Pushing Back On A Big Fish

Dan Solin wrote an article for Advisor Perspectives titled It's Increasingly Difficult To Defend Your Complex Portfolio. Dan is a big fish but there are still things in the article that we can dig into and push back on. With regard to complexity, generally I hope that long time and frequent blog readers will recall my preference for a lot of simplicity hedged with a little bit of complexity. There is an element of relativity though. Simple to Cliff Asness is not going to be the same simple to most of the rest of us. 

Dan goes into detail about how two and three fund portfolios can get the job done and often outperform more complex portfolios over the longer term. The context with these is very broad equity and fixed income exposure. I say this in just about every post on this subject, those types of simple portfolios, just two or three funds, can absolutely get the job done. There will be times during the course of a full stock market cycle where simple, two or three fund portfolios will be painfully suboptimal. 

Any portfolio you could possibly derive will have drawbacks and the major drawback to one of these two or three fund portfolios is they will feel every basis point down during large declines. That should not be any kind of secret, it just how it is and depending on the nature of a given, large decline it could be very painful (repeated for emphasis).

Then Solin does something that might be kind of odd. He says

A simple, two-ETF portfolio – combining a total stock market fund like the Vanguard Total World Stock ETF (VT) with a short-term bond fund like the iShares 1-3 Year Treasury Bond ETF (SHY) or the Dimensional’s Ultrashort Fixed Income ETF (DUSB) – could be more than adequate for most investors.

If you are reading this blog, it's a good bet you do a lot of stock market reading. How many articles advocated  just T-bill exposure all those years as rates were going down? How many pundits, besides me, were talking about keeping duration very short and finding yield in other places? Maybe Dan was, just the T-bill part apparently, but there were very few doing so. Yes, calling myself out like that is probably not so cool but I've been doing that for ages and was clearly very early in terms of when duration became a problem. And if he has always advocated for nothing but T-bills for fixed income exposure, he had clients getting essentially no yield out of what was probably a large portion of the portfolio, figure most fixed income allocations range from 30-50%. When T-bills had little to no yield there were plenty of fixed income sectors that had yields in the threes maybe up into the low fours without taking on duration risk. 

If you know, whether he was calling for putting all the fixed income exposure into T-bills before 2022, please leave a comment but this doesn't sit right. It's either hindsight bias or he subjected clients to no opportunity for any return for their fixed income allocation for a long time. Some T-bills with no yield? Sure. Nothing but T-bills with no yield? Yeah, I don't know about that. 

He then pivoted to pick on alternatives. A lot of them are expensive yes. Many of them do not offer as much diversification as they are touted to do. As we try to sift through here frequently, many of them don't really "work" the way they are supposed to. 

Citing John Rekenthaler from Morningstar, Solin said "He (Rekenthaler) found that the returns of all alternative categories positively correlated with the bond fund, with seven of the 10 categories posting a high correlation."

I posted a similar table recently. I feel like with a little selectivity, the correlation can come way down. Maybe more important than the correlation stats is that worst performer in 2022 listed above was down 3.37% versus 13.03% for the iShares Aggregate Bond ETF (AGG) which tracks a much more likely bond benchmark for advisors than putting the entire fixed income allocation into T-bills yielding zero. 

Being skeptical about alts is important, while I enjoy studying them, I've said countless times that I study far more than ever make it into the portfolio. 

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.