Author Topic: Duplicating The All-Weather Fund Using Low-Cost ETFs  (Read 749 times)

bthewalls

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Duplicating The All-Weather Fund Using Low-Cost ETFs
« on: November 06, 2018, 04:11:01 AM »
hello all,
I've started to realize that its quicker and better to ask stuff here than spend 10 years trying to learn it while working to achieve FIRE....

Here's the story.  Im going to liquidate everything and retire at about 45 and I need a no nonsense 'lower' risk investment strategy for end game. From what I can see the best is Ray Dalio's all weather portfolio.  This explains it: https://seekingalpha.com/article/3350735-duplicating-the-all-weather-fund-using-low-cost-etfs

Wonder could the more experienced mustachios comment on what I need to consider before allocating as per Dalio's recommended ratios?  I'm going all in on this i.e. it will affect the kids inheritance if I balls this up. As Dalio says, be brutally honest with me.  Any constructive advise really appreciated.

Baz


Dman214

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #1 on: November 06, 2018, 04:46:45 AM »
Ray Dalio is a smart guy so I'm sure this portfolio will do just fine over the long term.  However, personally (like MMM) I'm not a big fan of gold and commodities, and the bond portion seems a little riskier today given that interest rates are rising after the 30 year bull market for bonds. 

There are many threads over at bogleheads discussing the all weather portfolio, which will be helpful as you consider this option: https://www.bogleheads.org/forum/viewtopic.php?t=151127


Andy R

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #2 on: November 06, 2018, 09:20:26 AM »
Here is something that never made sense to me.

Ray Dalio had a very spefic strategy. He decided to lower risk (and return since risk & return are linked) by having much more fixed income and less equities, then increase return (and risk since risk & return are linked) by leveraging up equities. So overall the portfolio has a fairly similar risk and return to a more "normal" portfolio.

What I never understood, is how is it that Tony Robbins thinks it is perfectly fine to just completely leave out the leveraging part of this strategy and expect such a low risk low return portfolio to be comparable just because he name drops "Ray Dalio" as though leaving out a massive fundamental part of the strategy is somehow still related to the original portfolio of Ray Dalio?

This is a serious question, because it makes no sense to me whatsoever, and these threads that occasionally popup saying how great it sounds, never mention it, for the simple reason that Tony Robbins appears to have just left it out and thought that telling you half the story was acceptable, and now the reader is completely unaware of it.

When you retire at 45, I hope you're not planning on using the 4% rule with that allocation.
« Last Edit: November 06, 2018, 09:28:15 AM by Andy R »

Tyler

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #3 on: November 06, 2018, 09:21:37 AM »
FYI -- Tony Robbins refers to the personal version of the All Weather portfolio as the All Seasons portfolio.  If you haven't already, you might want to also give his book on the subject a read.

For my own analysis, this is a little old but still relevant: https://portfoliocharts.com/2016/01/04/investing-for-all-seasons/

My biggest critique is not so much with the portfolio itself but for the conveniently cherry-picked timeframe that Robbins uses to compare it to other options.  Bump that back a few years to the 70's and you can start to see where it might struggle.  So if you want to see the big picture, try this page that studies the same portfolio for every start and end date simultaneously.  If the portfolio works for you not only in the good times but also in the bad times, then you should be good to go.  :)

BTW, if you're looking for ETFs to build this portfolio for yourself then you might want to browse this tool.  It will help you find more options to consider than the ones listed in your link.  It's not that they're bad recommendations, but depending on your brokerage there might be better options for you personally.

CorpRaider

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #4 on: November 07, 2018, 07:55:50 AM »
Yeah, levered long bonds could get smoked in a 70's style stagflation environment, especially in real returns.  But I suppose that's not really what you asked.

MustacheAndaHalf

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #5 on: November 07, 2018, 09:35:40 AM »
"the fact that since the late 90s, gold has outperformed the Dow, the S&P 500, as well as Berkshire Hathaway"

This is a highly misleading claim about gold.  First, "90s" is false: only 1999 works for this comparison.  If you start in 1998 or any earlier year in the 1990s, the stock market beats gold.

And this neatly avoids a 1990-1999 time frame where US stocks gained 18%/year.  They skip the bull market, and include the dot-com crash in order to make gold look good.  It's highly misleading to include a crash, but not the bull market.
« Last Edit: November 07, 2018, 09:38:03 AM by MustacheAndaHalf »

bthewalls

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #6 on: November 07, 2018, 02:06:50 PM »
ok, thanks all.

so the question is...1) what is the idea low risk portfolio (I know this is low return) and 2) what is the ideal bear market portfolio...I know most of you trust the market more and play a higher risk long term strategy, but im not there yet.

2008 was sore!.....finanical PTSD..lol...

Andy R

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #7 on: November 07, 2018, 08:05:33 PM »
ok, thanks all.

so the question is...1) what is the idea low risk portfolio (I know this is low return) and 2) what is the ideal bear market portfolio...I know most of you trust the market more and play a higher risk long term strategy, but im not there yet.

