Regret Waiting To Happen

In response to yesterday's post about Matt Tuttle's take on the Permanent Portfolio, a reader Tweeted that his preferred version is to allocate 1/3 each to ReturnStacked Global Stocks and US Bonds (RSSB), gold and KMLM which is a managed futures ETF. RSSB is 100/100 so the mix has four quadrants, each at 33 1/3%.

A few days ago we looked at a similar portfolio to what the reader suggested that used PSLDX which is a much older 100/100, domestic equities and long bonds. Then I removed the bonds, just equities and the results were better so that was my first thought today, peel out the bonds and what does that do?

To be clear, Portfolios 1 and 2 are equally weighted between those three funds.

I took PRPFX out to declutter the drawdown chart. In the bigger events, both 1 and 2 went down less but you can see a long stretch of meandering as both gold and managed futures struggled through much the 2010's. There were also a few very difficult individual years in there too. In 2013, Portfolio 1 was down 4.59%, Portfolio 2 was down 0.99% while VBAIX was up just over 18%.

If we shorten up the original backtest to go back to KMLM's actual inception, the results for Portfolio 2 look a little better versus Portfolio 1.

The improvement is likely attributable to managed futures and gold doing much better in this decade versus the previous decade. If we just look at the 2010's, the idea would have been almost impossible to stick with.

After gold peaked in 2011 it trended lower for awhile and became more of an afterthought. Managed futures was not something that too many people even knew about. In fund form back then, managed futures never was, let alone becoming an afterthought. I stumbled into managed futures by accident in 2007 and bought RYMFX, then came AQMIX in what I believe was 2010 and the a few others in 2013/2014. I stuck with RYMFX for quite a while but that was much easier at 3% or so versus 1/3 or 1/4 of a portfolio.

Owning this portfolio would be very difficult the next time gold and managed futures both struggle. It happened in the 2010's so it can happen again. There's a lot to be said for quadrant-like sleeves but going so big is regret waiting to happen.

We haven't isolated it out this way before, looking at just the 2010's. Having some gold and having some managed futures is a good idea for portfolio robustness but at some point it is too much because the risks/vulnerabilities overlap some. The risks/vulnerabilities are not identical, but there is a lot of overlap. 

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