"Return On Hassle"

A phrase that Tadas Viskanta attributed to Khe Hy. It means what you think it means, extra return for more effort and the fulcrum point at which the extra effort is not worth the extra return.

I've quantified this point before with the following example of an active trader with a $1 million account. This person could make trading his account a full time job in pursuit of beating the market. If in a given year he could have put all $1 million into an index fund, done no work and made $100,000 or he could work 40 or more hours a week studying charts and trading all throughout the day for an extra what, even 5%? Any outperformance gives a lot of benefit of the doubt but that aside, is working that hard for someone with that much money already worth $50,000? It could be fun for him but in terms of value for time spent, that may not make sense and 5% of alpha is a colossal assumption. Even then, would that much alpha be repeatable? Don't forget the risk that he lags that year despite all the time spent.

This is a rephrasing of the concept of ergodic/ergodicity. I've summed that up before by saying that the equity market is going to go from the lower left to the upper right over the long term at some annualized rate. If you just own an index fund and do nothing else, you are getting the maximum benefit of the market's ergodic effect. The more active you are, the more you push against that ergodicity. 

There are times during a full market cycle where it does make sense to veer away from ergodicity like when the stock market goes down a lot. And there is value in structuring a portfolio to be less volatile than the market. There is a balance to be struck there where you capture enough of the market's long term gains to make your financial plan work without necessarily riding it all the way down basis point for basis point. This has been my approach and one of the fun things about blogging is playing around with different ideas to see if/how I can improve on my approach. 

 

The above idea came to me as something that might capture a meaningful amount of the upside with a little less volatility. BLNDX, PPFAX and MENYX are all in my ownership universe either personally, for clients or both. Here are the results.

It doesn't go back that far because BLNDX isn't that old but we've had very distinct market returns during that stretch.  

And the year by year. A lot of the superior CAGR comes from the massive outperformance in 2022. It was competitive, performance wise in 2020 and 2021 and due to being underweight mega cap tech it is lagging by a lot this year. I was able to sub in some things to create a backtest for Portfolio 1 and I added 100% VOO for Portfolio 3.

Over a long period it lagged by a little much of the time versus VBAIX and surprising to me it had a higher standard deviation. It is also closer to the S&P 500 in terms of CAGR than I would have guessed.

If that mix is compelling it would be because it has no exposure to bonds. I continue to believe that bonds with any sort of duration beyond a couple of years are going to be a source of unreliable volatility, less effective at helping offset stock market volatility. If I am right, then that three fund portfolio could continue to have a lower standard deviation than VBAIX. 

You see plenty of content out there about 2 or 3 or 4 fund portfolios and arguably just owning 1 fund like VBAIX would be valid even if the ride down would be absolutely brutal at times. Those so called lazy portfolios are valid but they all have drawbacks and risks and the 3 fund portfolio we assembled today is no exception. PPFAX sells puts that are far out of the money, really far. With a big enough crash that fund would probably get crushed. We saw earlier this year that the managed futures space got crushed from a whipsaw in the 2 year treasury. 

Even though I believe in the funds I used to build the portfolio, it is important to understand that no fund should be expected to work in every market event. Even bonds didn't "work" last year. I think there is influence to be had from these funds but I would still want to diversify my diversifiers. 

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.