2008 was sore!.....finanical PTSD..lol...

I would say you need to figure out your AA rather than looking for some "special" portfolio.

This might be worth seeing a fee-for-service financial advisor, but you would need to be careful to explain it is a single session to figure out your AA and that you do not want to be introduced to any of their (b.s.) products, so I don't know where you would look for one. I wonder if it is worth contacting the guys from Rick Ferri's new site (core-4.com), I have a lot of respect for Rick Ferri. I have never used them though, just going entirely by the fact that it is Rick Ferri's.

One of the simple questions to ask is, how much can you tolerate your portfolio dropping by? Lets say you have 1mil and you can tolerate it dropping down to 750 in a bear market but at 700 you would just lose your mind and panic, then you would double the 300k max loss and put no more than 600k into equities, and the rest into fixed income.
Here is a post from someone explaining it well:

Quote
Pick an Asset-Allocation that you can stick with, even if the market crashes 50% starting tomorrow.

Because it might.

If you are young, and feel like you have a high risk tolerance, this might mean 100% stocks.

If you are nearing retirement, this might mean 40/60 stocks/bonds.

It's a personal choice though.

Just understand that the market WILL crash at some point. Maybe even tomorrow.

So pick an AA with which you can "stay the course".

And then you don't have to worry about the market crashing anymore. Because you're already prepared.

Someone posted this for me on another forum when I asked for more info on how to figure out your AA, so that might be helpful to you also.
https://www.cbsnews.com/news/asset-allocation-guide-dealing-with-conflicting-goals/

The bottum line is you need to have an AA that lets you sleep at night.

Radagast

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #8 on: November 07, 2018, 08:31:15 PM »
ok, thanks all.

so the question is...1) what is the idea low risk portfolio (I know this is low return) and 2) what is the ideal bear market portfolio...I know most of you trust the market more and play a higher risk long term strategy, but im not there yet.

2008 was sore!.....finanical PTSD..lol...
This is kind of personal and there is no easy answer. Over the long term (like 80 years) 90%+ stocks is expected to be lowest risk, if extrapolating the past 150 years into the next 80 years is a sound technique. Over the short term (like two years), 90% bonds 10% stocks is lowest risk. Somewhere in between is the lowest risk balance for a given time period. Academics like 30% stocks 70% bonds (ish) because it results in a high Sharpe Ratio which they seem to think is meaningful. Many personal finance advisors lean more towards 70% bonds 30% stocks, as it has enough stocks for high long term returns and enough in bonds to be secure.

I strongly recommend:
At least 50% stocks
Not more than 40% bonds, but not less than 10%
Of the stocks, 20%-50% should be foreign stocks (or use market weight)
For bonds, try to approximate market duration and market yield unless you can safely get a higher yield (for example using high yield FDIC accounts)
If you fall outside of this you are foreseeably likely to end up poorer than you should.

For example; 25% US stocks, 25% foreign stocks, 25% personal income real estate properties in several economically diverse areas, 25% bonds/cash; is a nice diverse allocation that is both stable in a huge array of financial environments and should also give good returns.

MustacheAndaHalf

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #9 on: November 08, 2018, 04:45:08 AM »
@bthewalls - What maximum loss can you tolerate over time?  (within a year, or over several years)

I think you want as high an equity allocation as your fear will allow.  Here's an example of the largest losses from 3 different allocations of US stocks and US bonds, from 1979-2018 (the past 40 years):

100% US stocks :  -51% (late 2007 - early 2009)
50% US stocks / 50% intermediate term bonds :  -22% (late 2007 - early 2009)
25% US stocks / 75% intermediate term bonds:  -8% (late 2007 - early 2009)

It's also worth keeping in mind that 100% US stocks resulted in almost triple the money as 25% US stocks.  You should keep checking on your ability to tolerate rough markets, because 25% stocks will almost certainly delay your retirement.

There's also some studies on correlations of asset classes that might help you smooth out your portfolio.  I would suggest trying international stocks and REITs (real estate investment trusts) in your portfolio.

Indexer

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #10 on: November 08, 2018, 05:23:49 AM »
I much prefer a Bogleheads 3-fund or 4-fund portfolio over the all weather.

The all weather portfolio confirms for me that back testing has gone too far. It's very heavy in long term bonds and the back testing covers a period where long term bonds did very well. Rates started high and have been falling for decades. It is highly unlikely that you would get the same returns off long term bonds when you are starting out in a low interest rate environment with rates rising over time.


ok, thanks all.

so the question is...1) what is the idea low risk portfolio (I know this is low return) and 2) what is the ideal bear market portfolio...I know most of you trust the market more and play a higher risk long term strategy, but im not there yet.

2008 was sore!.....finanical PTSD..lol...

This link is a good starting place:  https://about.vanguard.com/what-sets-vanguard-apart/principles-for-investing-success/ICRPRINC_042017_Online.pdf

Page 10 is especially useful.

Here is a picture.



