset allocation funds. AOR will always be 60/40, stocks/bonds. What if bonds are a terrible place to be for a while? The bond allocation in AOR has not offered any place to hide. Similar story with target date funds. A buddy who is my age recently asked me to look at his 2030 target date fund. It has a large weighting in the type of fixed income that is going down a lot. Both his target date fund and AOR are down almost as much as the S&P 500 all by itself.

I should note, I have zero concern about equities bottoming at some point, although not trying to guess when, and then going back up. The bond market is a different story. While I think a repeat of 1981/82 seems very unlikely, if bond yields go from now 3%, up from pretty much nothing, up to 6% or 7% or 8% and stay there a while, that will essentially be a permanent impairment of capital for bond funds. We have a little exposure to these types of bonds in one or two hedge products but do not have a large allocation to "traditional" fixed income. I've talked before about floating rate, short dated Bullet Shares, bank loans and short dated TIPS being the bulk of what I have on for clients. 

Where the underlying premise of Tariq's question is about a forever all-weather portfolio with as few holdings as possible, something with a lot of bonds in it fails the test IMO. 

My response to the original Tweet was "simple is great, my idea of simple would probably be more like 3 funds but maybe be willing to change occasionally, I would not limit this exercise to just ETFs, have had great luck with BLNDX (no affiliation beyond owning it personally and for clients)." 

It's not a great idea to build some sort of very simple portfolio expecting to never change it. Intermediate to long term bond funds were a great hold for years, for decades up until this point. I think the risk was sky high in owning that part of the curve in relation to what people usually are looking for from bonds but the trade certainly worked, almost without consequences until this recent market event. 

Standpoint Multi-Asset (BLNDX or REMIX) is either as close to being a single, all-weather fund solution for a one fund portfolio or, it's just having a great run coinciding with its inception through today and hopefully going forward but of course, I have no idea. The back test, when I first saw it was fantastic, but then again the back tests are always fantastic, but unlike so many funds, the performance is just as good as the back test. I still don't know what will happen in the future. Putting a huge percentage into a strategy is not something I can do, it probably isn't ok from a compliance perspective but I don't know, I don't need to know, because I'm not considering something radical like 50% or even 25%. Yahoo Finance shows BLNDX up 8% YTD.

I said similar things about AGFiQ US Market Neutral Anti-Beta Fund (BTAL) right before it started a run of underperformance. I still hold the fund and YTD it's up 16%, per Yahoo Finance. I never did anything crazy with the weighting, I never considered that just like I am not considering anything crazy with the BLNDX weighting. IMO they are simply very good funds that do what I think they should do, far more often than not.Well known investor Raoul Pal has referred to his positioning in a couple of different crypto currencies as "irresponsibly long." Not me for BLNDX and BTAL.

Here's an article by Nomadic Samuel about BLNDX/REMIX that considers going very heavy (irresponsibly long?) into the fund for the attributes I cite and a couple of others. 

I am comfortable with very high weightings to the plainest of vanilla equity ETFs. There's nothing to malfunction. The equity market might crater of course but there's no compounded effect potentially with some sophisticated strategy fund where both the underlying market goes down a lot and something not reasonably predicted goes bad with the strategy. I'm also comfortable with a pretty heavy weighting in short dated TIPS. 

I've written a lot of posts about two or three or four fund portfolios, it's a fun thought exercise and the funds I would consider has evolved. I've always suggested the largest weighting, the majority of the portfolio, in this sort of concept to plain vanilla equities. If you want fixed income, I think you need to avoid interest rate risk. If you take credit risk then you need to be prepared to make a change whenever the next crisis involving credit risk comes along. I would go with short dated TIPS for the second allocation in this all weather portfolio you're hoping you never have to change. The fund I use for this space is down slightly but looks nothing like the double digit decline for funds tracking the aggregate bond index.

For the third type of holding, I would go with an alternative of some sort. I've been using these, in moderation, for many years now, I've had good luck and will stick with them. Plenty of advisors don't believe in them so you obviously need to sort that out for yourself one way or another. To the extent diversification means that you always have something going up, alts can offer that, no guarantee, but it's possible with the right alts. 

If you do something like this, it might work over the longer term, I suspect it would, but you're still participating in risk markets. There's no avoiding risk. I think the right allocation has chance of avoiding the full brunt of large declines, that has been my experience looking back but going forward, anything can happen. 

Cheating now, I would set aside a year or two's worth of expected income needs so you're not forced to sell at the "wrong" time to pay for something unexpected. Also, I still believe in a percent or two as a starting position for asymmetry like Bitcoin or some sort of lottery ticket biotech or maybe a small cap uranium name which would be a fourth holding that you're willing to change. 

Bitcoin is obviously getting pasted in this event, I'd say if this is a test it is failing so far but buying something after a large decline is not the worst trade in the world. If you can't live with the possibility of it going to zero, then yeah, don't buy it.