This will be fun. Meb Faber asked via Twitter for input on well known buy and hold strategies for some research or maybe to update previous work. He gave examples like Risk Parity, Permanent Portfolio, Talmud (never heard of that one), the Endowment Portfolio and there were comments for others including the Ivy Portfolio which is different from the Endowment Portfolio. There were more and Meb included 60/40 in his list too.
It's worth looking at the various portfolios listed, some might be new to you or to revisit ones you've looked at before and maybe do a little deconstruction. One thing you'll see overlap across quite a few of these are large allocations to REITs, like 20%. Twenty years ago +/- it was very popular to suggest 20% weightings to things like REITs and MLPs. On the first version of my blog I wrote regularly back than about what a bad idea that was in terms of thinking you were getting any sort of bear market or drawdown protection.
The yellow highlights are big market events where REITs as measured by VNQ went down pretty much in lockstep with the S&P 500. The green highlights are some instances where REITs just turned down for whatever reason, maybe a little uptick in interest rates but either way. The overall lag in VNQ is a little misleading because Yahoo charts price only and VNQ has historically yielded quite a bit more than the S&P 500. The lag is big, just not that big.
I'm not saying don't own any REITs but circling back to the title of yesterday's post, there's no reason to believe that large allocations to REITs now can help build robust and resilient portfolios. Maybe they used to, maybe something changed but I can't see how 20% could offer any zig when stocks zag. Portfoliovisualizer has the correlation between VNQ and the S&P 500 at 0.74 which is much higher than the S&P 500's correlation to utilities which comes in at 0.43. I wouldn't put 20% in utilities either.
If the argument is that actual real estate offers true diversification benefits, sure. I don't know but I can't refute it and chances are the value of your home was not effected by any of the flash crashes, the mini crash at the end of 2018 or any other stock market events that proved out to be insignificant including The Great Dip Of August, 2024.
A lot of images coming, starting with modeling out the Ivy Portfolio, Talmud Portfolio, and a typical portfolio like we often create for blog posts.
Ivy prepopulated by Portfoliovisualizer
Plain vanilla 60/40 works most of the time even if it is far from optimal (my opinion) so the objective is not to look nothing like 60/40 but to have some resilience or protection when 60/40 gets hit. First, the long term result.
The low and negative correlation that some of the alts in the Typical allow for a slightly higher allocation to equities yet still that portfolio has the lowest standard deviation. I used ACWI instead of domestic equities to be a little truer to Ivy. The performance using the S&P 500 would have compounded about 260 basis points more with only a slight increase in standard deviation.
You can see by looking that Typical held up much better in 2022 because it has holdings that are fairly reliable in differentiating from stocks and bonds, something that I'm saying REITs don't do. In the mini crash in late 2018 the Typical did not stand out but BTAL went up and SHRIX, QSPIX and TFLO all went pretty much sideways. In the 2020 Pandemic Crash it didn't really stand out but again BTAL went up and SHRIX and TFLO went sideways. QSPIX felt that one a little more, it went down about 11% as the S&P 500 was falling 30%. I would note that QSPIX kept trending lower after the market bottomed in that event and I would also note that VNQ was down 38% in the 2020 Pandemic Crash. Despite the lousy year for QSPIX in 2020, the Typical was the second best performer of the four that year. In 2018, EBSIX went up until it's ex-dividend date and in 2020 it went up a little more.
The year by year of all four isn't noteworthy other than 2022. Again, 60/40 "works" most of the time. The idea here is to build in some robustness when things go sideways as they do every so often. 2018 and 2020 were both fast events. The alts generally did what they're "supposed to do" but nothing can always be great.
The point really is about having a basis to believe something you own to diversify equity volatility can actually do it when you need it most. I don't see how REITs can do that and if bonds used to do that, ok but I don't think they do anymore. That ended when the 10 year Treasury hit 58 basis points.
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.
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