Can this portfolio beat VTSAX with less risk?

[index]

This portfolio is my attempt to mirror or beat the performance of a 100% equity portfolio with less drawdown risk. This idea was discussed on bogleheads, but did not get a lot of traction. Most strategies rely on treasuries/bonds to provide ballast and actually outperform a 100% equity portfolio through rebalancing. I tend to think bonds/treasuries are not the low risk asset they once were with rates hovering near zeoro.

I constructed the following portfolio aiming to achieve the kind of Sharpe Ratio offered by the funds holding treasuries:

20% - BAR - Gold
20% - VPU - Utilities
20% - VDC - Consumer Staples
20% - VGT - Technology
15% - XBI - Biotech
5% - BRK.B - Berkshire (substitute your favorite ETF here)

The above were chosen due to having low correlation similar to equities and bonds:



The portfolio had a sharp ratio of 1.0 from March 2006 till today which is higher than any one of the portfolio components. Here is the performance versus the Boglehead 3 Fund Portfolio and S&P 500 (VTSAX):



I used sector mutual funds to extend the back test back to 1986 and compared it to both Wellington and the S&P500:



Here is a comparison of the back tested mutual fund portfolio to the ETF portfolio:



What do you all think? Is relying on the historical correlation of these sectors back to 1986 going to hold true going forward? I tend to think technology and biotech innovation will continue into the future, but is pick these sectors to outperform cherry picking based on historic data?

[ChpBstrd]

TQQQ, a triple-leveraged nasdaq ETF, has a Sharpe of 1.2 and would have turned a $10,000 investment back in 2011 into $740k today.
https://research.tradeking.com/research/etf/performance.asp?mcsymbol=TQQQ
https://screener.fidelity.com/ftgw/etf/goto/snapshot/performance.jhtml?symbols=TQQQ

:))

That said, it looks like the proposed portfolio is a barbell of sorts, with high-growth tech/biotech on one side and safety-oriented staples/utilities/value on the other. Exaggerated rebalancing between these trends is partially responsible for the outperformance of the Vanguard 500, and you would have had to follow a rebalancing regimen religiously in order to actually realize the results produced by the backtest. However, there is another factor at play here: All tested timeframes featured an environment of falling interest rates and inflating PE ratios, particularly among the techs, PLUS a set of economic crises every 8-12 years that reversed within months or years, causing rebalancing strategies to shine.

The next 20 years could look different: rising interest rates, falling PE ratios, falling tech spending, increasing rather than decreasing competition among tech firms - some of which could be from Chinese companies that most of us would consider un-investable, a pressured middle class that gravitates toward generic products like in the 1980s or develops Japanese-style spending patterns, or simply a lack of any big crisis for the next 20 year. If healthcare spending gains another 4% of GDP like it did in the past 20 years, calls for a government run system will grow louder. The U.S. could develop a large "public option" or rewrite patent laws in a way that drains funds from the pharmaceutical/biotech industry, etc. There are certain trends that occurred over the past 20 years which simply cannot continue. We went from spending zero hours staring into smartphones to a world where 60% of us spend 5 hours or more per day doing that. There is physically not another 5-6 hours for technology to take. Interest rates cannot drop yet another 5%, because they'd be deep into negative numbers.

It's hard to imagine, but in many ways the future has to look different from the past. If the trends that made the last 20 years are unsustainable, then they have to break in one way or another. What if the way they break rewards firms in the middle of the barbell, which are not too risky but not too conservative either? As tech/biotech PE ratios collapse, and utility/staples margins fail to keep up with rising inflation, maybe these mid-value firms just keep chugging along making money and growing? Or maybe if we finally have a quiet couple of decades without major rebalancing opportunities, maybe barbell approaches lose out to the steady growth of the index? Then again, maybe we're all taking way too much risk given the demographic crunch, debt issues, and geopolitical competition facing the U.S. and the right answer will have been 100% utilities. There's no telling what lies in the future, but we at least know in some ways it cannot look like the past.

 https://www.statista.com/statistics/1224510/time-spent-per-day-on-smartphone-us/

[Radagast]

I think it is a good start. I doubt there is more fundamental reason to believe in factor funds than sector funds, and loads of people use factor funds. I would caution that you chose to overweight two of the sectors that out performed over the period, while completely ignoring international companies which as a whole did relatively poorly. Also I would feel very uncomfortable with 20% gold.

There are three additions I would recommend:
1. Long term treasuries (EDV or VGLT). These are not ballast, they are pure risk, of both upside and downside. A useful counter point to gold.
2. Emerging markets stocks. Similarly low correlation to anything you chose, and at least as conceptually different.
3. International small cap (or small cap value) stocks. Same as above.

So now you have an 8 fund portfolio, but it is much better diversified, and less prone to backtesting errors.

Also it meets my universal criteria: at least 50% in stocks, not more than 50% in US stocks, 10-40% bonds, include a meaningful international allocation, a real asset is useful.

https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=2&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VPU&allocation1_1=20&allocation1_2=12&symbol2=VGT&allocation2_1=20&allocation2_2=13&symbol3=VDC&allocation3_1=20&allocation3_2=12&symbol4=XBI&allocation4_1=20&allocation4_2=13&symbol5=IAU&allocation5_1=20&allocation5_2=12&symbol6=VEIEX&allocation6_2=13&symbol7=TLT&allocation7_2=12&symbol8=VINEX&allocation8_2=13

https://www.portfoliovisualizer.com/asset-correlations?s=y&symbols=VFIAX+VPU+VGT+VDC+XBI+IAU+VEIEX+TLT+VINEX&timePeriod=4&tradingDays=60&months=36

[index]

