What Are You Willing To Give Up In Pursuit Of All-Weather

The idea of building an All-Weather portfolio of course has its appeal. The basic idea is to be much less volatile than the broad market or the typical 60/40 portfolio. However, All-Weather is less likely to be appealing when markets are going up, which they do most of the time. Several years into a rising bull market and investors forget the pain of large declines and drift away from the important All-Weather traits to include into a diversified portfolio.

As a bull market wears on, simple market cap weighting (MCW) will likely pull away from All-Weather, performance wise. Then, the market drops a lot perking up interest in All-Weather and the pendulum swings back to wanting a lot allocated to All-Weather, maybe everything into All-Weather.

Back in the financial crisis, a reader left a comment about just "putting it all in Hussman" and forget about it. The reader back then didn't specify which funds but since 2008, Hussman's two most prominent funds have compounded at -4.15% and 3.16% versus 7.52% for Vanguard Balanced Index Fund (VBAIX). The two Hussman funds are HSGFX and HSTRX and the data is per Portfoliovisualizer. 

It raises the question though of how much performance should an investor expect or be willing give up for the potential emotional comfort of an All-Weather portfolio. I say potential comfort because even though a strategy or fund is billed as being All-Weather doesn't mean it always will be. 

The Permanent Portfolio Mutual Fund (PRPFX) was an early, retail accessible fund in the All-Weather space going back to the early 90's. Over the long term it has trailed a plain vanilla 60/40 portfolio by 105 basis points annually, 7.19% CAGR versus 8.24% but with only a modestly better standard deviation. Despite the lag, I think 7% annualized is pretty good but there have been longer periods where PRPFX has lagged by much more than that which certainly can be difficult to endure. 

That period ending in May 2000 was relatively bad for PRPFX. I'd argue it all worked out in the end but imagine how you might handle being that far behind in early 2000. That would not have been easy of course there was no way to know how well gold was about to do to help PRPFX catch up over the next few years. 

The prompt for this post is that I wanted to check in on the Cambria Trinity ETF (TRTY) which I view as being a different form of All-Weather. Unlike the 25% each to stocks, long bonds, gold and cash in the Permanent Portfolio, TRTY allocated 35% to trend following, 25% each to equities and fixed income and the last 15% to alternative strategies. I don't know whether those weightings can vary but the numbers come off the home page for the fund.

TRTY only goes back to late 2018 so I build the following to try to replicate it with exposure I believe to be consistent with what TRTY owns.

In terms of being less volatile and faring better during market it turmoil, TRTY Replication has worked looking backwards.

In 2022 it was up slightly versus down 5% for PRPFX and down 16% for VBAIX. It only dropped 6% during the Pandemic Crash in 2020 versus 12% for VBAIX. The overall result does include a few years where it lagged by a lot, really a lot which is important to remember. Any sort of All-Weather is likely to have years where it completely misses some big gains. Is the longer term CAGR of 5.66% worth quite a bit less volatility and what looks like will be shallower declines? 

I'm not bagging on this even a little. I wouldn't say every All-Weather fund/strategy will work as advertised but there enough that do. Is the tradeoff worth it? For some people yes and others, no. There's no single right answer but I do think the odds of someone getting this wrong for themselves is pretty high especially when emotions are at play. I'd bet that Hussman anecdote from above came from a place of emotion given the timing of it. 

The decision to go full All-Weather needs to be a financial planning decision not a reactionary decision to a bear market. An investor is 60, 30-40% ahead of his "number," sure going full All-Weather could be the right decision. Reacting in the middle of 2022 after learning too much was allocated to risk assets? That person will be best off waiting for some portion of the recovery that will inevitably occur and then make their decision about asset allocation when there is less emotion at play.

I do want to take just a second to discern between going full All-Weather versus having holdings with all-weather attributes to help manage the volatility for a portfolio that has something of a normal allocation to equities. FTR, I consider 25% to be well below normal. I use several alt funds that I believe add all-weather in this fashion and I want to be very clear, that is much different than going all in on the idea. 

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.