A Panic Sale Waiting To Happen

This is a little bit of a follow up to yesterday where I mentioned the Global Asset Allocation as mentioned in a paper by Meb Faber. Today, Meb Tweeted out a reference to the Atlas Lifted report from Robeco which references a similar idea, the Global Market Portfolio which is allocated as follows.

I was able to find this version of what Meb was talking about in his paper. Meb's GAA includes commodities which are conspicuously missing from Robeco.

The overlap with yesterday's post is to reiterate the extent to which broad based diversification has lagged the S&P 500 for an extended period. 

I built out the following to replicate the Robeco allocation, GAA by Meb and then a portfolio consistent with yesterday's post about setting without completely forgetting. 

BTAL is a client and personal holding. And the results compared to the S&P 500.

Comparing a multi-asset portfolio against 100% equities is obviously not an apples to apples but the context is the frustration that sets in when a valid asset allocation can appear to struggle so much on a relative basis. "Well, why I don't I just buy the S&P 500?" 

Part of the lag of the two global allocations is they are both underweight equities versus something like the Vanguard Balanced Index Fund (VBAIX) which is a proxy for a 60/40 portfolio. For the above backtest, VBAIX had a CAGR of 9.01%, standard deviation of 10.58 and a Sharpe Ratio of 0.69.

An investor going through some sort of process that determines that 45% equities is right for them is going to be bummed out when stocks go up a lot. An investor who goes through some sort of process that determines 85% equities is right for them is going to be bummed when stocks go down a lot. 

Now layer on top of that the machinations of what is driving the S&P 500 lately as shown below.

That's not quite a Mag 7 chart but the signal is similar. The market is distorted. That is not unprecedented but history shows that chasing these sorts of distortions ends badly. 

RSP is an ETF that equal weights the S&P 500, GSPC is the S&P 500 Index which is of course market cap weighted and MAGS is an ETF that just owns the Magnificent 7 stocks. The MAGS are driving the S&P 500. As big as the gains have been for MAGS, think back to the summer where you can see that decline. From mid July to the bottom of that dip, RSP fell 3.2%, the S&P 500 fell 8.4% and MAGS fell 18%. Having an allocation to something that moves like that makes sense in the context of constructing a diversified portfolio but going heavy into that sort of volatility is a panic sale waiting to happen. 

Going back 24 years, VBAIX compounded at 6.99%. $10,000 invested on November 30, 2000 would have grown to $50,820 according to testfol.io. That result, combined with an adequate savings rate and no panic selling along the way is enough to get the job done. VBAIX is far from optimal in my opinion but it still can get the job done. For plenty of people, the 6.45% backtested with the Robeco portfolio can get the job done. The important thing is remembering that is you have built a valid allocation strategy with weightings chosen to meet your needs, that's going to get the job done over a longer period even though it will absolutely frustrate you here and there over shorter periods. 

The Invesco S&P 500 Momentum ETF (SPMO) always backtests well but I can almost promise you that going heavy into that one alone will lead to two or three different occasions out in the future of "Goddammit, why do I own that fund?"

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