TQQQ, a triple-leveraged nasdaq ETF, has a Sharpe of 1.2 and would have turned a $10,000 investment back in 2011 into $740k today.
https://research.tradeking.com/research/etf/performance.asp?mcsymbol=TQQQ
https://screener.fidelity.com/ftgw/etf/goto/snapshot/performance.jhtml?symbols=TQQQ

:))

That said, it looks like the proposed portfolio is a barbell of sorts, with high-growth tech/biotech on one side and safety-oriented staples/utilities/value on the other. Exaggerated rebalancing between these trends is partially responsible for the outperformance of the Vanguard 500, and you would have had to follow a rebalancing regimen religiously in order to actually realize the results produced by the backtest. However, there is another factor at play here: All tested timeframes featured an environment of falling interest rates and inflating PE ratios, particularly among the techs, PLUS a set of economic crises every 8-12 years that reversed within months or years, causing rebalancing strategies to shine.

The next 20 years could look different: rising interest rates, falling PE ratios, falling tech spending, increasing rather than decreasing competition among tech firms - some of which could be from Chinese companies that most of us would consider un-investable, a pressured middle class that gravitates toward generic products like in the 1980s or develops Japanese-style spending patterns, or simply a lack of any big crisis for the next 20 year. If healthcare spending gains another 4% of GDP like it did in the past 20 years, calls for a government run system will grow louder. The U.S. could develop a large "public option" or rewrite patent laws in a way that drains funds from the pharmaceutical/biotech industry, etc. There are certain trends that occurred over the past 20 years which simply cannot continue. We went from spending zero hours staring into smartphones to a world where 60% of us spend 5 hours or more per day doing that. There is physically not another 5-6 hours for technology to take. Interest rates cannot drop yet another 5%, because they'd be deep into negative numbers.

It's hard to imagine, but in many ways the future has to look different from the past. If the trends that made the last 20 years are unsustainable, then they have to break in one way or another. What if the way they break rewards firms in the middle of the barbell, which are not too risky but not too conservative either? As tech/biotech PE ratios collapse, and utility/staples margins fail to keep up with rising inflation, maybe these mid-value firms just keep chugging along making money and growing? Or maybe if we finally have a quiet couple of decades without major rebalancing opportunities, maybe barbell approaches lose out to the steady growth of the index? Then again, maybe we're all taking way too much risk given the demographic crunch, debt issues, and geopolitical competition facing the U.S. and the right answer will have been 100% utilities. There's no telling what lies in the future, but we at least know in some ways it cannot look like the past.

 https://www.statista.com/statistics/1224510/time-spent-per-day-on-smartphone-us/

I think you're right regarding trying to predict the future. I think there are some things we can speculate on being high probability events and invest accordingly. I really like Ray Dalio's book about monetary history and the rise and fall of nations:

https://www.principles.com/the-changing-world-order/  (free)

It is fascinating to see the rise and fall of nations over time and the impact that has on those countries monetary system. I had no idea the US has been on and off the gold standard twice now. Once around the civil war and again in the 70's. Also the breaking down the debt cycle is fascinating. The US has already printed their way out of debt once, returned to the gold standard, and started the cycle again. Spain, the Netherlands, and England have done the same since the 1600's. The big themes I see going into the future are:   

• The current debt cycle is closer to ending than beginning. This is important because it means at some point, debt will be reset most likely by inflation or currency debasement.
• The US has enjoyed having the primary reserve currency since the end of WWII. The USD will not be the primary reserve currency sometime within my lifetime
• fossil fuels are on their way out and will be replaced by nuclear (fusion/fission), solar, and wind
• advances in technology and medicine will continue - whether this is lead by the US as I have assumed in my asset allocation remains to be seen

I do not believe bond yields can increase substantially. We are too late in the debt cycle. Bond yields will continue to bounce around near 0 and monetary expansion and inflation will whittle away at debt. This means those in debt will be rewarded while those holding will tread water.

The US is going to continue to benefit from reserve currency status for some time. Our companies will continue to be rewarded by being able to borrow money below their return on equity. Emerging markets and international companies keep the demand for dollars high and it keeps their growth down as they have to borrow at higher rates.

The end game in 20-40 years probably looks something like Eurpoe today. Specialty manufacturing and services with very slow growth.

[ChpBstrd]

I also find Dalio’s ideas fascinating. They are a cautionary tale about extrapolating the past into the future, which is what we are all doing when we use a particular currency to buy particular financial instruments that exist within a particular legal era, because they did well for a couple of generations in the past. Dalit also gets me thinking about how things change - it’s because things have to change.

There is however an element of early 20th century classical economics to Dalio’s assumptions. He explicitly states in some places that as debt levels increase, there comes a point when interest rates increase (as a result of investor reactions to risk and leverage). Rising rates choke economic growth, which makes the debt more burdensome, etc. This is at odds with the expectation of a low interest rate future. Such theories have an element of unfalsifiability, because year after year the theoretical tipping point  seems just around the corner. People were talking about imminent hyperinflation in 2010 too. Still waiting.

[index]

I also find Dalio’s ideas fascinating. They are a cautionary tale about extrapolating the past into the future, which is what we are all doing when we use a particular currency to buy particular financial instruments that exist within a particular legal era, because they did well for a couple of generations in the past. Dalit also gets me thinking about how things change - it’s because things have to change.

There is however an element of early 20th century classical economics to Dalio’s assumptions. He explicitly states in some places that as debt levels increase, there comes a point when interest rates increase (as a result of investor reactions to risk and leverage). Rising rates choke economic growth, which makes the debt more burdensome, etc. This is at odds with the expectation of a low interest rate future. Such theories have an element of unfalsifiability, because year after year the theoretical tipping point  seems just around the corner. People were talking about imminent hyperinflation in 2010 too. Still waiting.

