I wanted to circle back to a couple of things from yesterday's post.
First, the growing pains at Twitter. They are selling blue check "verification" for $8/mo. I'm pretty sure there is no vetting going on and this happened.
It's fake but still caused a 5% decline in the shares of Eli Lilly (LLY). It also took down client holding Novo-Nordisk (NVO) down 5% too. The weird thing is that although it's been widely disseminated as being untrue, the share prices have not recovered yet. New disclosure rules require me to say I have no interest or intention in buying Eli Lilly personally or for clients. I said on Twitter Elon Musk appears to be making it up as he goes along. I'm doubling down on that. Will there be other market moving copycats? I can't see how this little episode doesn't end without lawsuits.
A little less dramatic but more interesting is the idea we broached yesterday about extreme portfolio simplification becoming an appropriate asset allocation for an older retiree who is not cognitively impaired but wants to spend less time on their investments without hiring someone to help them.
After writing yesterday's blog post I found this from Barron's about Warren Buffett planning a type of "barbell" strategy that allocates 90% to an S&P 500 index fund and 10% in T-bills for his wife after he passes. That certainly would be simple.
A different route to explore here is a form of risk parity from a Cliff Asness paper written back in the 1990's. The bottom line was that a leveraged allocation working out to 93% to equities and 62% to bonds had a slightly better return over the long term with the same standard deviation as 100% equities. The backtest is compelling of course and it continued to do well into the start of 2022 but would be down a lot this year of course. If you read that link and are compelled then a 100% allocation to the WisdomTree US Efficient Core ETF (NTSX) would essentially get you there. NTSX is the 90/60 ETF. Again, I have no interest or intention in buying NTSX personally or for clients.
Meb Faber who runs Cambria Investments occasionally Tweets something to the effect "Trinity and chill." Trinity refers to an ETF his firm manages, the Cambria Trinity ETF (TRTY). It is a multi asset fund of funds but it also includes some complex strategy funds like tail risk and managed futures. Much of the equity exposure uses factor strategies. On the spectrum of plain vanilla simplicity to complex-complexity I might put this at about 60% of the way toward complex-complexity. There is sophistication but I believe it can be assessed and analyzed as opposed to some of the extremely complex funds we've looked at before that cannot.
You can see from the chart and the data that blue line TRTY had a lower CAGR and lower standard deviation than red line Vanguard Balanced Index Fund (VBAIX). This year, TRTY is down 5.09% versus 17.37% for VBAIX. I'd say TRTY has a much smoother ride, almost like an alternative that is intended to be a horizontal line or maybe one of those absolute return funds that targets inflation plus some number of basis points. TRTY hasn't been around very long so I have no idea what it will do and I have no interest or intention in buying TRTY or VBAIX personally or for clients.
A fund with TRTY's attributes, there are others, could be appropriate for the idea we're kicking around today. I would not expect this sort of fund to capture much upside in the good years. It could of course but in 2020 it was only up 1.27%. Some combo of a huge weighting to a fund like TRTY while maintaining a couple of years worth of expected expenses set aside in cash could work for wanting a very simple portfolio for someone who doesn't necessarily need normal stock market growth for their plan to work.
It's important to understand that an older retiree could very realistically be relying on capturing normal stock market growth to avoid running out of money, for that person TRTY is probably not the answer.
Personally, I am a big fan of setting cash aside to manage sequence of return risk. If I found myself on the verge of wanting to spend far less time on my portfolio when I was 75 or 85 or whatever, I think I would prefer to anchor around plain vanilla equity exposure like a broad index fund with an alt or two that should go up a lot when stocks drop and an alt or two that should look like horizontal lines that tilt upwards. The cash would be in a separate bucket.
We've learned this year, or maybe better said that this year has reiterated, that bonds will not always buffer equity market volatility. I've been saying for months that I think traditional fixed income has become a source of unreliable volatility. That dynamic, if it even exists, will end at some point but who knows when and even then, will investors trust fixed income the way they used to?
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