Adapting Bob Elliott's Simple Game Plan Portfolio

Today's rabbit hole comes courtesy of Bob Elliott from Unlimited Funds. The starting point was the futility of trying to time the market. He didn't use what I think is a great example choosing all out sitting in cash or all in in a portfolio of 30% equities, 55% bonds and 15% commodities. That allocation was referred to in the post as 'assets.' I don't know how he came to choose that allocation, maybe the Unlimited Hedge Fund ETF (HFND) was similarly allocated at one or more points but doesn't appear to be now based on the fact sheet. Regardless, being invested in 'assets' outperformed cash while obviously being more volatile.

I'm not going to make an argument for actual market timing but I think we can dovetail to a concept that I take from John Hussman, others probably do something similar. There are ways to take an inventory of when risks are elevated or maybe less so. A simple example from previous posts a long time ago is that there is less risk of a large decline in equities immediately after a large decline in equities. When a chart goes up in parabolic fashion, risk of a decline goes up. There are many other equally simplistic rules of thumb that fit in this discussion. 

Quantifying it just a bit, when an index like the S&P 500 goes below its 200 day moving average (DMA), it indicates a problem with demand for equities. The problem may or may not turn out to be serious but still a problem of some sort. In terms of putting on some defense based on a breach of the 200 DMA and to Bob's point, going all out is going to be a very bad bet more often than not. All out is a whole different matter versus putting on a little defense, like adding an inverse fund or a long VIX fund or something else that would be likely to go up when stocks go down. 

Also related to the 200 DMA is how far the index is from the 200 DMA. Although it doesn't happen very often, a 20% gap between the index and the 200 DMA has historically not been sustainable and a good time to buy when the index is 20% below the 200 DMA or a good time to get defensive when the index is 20% above the 200 DMA. Not get out entirely, just get defensive a little whether that means reducing exposure or adding negatively correlated assets.

I've acted on this just a couple of times, it doesn't happen often, with just an incremental change to the portfolio. The mindset should not be that you are trying to time the market like you are hitting a bottom because that is unknowable in real time. The mindset should instead be that you are buying low. If you buy something after a 25% decline, you are buying low but it absolutely could go lower. It is hopefully a more comfortable mindset for a task, buying after a large decline, that is generally uncomfortable. 

Included in the blog post was a link to a blog Bob wrote in 2023 about a portfolio he called A Simplified Game Plan (SGP). SGP allocates as follows;

I started to map out a portfolio to match this allocation idea and then it occurred to me that I probably wrote about this before and sure enough I did. I put together the 2024 version before I remembered that I wrote about it in 2023. I labeled each version accordingly.

There were a couple of holdovers including client and personal holding ASFYX. Part of SGP portfolio drifts into All-Weather by Ray Dalio which makes sense because Elliott worked at Bridgewater. Portfolio 3 below is just QDSIX which strikes me as being a variation of all-weather and I used client and personal holding BLNDX as the benchmark which is marketed at an all weather portfolio. As I read what I just wrote, maybe SGP is just flat out a variation of all weather. 

The 2024 version has a much lower volatility and return because it takes a lot less risk with the diversified alpha sleeve. 10% each into two stocks as we did with the 2023 version is very much a live by the sword, die by the sword approach. QDSIX is a fund of AQR funds whose largest allocation is to AQRIX which is sort of risk parity fund. It used to be called AQR Risk Parity. All four offered crisis alpha in 2022. The worst performer was the 2023 version which was down 2.81% versus a drop of 16.87% for the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. 

In one of the two posts from Bob was this link to a short Ray Dalio video explaining how he gets to believe 15-20 uncorrelated income streams makes for a Holy Grail portfolio. The results of both SGP versions are interesting but do they pass the uncorrelated return stream test?

Well, yeah kind of. It looks like mostly lowish correlations but we've done better in previous blog posts, still though its decent. The 2024 version was only up slightly in 2023 and is not up very much this year either. The portfolio is valid IMO but as is the case with any valid portfolio there will be periods that try an investors patience. 

And just for fun

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