Agreed about extrapolating the past into the future and denominating in a currency implicitly buying into that narrative. The question is what is the right way to invest moving into the future?

I would like to invest in China, but they are not shareholder friendly to foreign investors. EM and international are being trashed by having to buy US dollars which the treasury is happy to print as long as they can to keep our domestic companies happy and debt manageable. For the near/middle term - I think that means stay invested domestically and take advantage of the USD position as the reserve currency.

I don't like the 20% gold allocation, but it is the only uncorrelated asset i can find that is not a bond. I think tech and biotech benefit from cheap debt and utilities are actually in a good position for the first time in 30 years as the nation's transportation infrastructure electrifies. Right now the utilities own the means of production and buy fossil fuels from the big energy companies. This will lessen as the grid transitions in a green direction. I don't know if you keep up with the advances happening in fusion energy, but there is a chance the utilities will own all the means of production and generation.

Here is the theory behind the portfolio (posted previously on bogleheads):

I don't think bonds are an ideal asset class going forward, but the negative correlation to equities makes them ideal for risk parity strategies. Risk parity works because the negative correlation of LT Treasuries blunts the decline of Equities - rebalancing and leverage allows the strategy to outperform. My idea is to use less volatile equities and gold to accomplish the same goal. Gold is not as efficient as LT treasuries as a hedge so the equity portion has to be less volatile. What are the least volatile sectors in the market? Here is an equal weighted sector portfolio with risk decomposition shown:
   


Utilities, Consumer Staples, and Healthcare

Here is a back test of an equal weight portfolio of these low risk sectors:



I wanted to incorporate my theme of continued American innovation and include technology. I like that utilities have heavy debt loads (benefit from money expansion) and they should benefit from electrification of vehicles. Here is the same portfolio with technology added in:



Now continuing with the theme of American innovation - I wanted to add biotech to the portfolio. I really like the ETF XBI - which tracks an equal weighted small cap biotech index. If you look at my first post - XBI has almost no correlation to the rest of the portfolio, but it has a very strong (0.8) correlation to VHT. This is why I dropped VHT from the portfolio.

I got to an equal weight biotech-tech-staples-utility-gold portfolio. Here it is compared to the previous portfolio without gold. Also, I subbed VHT and XBI to show the difference:



I didn't like how much on an influence XBI had on the portfolio as a whole:



So I trimmed the exposure from 20% to 15%. At this point there is an extra 5% that needs to be allocated to something on the low risk side of the portfolio - so gold-staples-utilities. I added Berkshire - but the 5% just needs to be invested somewhere less volatile and uncorrelated to tech or biotech.

Bringing it full circle - here is how the proposed portfolio compares to the risk parity portfolios detailed in the thread referenced at the beginning of this post. The new portfolio is unleveraged (versus 40% leverage in the 3 fund risk parity and 20% in the index20 risk parity portfolio) and uses no bonds:

[Radagast]

Ok, so you want to take advantage of the "reserve currency" but not actually own any of that currency. If the USD's next 25 years are bright, then things will be very very bright for EDV as yields on the 30-year bond go to zero. 30-year bonds and gold look very similar to me in terms of volatility and expected real return, but which will actually be best over the next 10 and 20 years?

If US companies are so amazing, why haven't their sales, earnings, and dividends kept up with their stock prices? And in general, what if your theory for the way things have worked over the last 10 years turns out to be wrong? Just saying, your theory is probably wrong. We don't know what that will mean in practice, but it might work out for you and it might not. Why not also put some money into the assumption that you are wrong?

[index]

Ok, so you want to take advantage of the "reserve currency" but not actually own any of that currency. If the USD's next 25 years are bright, then things will be very very bright for EDV as yields on the 30-year bond go to zero. 30-year bonds and gold look very similar to me in terms of volatility and expected real return, but which will actually be best over the next 10 and 20 years?

If US companies are so amazing, why haven't their sales, earnings, and dividends kept up with their stock prices? And in general, what if your theory for the way things have worked over the last 10 years turns out to be wrong? Just saying, your theory is probably wrong. We don't know what that will mean in practice, but it might work out for you and it might not. Why not also put some money into the assumption that you are wrong?

Reserve currency is just what countries use to buy goods and materials from each other. Costa Rica has coffee and China has TV. If CR wants TVs from China they can't use their currency - the colon - and China doesn't drink much coffee. Costa Rica has to go sell coffee to someone to get something China wants. Right now China and most countries want US dollars and secondary currencies that might work are the Euro, Pound, Yen, or Yuan. No country wants or cares about Colones. I think this is the reason you have seen ex-US and especially EM lag. The US, China, Japan, and EU have been expanding their money supply (printing). You have seen stable durable assets increase in nominal currency related value - houses, gold, shares of VTSAX etc. without intrinsically becoming more valuable. A house is still a house, gold is no more rare, VTSAX hasn't been increasing earnings at the rate of value increase etc. Emerging markets have to trade domestic goods for reserve currency if they want to buy any foreign goods or oil. All this money printing is being spent domestically - inflating durable assets - but the price of EM non-durables and commodities is not keeping pace because the money supply outside the US is similar to where it was 10 years ago.

That is the theory anyway. I could be wrong about LT treasuries versus gold. I am in the camp where I don't think the major governments around the world are going to stop printing money. I don't want to be a lender, though I appreciate for diversification and correlation - you cannot beat LT treasuries.         

[Radagast]

Is it possible to falsify your theory? What evidence would you accept as a sign that you are incorrect? Have to tried to find flaws in your own thinking?