The number in the middle of each bar is the average return. The number under each bar is the worst year. Find the balance of returns VS risk that works for you. If you have a lot time before you will need the money I wouldn't get any more conservative than 60% stocks and 40% bonds.

Tyler

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #11 on: November 08, 2018, 08:59:15 AM »
ok, thanks all.

so the question is...1) what is the idea low risk portfolio (I know this is low return) and 2) what is the ideal bear market portfolio...I know most of you trust the market more and play a higher risk long term strategy, but im not there yet.

2008 was sore!.....finanical PTSD..lol...

One of the important things I've learned over years of studying asset allocation is that there's no single "ideal" portfolio suitable for all people.  As you can see in this thread, intelligent people can have strong opinions about very different investing styles.  IMO, the most important thing is to find one that you're personally comfortable with and will be willing to stick with through thick and thin. 

Try browsing this collection of portfolios.  Note that it contains several options mentioned in this thread (All Seasons, Three Fund, Core Four) and many more.  Find a handful that speak to you, and read the recommended source materials to understand how they work.  Take your time to fully internalize your investing plan, and I'm confident you'll be fine no matter what you choose. 
« Last Edit: November 08, 2018, 09:02:44 AM by Tyler »

OurTown

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #12 on: November 08, 2018, 02:53:09 PM »
Take out the gold and the commodities, don't touch the leverage (except for your home mortgage!  ha!).  Trim the bonds back to about 40%.  Divvy up the stocks between US and international.

Hey, I'll be damned.  You've got yourself a 3-Fund Portfolio!

ETA:  If you want something a little sexier, this one has a few tilts:  http://www.coffeehouseinvestor.com/coffeehouse-beans/coffeehouse-portfolios/


bthewalls

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #13 on: November 08, 2018, 03:13:33 PM »
thanks all....am going through all the resources you all are sharing and want to say thanks (with an irish accent).

It is to naive to think that if I had the balls and enough time, and went 80% stock and only 20% bonds and ride out any crashes without selling, it has to go up eventually? or is this crazy thinking....I am not in a rush since when I FIRE, i'll still trickle at work (I know thats a bad word...I kinda like my work and will hang my head in shame)...

I'm assuming that except in the event of a castrosphic meteor impact/nuclear winter/alien invasion, markets eventually rise on average every decade+.....

I'm also aware that the post 2008-current time graphs are not an accurate picture of a normal multi decade scenario. Markets are crazy high in recent times.


Andy R

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #14 on: November 08, 2018, 08:24:22 PM »
It is to naive to think that if I had the balls and enough time, and went 80% stock and only 20% bonds and ride out any crashes without selling, it has to go up eventually? or is this crazy thinking....

I don't think you can just say "Hey I will suck it up".
Say your target to retire is 1.5m and you are up to 1m, you can't really just "suck it up' when your 1m drops steadily over a couple of years, the whole time you don't know when it will stop dropping and you see a decade or more of savings disintegrate, more and more every day with no end in sight, down to 800k, steadily to 700k, eventually dropping below 600k, then down towards 500k not knowing when it will stop. Some people can tolerate this. Some can't. I don't think it's something to be ashamed of by saying one doesn't have "the balls" to tolerate something like this. I think someone would have to be a freak of nature to be able to tolerate it.

That link I posed by Larry Swedroe says to find an allocation based on each of ability, willingness and need to take risk, and using the lowest, to ensure you don't screw it up and end up worse than if you just did it sensibly.

I am not in a rush since when I FIRE, i'll still trickle at work (I know thats a bad word...I kinda like my work and will hang my head in shame)...

If you can continue working, work acts as a form of bonds (as does SS, pension, rental income, lack of paying rent if you own your own home - they all reduce your market risk when the market goes down which is the point of bonds).

If you actually don't mind your work and are able to continue, you have it made! You are truly one of the lucky ones. This changes everything. You now don't have a "need" to take more risk than you are comfortable with, and can just focus on your ability and willingness to take risk. We are not all in your fortunate situation, which is why some of us are forced to take more risk whether we like it or not. If you don't need to do it, why on earth would you?

bthewalls

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Re: Duplicating The All-Weather Fund Using Low-Cost ETFs
« Reply #15 on: November 09, 2018, 12:37:00 PM »
Hello Andy!.
why would I take the risk indeed.....

2 reasons.  first, I want to understand how you are all doing this, in case I want to retire completely.  I am only starting to understand/study this.  Second, I want to set up my investment strategy for long terms gains so that my eventual retirement is max'd out.

my philosophy might seem odd andy, but I'm 43.  Im dead in 40 years give or take.  I want to max out life while im here rather than look back and wish I had of had 'the balls'....but I dont know enough yet about these economic strategies and I dont want to damage the kids inheritance...or they will dump me in a cheap nasty old folks home and leave me on a commode...:-)

I'm still trying to understand is it that: bonds provide the base line income and the stock vs gold vs commodities hedge aginst crashes, inflation and provide the rest 25% of the time at a 4-9% ish return....(I studied the wrong stuff at uni andy). Its very complex.

Barry