Checking The Box For Simplicity

The catalyst for this post was a write up from Cliff Asness titled Why Not 100% Equities? It's a good quick read that got me thinking about focusing on longer term portfolio outcomes versus short term portfolio gratification. 

As I thought about where to go with this I thought of the Cockroach Portfolio. Here is a link to one of my posts in Aug 20222 where I took a stab at trying build it using exchange traded products. Below is how I built it except for GBTC. You can model actual Bitcoin (^BTC) on Portfoliovisualizer.

Then it occurred to me to model it without Bitcoin. So the difference is that without Bitcoin, I allocated 20% to gold, not just 16%.

The third portfolio as you can see is something I thought might be competitive and certainly simpler with only three holdings, plain vanilla equities, managed futures and the SPDR T-bill ETF.

Clearly, a little Bitcoin went a long way in the period studied. The difference in growth with and without is astounding to me. It is important to understand how that happened though. You can see in 2017, the blue line for Cockroach with Bitcoin went parabolic. The portfolio was up 51% that year versus 91 basis points for Cockroach without Bitcoin and 15% for Portfolio 3. 2020 was also a very good year for Portfolio 1 thanks to Bitcoin but it wasn't as big as 2017. 

You can see, other than those two years, Portfolio 1 was very unremarkable.

Asness lays out why 100% equities is not a good idea. Equities are the thing that goes up the most, most of the time but of course there are issues related to volatility and drawdowns that make 100% equities a tough way to go. But drifting too far from a "normal" allocation sacrifices a lot of growth opportunity. Not everyone needs that much growth but if you do, I would be careful going to far down the liquid alt rabbit hole. 

I long ago settled on small slices to several different types of alts with different attributes while still maintaining a normal allocation to equities. 

Portfolio 3 is valid in my opinion for generally capturing most of the effect of a 60/40 portfolio. It tracked very closely to VBAIX until 2022 when it went up 80 basis points and VBAIX was down almost 17%. Modeling that sort of result is not new, we've done it in countless posts. With just three holdings, Portfolio 3 certainly checks the box for simplicity but if managed futures hadn't done so well in 2022 then result would have been worse. There were plenty of alt strategies that did better than bonds in 2022. Simplicity is great but diversifying your diversifiers is important for the times where one strategy doesn't work for whatever reason. 

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.