I see three big inconsistencies.

First, you say you are looking for uncorrelated assets, but then you exclude bonds, and all countries and sectors except those which caused past outperformance of S&P500.

Second, you say USD is a reserve currency, but ignore that it is a reserve currency in both the numerator and the denominator.

Third, you also say "Euro, Pound, Yen, or Yuan" can be used as reserve currencies, but then exclude the possibility that the stock markets of the developed countries could benefit from those, because only the US can do that.

Anyhow, it's not up to me to shoot holes in your theory, it's up to you. I'm not even saying you are wrong for sure, I am saying for sure you might be wrong.

[vand]

Investors have been trying to create the perfect portfolio for a long time now. The problem always seems to be that while the backtesting seems to give it the stamp of approval, it invariably performs not as well going forward.

Look at Meb Faber's Trinity Portfolio as an example. The result of all the quant analysis you could hope to do thrown into a strategy, and then going forward the performance is very much 'meh'.

[HeadedWest2029]

First of all, I love when people do these portfolios...seriously.  Good stuff.
But yeah, in terms of backtests versus results going forward, nothing says it better than this tweet https://twitter.com/patrick_oshag/status/979703551466393600
The Cambria Trinity portfolio is indeed an excellent example. 

[vand]

I'd also add in that *puts on cynics hat* - beating the S&P with less drawdown has been virtually impossible for the last few years. For whatever reason the market is far less volatile than it used to be.  This year the US market up 20% with no drawdown larger than 4%. Investors have literally NEVER had it so good in terms of risk vs reward. 

If you are old enough like me to remember bull markets of the past, there would be usually at least 1 >10% correction a year and the market would spend more time in drawdown. There was enough volatility involved that if you took on too much risk you would be reminded of it a couple of times a year.  Q1 2020 aside, I can not remember a more benign market that what we've had since 2014.

Personally I believe that today the US market is more managed by political machinations and the PPT than it has ever been, but that is a slightly different discussion. Every statement by the Fed is designed to boost investor confidence, and investors (correctly) believe that the market is a proxy for the economy and thus the sitting White House incumbent cannot afford to allow anything other than strong market that is continually pushing new highs.

[ender]

I'd also add in that *puts on cynics hat* - beating the S&P with less drawdown has been virtually impossible for the last few years. For whatever reason the market is far less volatile than it used to be.  This year the US market up 20% with no drawdown larger than 4%. Investors have literally NEVER had it so good in terms of risk vs reward. 

If you are old enough like me to remember bull markets of the past, there would be usually at least 1 >10% correction a year and the market would spend more time in drawdown. There was enough volatility involved that if you took on too much risk you would be reminded of it a couple of times a year.  Q1 2020 aside, I can not remember a more benign market that what we've had since 2014.

Are you choosing to forget the end of 2018 for any specific reason?

There have been two meaningful market drops in the last 3 years. That seems pretty meaningful if you ask me.

[MustacheAndaHalf]

20% - BAR - Gold
...
20% - VGT - Technology

Wow, IAU has a 0.25% expense ratio, while BAR comes in at 0.17%.  Good to know.

Have you tried running 80% Vanguard Total Stock Market (VTI) and 20% Vanguard Technology (VGT)?  You get about the same 12% annual return.  If you wanted to go for simplicity and beating the market, that might be simpler and more likely to work.

[boarder42]

https://paulmerriman.com/90-years-of-evidence-shows-investor-patience-leads-to-better-returns/

here is 9 decades of information on beating the sp500 its simple its not complex, and its easily color coded so anyone can read it.  the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.  Big ERN has a whole post that attempts to counter Paul's concepts and the data from Fama and French.  And even he concludes that after expenses on SCV it still should outperform the market by .5% over long periods of time. 

trying to build a portfolio with short term data sub 50 years is pretty short sighted and recency bias.

[boarder42]

I'll also add berkshire has failed to outperform Value asset classes since the first decade of its existence which was primarily driven by the first 5 years of that decade of performance.  Further proving that whatever market sector you're trying to beat you can only do it for a short time and its unlikely to be repeatable.  - Buffett is a value investor who's lost to value since the end of the 80s

[MustacheAndaHalf]

the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.

VTI/VTSAX have 3,935 stocks in them.  VTI beat the S&P 500 by 2.6% last year.  Is that what you're calling "not perform any different"?

[boarder42]

the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.

VTI/VTSAX have 3,935 stocks in them.  VTI beat the S&P 500 by 2.6% last year.  Is that what you're calling "not perform any different"?

go run a standard deviation calculator against VTI over time. 1 year of anecdotal evidence isnt proof that it performs differently.

https://www.portfoliovisualizer.com/asset-correlations

they perform identically for all statistical purposes using VTSAX and VFIAX

Cap weighting out weighs anything else. You only own the SP500

To be fair I used to have the same mindset but its just wrong. and the data backs that up.

[index]

Is it possible to falsify your theory? What evidence would you accept as a sign that you are incorrect? Have to tried to find flaws in your own thinking?

I see three big inconsistencies.

First, you say you are looking for uncorrelated assets, but then you exclude bonds, and all countries and sectors except those which caused past outperformance of S&P500.

Second, you say USD is a reserve currency, but ignore that it is a reserve currency in both the numerator and the denominator.

Third, you also say "Euro, Pound, Yen, or Yuan" can be used as reserve currencies, but then exclude the possibility that the stock markets of the developed countries could benefit from those, because only the US can do that.

Anyhow, it's not up to me to shoot holes in your theory, it's up to you. I'm not even saying you are wrong for sure, I am saying for sure you might be wrong.

I think I have laid out why I don't want to be invested in bonds above. They are yielding very little right now, so investing in bonds is just hoping interest rates continue to go down and bond investors in the future will accept even lower returns. Bonds are becoming a game of "the greater fool" and if I am going to play that game, I will buy gold instead. The whole purpose of the portfolio is low correlation across asset classes while avoiding bonds and emerging markets.

The big bet of the portfolio is bonds will not perform as well in the next 20 years as they have in the last 20 years, and that the status quo of printing money is here to stay for the foreseeable future. Other countries with reserve currencies could benefit from their own money printing, but the US is in the best position to capitalize because of its size. I would love to invest a portion of my portfolio in China, but they have proven to not be very shareholder friendly to foreign investors.

I would certainly admit to being wrong if the federal reserve comes out and says they are going to shrink their balance sheet to pre-2008 levels.

 

[index]

https://paulmerriman.com/90-years-of-evidence-shows-investor-patience-leads-to-better-returns/

here is 9 decades of information on beating the sp500 its simple its not complex, and its easily color coded so anyone can read it.  the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.  Big ERN has a whole post that attempts to counter Paul's concepts and the data from Fama and French.  And even he concludes that after expenses on SCV it still should outperform the market by .5% over long periods of time. 

trying to build a portfolio with short term data sub 50 years is pretty short sighted and recency bias.

I agree with you that I would rather have more than 35 years of data. I have seen from posts in other threads that you are very committed to small cap value. What makes you think it will outperform going forward? I think low interest rates and easy money makes it very unlikely great small cap companies are going to continue to go public. Companies only go public if they need access to investor money to continue growing or the owners want to cash out. In the 80's to the late 00's, the only way to avoid a 12% bank loan was to go public. That is not longer the case. 

It seems SCV is also very correlated to the SP500.

[boarder42]

https://paulmerriman.com/90-years-of-evidence-shows-investor-patience-leads-to-better-returns/

here is 9 decades of information on beating the sp500 its simple its not complex, and its easily color coded so anyone can read it.  the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.  Big ERN has a whole post that attempts to counter Paul's concepts and the data from Fama and French.  And even he concludes that after expenses on SCV it still should outperform the market by .5% over long periods of time. 

trying to build a portfolio with short term data sub 50 years is pretty short sighted and recency bias.

I agree with you that I would rather have more than 35 years of data. I have seen from posts in other threads that you are very committed to small cap value. What makes you think it will outperform going forward? I think low interest rates and easy money makes it very unlikely great small cap companies are going to continue to go public. Companies only go public if they need access to investor money to continue growing or the owners want to cash out. In the 80's to the late 00's, the only way to avoid a 12% bank loan was to go public. That is not longer the case. 

It seems SCV is also very correlated to the SP500.

It's not highly correlated it's correlated but not at a std dev of 1.

And I don't expect it to outperform. I expect it to perform as it has for 90 years.

[index]

20% - BAR - Gold
...
20% - VGT - Technology

Wow, IAU has a 0.25% expense ratio, while BAR comes in at 0.17%.  Good to know.

Have you tried running 80% Vanguard Total Stock Market (VTI) and 20% Vanguard Technology (VGT)?  You get about the same 12% annual return.  If you wanted to go for simplicity and beating the market, that might be simpler and more likely to work.

For gold - BAR, GLDM, and SGOL are the cheapest I have found.



Adding tech does help juice returns, but the standard deviation is 5% higher. The goal of this portfolio is to approximate being 100% VTSAX with potential returns, but to reduce the standard deviation and associated sequential return risk.

[MustacheAndaHalf]

the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.

VTI/VTSAX have 3,935 stocks in them.  VTI beat the S&P 500 by 2.6% last year.  Is that what you're calling "not perform any different"?

go run a standard deviation calculator against VTI over time. 1 year of anecdotal evidence isnt proof that it performs differently.

https://www.portfoliovisualizer.com/asset-correlations

they perform identically for all statistical purposes using VTSAX and VFIAX

Cap weighting out weighs anything else. You only own the SP500

To be fair I used to have the same mindset but its just wrong. and the data backs that up.

Identical doesn't mean for certain purposes - it means identical.  If they have 0.1% difference in performance, that's not identical.

And also, correlation is not performance.  Go to the exact URL you suggested, and plug in UPRO and VOO.  You will see 1.00 correlation, even though annualized returns are 37.3% and 15.7%.

[boarder42]

the sp500 is not "the market" so beating the market is a misnomer that everyone throws around here the sp500 and VTI/VTSAX are only 500 stocks in "the market" - VTSAX does not perform any different than the top 500 companies b/c its cap weighted.

VTI/VTSAX have 3,935 stocks in them.  VTI beat the S&P 500 by 2.6% last year.  Is that what you're calling "not perform any different"?

go run a standard deviation calculator against VTI over time. 1 year of anecdotal evidence isnt proof that it performs differently.

https://www.portfoliovisualizer.com/asset-correlations

they perform identically for all statistical purposes using VTSAX and VFIAX

Cap weighting out weighs anything else. You only own the SP500

To be fair I used to have the same mindset but its just wrong. and the data backs that up.

Identical doesn't mean for certain purposes - it means identical.  If they have 0.1% difference in performance, that's not identical.

And also, correlation is not performance.  Go to the exact URL you suggested, and plug in UPRO and VOO.  You will see 1.00 correlation, even though annualized returns are 37.3% and 15.7%.

your suggested mix of funds cuts a decade off the returns and looks at only the last 10 years.  good luck with data that short - 20 is 2x as good 10 is pretty poor historical data tracking.  my suggested AA can be backtested 50 years on multiple tools and the equity portion backtested 90+ years now.

[index]

your suggested mix of funds cuts a decade off the returns and looks at only the last 10 years.  good luck with data that short - 20 is 2x as good 10 is pretty poor historical data tracking.  my suggested AA can be backtested 50 years on multiple tools and the equity portion backtested 90+ years now.

What asset allocation are you using?

[boarder42]

your suggested mix of funds cuts a decade off the returns and looks at only the last 10 years.  good luck with data that short - 20 is 2x as good 10 is pretty poor historical data tracking.  my suggested AA can be backtested 50 years on multiple tools and the equity portion backtested 90+ years now.

What asset allocation are you using?

80% SCV 20% bonds

[boarder42]

history tells us you will lose a decade sometime in the next 50 years in the sp500 its not happened just once its happened 2x - the other thing we know based on history b/c thats all we're betting on with the sp500 (which is not the market its 500 stocks - or VTI which is basically the same b/c its cap weighted) is that its recovery time is SLOOOOWWW the decade that SCV lost was followed by a decade of 20% performance then another 20% annualized.  Historically holding all SCV has never lost you your nest egg with a 4% swr.  Even using Tylers calculators you find sp500 to be one of the worst asset classes - which holds up to long tested data.  Large growth gets really big and oversized then pops and takes a very long time to recover. 

If you're looking for less risk i'd be looking more towards recovery time risk as opposed to standard deviation risk SCV standard deviations are far higher than SP500 but its mostly due to the larger upside vs the larger downside. 

Given what you presented here, just about any diverse asset allocation that's equity heavy and light on large growth will be better than any sp500/bond make up you can present.

B/c the sp500 is a really shitty long term investment vehicle when you look at all equity classes available. ESP as it relates to SORR.

I'm not a market timer but the argument that SCV premium is dead b/c its been flat to down against the sp500 for the last 14 years is not a reason to run away from it its a reason to run towards the sector.  You see all the time about how its premium must be dead - but its lost for 20 years before going on a terror and the sp500 never catches back up.  The simple fact that people are quoting how good the sp500 has been vs SCV should make you understand the psychology behind how people invest in the market and understand that the premium still remains just due to behavioral tendencies. 

See Marathon Petroleum vs. Amazon today and go ask the avg investor what will win the next decade - I bet you're lucky to find 10% willing to say marathon wins that.  And you know it probably won't - Only 4% of the stocks drive the premium any one asset class makes over standard bond returns.  But there are 100s of other small companies in there that will pivot their business from something dying like oil to who knows what and those 4% will make piles of gains b/c they can put your money to work better and have more room for growth that large growth does.

[Radagast]

In what historical cases would your allocation have underperformed VTSAX?
In what hypothetical cases would your allocation underperform VTSAX?
In what historical cases would your allocation have underperformed a balanced 80/20 allocation such as Vanguard LifeStrategy Growth Fund (VASGX) of Fidelity FFNOX?
In what hypothetical cases would your allocation underperform a balanced 80/20 allocation such as Vanguard LifeStrategy Growth Fund (VASGX) of Fidelity FFNOX?

I you can't think of strong cases for all four of those, then I would say you have not done enough due diligence.

[index]

history tells us you will lose a decade sometime in the next 50 years in the sp500 its not happened just once its happened 2x - the other thing we know based on history b/c thats all we're betting on with the sp500 (which is not the market its 500 stocks - or VTI which is basically the same b/c its cap weighted) is that its recovery time is SLOOOOWWW the decade that SCV lost was followed by a decade of 20% performance then another 20% annualized.  Historically holding all SCV has never lost you your nest egg with a 4% swr.  Even using Tylers calculators you find sp500 to be one of the worst asset classes - which holds up to long tested data.  Large growth gets really big and oversized then pops and takes a very long time to recover. 

If you're looking for less risk i'd be looking more towards recovery time risk as opposed to standard deviation risk SCV standard deviations are far higher than SP500 but its mostly due to the larger upside vs the larger downside. 

Given what you presented here, just about any diverse asset allocation that's equity heavy and light on large growth will be better than any sp500/bond make up you can present.

B/c the sp500 is a really shitty long term investment vehicle when you look at all equity classes available. ESP as it relates to SORR.

I'm not a market timer but the argument that SCV premium is dead b/c its been flat to down against the sp500 for the last 14 years is not a reason to run away from it its a reason to run towards the sector.  You see all the time about how its premium must be dead - but its lost for 20 years before going on a terror and the sp500 never catches back up.  The simple fact that people are quoting how good the sp500 has been vs SCV should make you understand the psychology behind how people invest in the market and understand that the premium still remains just due to behavioral tendencies. 

See Marathon Petroleum vs. Amazon today and go ask the avg investor what will win the next decade - I bet you're lucky to find 10% willing to say marathon wins that.  And you know it probably won't - Only 4% of the stocks drive the premium any one asset class makes over standard bond returns.  But there are 100s of other small companies in there that will pivot their business from something dying like oil to who knows what and those 4% will make piles of gains b/c they can put your money to work better and have more room for growth that large growth does.

Here is a 80/20 SCV/Bond portfolio using DFSVX and VBMFX versus the proposed portfolio going back to 1993:



Drawdowns:





So at least for the last 28 years (history of DFSVX) the proposed portfolio has beat a 80/20 SCV/Bond portfolio on a risk adjusted basis. The standard deviation is not just due to excess returns, the 80/20 portfolio had 20% drawdowns 5 times in 28 years, while the SP500 had 4, and the index20 portfolio had 2. Underwater periods have been shorter as well.

Fundamentally you are making the argument that SCV companies are more nimble so they can adjust faster to changing economic cycles. That is probably true. In order to outperform VTSAX or whatever benchmark you want to use, you have to make a bet on what will be in demand in the future with a heads you win - tails you don't underperform too badly. 

I tend to believe human nature leads business owners make money as much money as they can. When small business loans were >12%, it was cheaper to raise capital by going public and selling a portion of your company. The small businesses going public today are doing so because they are no credit worthy or the owners want to cash out.

Your argument comes down to market timing and historical data - this asset class has outperformed for 90 years and its down the last 14 so there will be a reversion to the mean. What if the market is not wrong, and small value just does not perform as well given where we are in the credit cycle?

I have made my argument against bonds upthread. Printing money silently steals value from debt holders and inflates durable assets. I am not going to call a top in bonds, but I listen when Bill Gross, Buffett, Munger, and Dalio all say bonds are not the same low risk investment they once were. The imputes for the portfolio was to avoid bonds, but have a similar risk profile to a 70/30 fund.       

[boarder42]

What if the market is not wrong, and small value just does not perform as well given where we are in the credit cycle?


you can literally pose a question about any historical market returns over any time period and say but what if that was incorrect. including the 90 year history of the sp500.  I don't expect it to outperform the market i expect it to continue performing as it has. 

And i honestly dont care how many things you backtest differently. 90 years of performance speaks for itself we can talk in 10 years.  then 20 years. then 30 years. then 40 years.  and when i'm a half a billionaire in 50 years we can keep discussing the same thing

[boarder42]

I've placed my money where my mouth is and this is my ips. Without some very crazy new data to convince me otherwise then I'm not changing. You're just trying to build a short term back tested portfolio. It's up to you to put you money where your mouth is.  I'm not here to convince anyone to change I've made my choices I'm comfortable FIREing on them. I'm not posing a question of can something beat VTSAX. I've researched and concluded that if history repeats itself which is what every. Single. One. Of  us here bought into with VTSAX and forget it. Well then my chosen allocation is historically better and never failed at a 4% pwr

[Radagast]

Here is a 80/20 SCV/Bond portfolio using DFSVX and VBMFX versus the proposed portfolio going back to 1993:

You would need to use VUSTX instead of VBMFX to accurately model B42's target portfolio (based on past conversations, I just realized he did not say that).

Your argument comes down to market timing and historical data - this asset class has outperformed for 90 years and its down the last 14 so there will be a reversion to the mean.

OK, Boarder42 says he is using 90 years of data, with the last 14 being a weak period. You say that is market timing. You are basing your own investment plan on 15 or 25 years of data over the most recent period, with the last 14 years being a strong period, and you feel you are not market timing?

You should put half as much (or just as much) energy into critiquing your own ideas as you do into critiquing the advice you get.

[boarder42]

Here is a 80/20 SCV/Bond portfolio using DFSVX and VBMFX versus the proposed portfolio going back to 1993:

You would need to use VUSTX instead of VBMFX to accurately model B42's target portfolio (based on past conversations, I just realized he did not say that).

Your argument comes down to market timing and historical data - this asset class has outperformed for 90 years and its down the last 14 so there will be a reversion to the mean.

OK, Boarder42 says he is using 90 years of data, with the last 14 being a weak period. You say that is market timing. You are basing your own investment plan on 15 or 25 years of data over the most recent period, with the last 14 years being a strong period, and you feel you are not market timing?

You should put half as much (or just as much) energy into critiquing your own ideas as you do into critiquing the advice you get.

That's pretty much my point.  Recency bias is basically the bulk of his argument for his asset allocation and against mine.  I'm not in mine for a few years I'm planning to be in it for life.  Now if my account hits 50x what i started with maybe later in life i back off the aggressiveness and add some more bonds or just some other asset classes that aren't correlated. 

In general the theory of this post is correct, not sure I like the selection of funds with short term history but diversification away from large value and across different asset classes or market sectors should outperform VTSAX long-term.  You can pick just about anything and it will do that. Large growth is the worst performing asset class over most investing windows.  We all just happened to get lucky we caught a good decade in its historical patterns the last 10 years.  Think if you had found all this info in the year 2000 and now we're sitting in 2010 and you avg. NEGATIVE .1% annually how would you feel about VTSAX and forget it.  We'd probably have 30 more posts like this a month. 

It's not even that SCV has to outperform to the levels it has in the past even in the past 14 years from its previous peak a tell tale chart will show you that its basically kept pace with the SP500 sometimes higher sometimes lower.  So if you can stomach different returns than the sp500 that are based on historical data, you're going to outperform the sp500 over most 10 year periods - almost all 20 year periods and 95% of 40 year periods(against all asset classes).  But you have to stick with it when its not so great compared to the sp500.

In the chart below that line is still moving down thru 2020 and turns in 2021 as scv is up 31% and the sp500 is up 20%.  who know when the next escalator will be history tells us it should happen sometime but in the mean time i'll take a depreciated asset class relative to the sp500 and wait.  b/c once it hits its never looked back.

[index]

Here is a 80/20 SCV/Bond portfolio using DFSVX and VBMFX versus the proposed portfolio going back to 1993:

You would need to use VUSTX instead of VBMFX to accurately model B42's target portfolio (based on past conversations, I just realized he did not say that).

Your argument comes down to market timing and historical data - this asset class has outperformed for 90 years and its down the last 14 so there will be a reversion to the mean.

OK, Boarder42 says he is using 90 years of data, with the last 14 being a weak period. You say that is market timing. You are basing your own investment plan on 15 or 25 years of data over the most recent period, with the last 14 years being a strong period, and you feel you are not market timing?

You should put half as much (or just as much) energy into critiquing your own ideas as you do into critiquing the advice you get.

If you look up thread to the first post, it is 36 years of data. I asked in the first post if using the sector funds was cherry picking based on past performance and shared my thoughts on what is going to happen broadly in the economy going forward.

I have been invested in a 70/30 allocation with the 30% being treasuries since 2006. I am no longer comfortable holding treasuries/bonds and wanted to create a portfolio that gave a similar smooth ride to a 70/30 portfolio without the treasury allocation. That is tough to do since treasuries are the most negatively correlated asset classes you can buy easily.

I don't mean to pick a fight about Border's allocation, rather I am asking what makes him believe SCV will perform as it has for the past 90 years in the current/future market. There is a reason SCV has lagged the SP500 for 14 years. What is that reason and why will it be different in the future? The argument so far has been:

That's pretty much my point.  Recency bias is basically the bulk of his argument for his asset allocation and against mine.  I'm not in mine for a few years I'm planning to be in it for life.  Now if my account hits 50x what i started with maybe later in life i back off the aggressiveness and add some more bonds or just some other asset classes that aren't correlated. 

In general the theory of this post is correct, not sure I like the selection of funds with short term history but diversification away from large value and across different asset classes or market sectors should outperform VTSAX long-term.  You can pick just about anything and it will do that. Large growth is the worst performing asset class over most investing windows.  We all just happened to get lucky we caught a good decade in its historical patterns the last 10 years.  Think if you had found all this info in the year 2000 and now we're sitting in 2010 and you avg. NEGATIVE .1% annually how would you feel about VTSAX and forget it.  We'd probably have 30 more posts like this a month. 

It's not even that SCV has to outperform to the levels it has in the past even in the past 14 years from its previous peak a tell tale chart will show you that its basically kept pace with the SP500 sometimes higher sometimes lower.  So if you can stomach different returns than the sp500 that are based on historical data, you're going to outperform the sp500 over most 10 year periods - almost all 20 year periods and 95% of 40 year periods(against all asset classes).  But you have to stick with it when its not so great compared to the sp500.

In the chart below that line is still moving down thru 2020 and turns in 2021 as scv is up 31% and the sp500 is up 20%.  who know when the next escalator will be history tells us it should happen sometime but in the mean time i'll take a depreciated asset class relative to the sp500 and wait.  b/c once it hits its never looked back.

 

That is divination off a stock chart, not an explanation for why SCV will outperform VTSAX. The last time SCV underperformed the broader market was in the 30's. Interest rates looked very similar to today:



Is it a coincidence? Do you see interest rates going higher leading small companies to list publicly for funding or do you see more of this churning at around 0 that we have been doing to the past 10 years? 

[boarder42]

no the last time SCV underperformed the SP500 was when interest rates were high on your chart so your assumption is flawed. from the mid 80s thru the 90s.  Even as rates contiued to drop in the 2000s SCV took off on its escalator.

i'm not trying to divine shit from anything other than i expect historical performance to repeat you're trying to read tea leaves and predict the future based on self stated asset classes you expect to outperform.

like i said you do you put your money where you mouth is but you're trying to infer and guess a future i'm simply applying the EXACT SAME LOGIC we all applied to why VTSAX and forget it worked and moving forward with a different section of the market with similar data.

what specific new 90 year information have you been presented with that makes you think these will outperform over long periods of time - simply the answer is none you have 36 years.  and whats your policy for changing your asset allocation 36 year lookbacks every 10 years? 20 years?

why do you think VTSAX will continue to perform as it has or did why would it produce 10% when japan produced 0% for a long period of time.   

My answer to your question will never change your answer is much more indicative of someone chasing returns with short term data.

[boarder42]

if i really had to answer why i think it outperforms its b/c of how overpriced the sp500 gets so frequently.  and by definition small VALUE is underpriced out of favor companies based on book.  So when the market gets frothy and bloated its normally people investing in the companies they know the top 500.  And when that crashes it crashes hard.  SCV may crash along side it and frequently does but quickly recovers as people realize wait a minute these are crazy undervalued now.  While the sp500 may still be coming back to earth.

add to that the growth potential of any company with a lot of cash and a dying market that pivots like maybe marathon petroleum starts making microchips.

[boarder42]

and further on low interest rates - these companies are asset rich - low interest rates would allow them to borrow against these assets and pivot their business or purchase a new business.

[FLBiker]

In the chart below that line is still moving down thru 2020 and turns in 2021 as scv is up 31% and the sp500 is up 20%.  who know when the next escalator will be history tells us it should happen sometime but in the mean time i'll take a depreciated asset class relative to the sp500 and wait.  b/c once it hits its never looked back.

Thank you for this chart -- that is VERY interesting.  I've heard and read about small value tilt over the years, but that chart sells me on it more than anything I've previously encountered.  I may have to revisit my IPS...

[boarder42]

In the chart below that line is still moving down thru 2020 and turns in 2021 as scv is up 31% and the sp500 is up 20%.  who know when the next escalator will be history tells us it should happen sometime but in the mean time i'll take a depreciated asset class relative to the sp500 and wait.  b/c once it hits its never looked back.

Thank you for this chart -- that is VERY interesting.  I've heard and read about small value tilt over the years, but that chart sells me on it more than anything I've previously encountered.  I may have to revisit my IPS...

https://paulmerriman.com/90-years-of-evidence-shows-investor-patience-leads-to-better-returns/

this is some more evidence but also its worth listening to his podcast or just digging thru the site its not the best organized.

[boarder42]

Litterally by definition of the 2 variables in play here

SMALL = small company with more upside potential as you can only get so big see GE
LARGE = Massive company with its fingers in lots of different markets typically very well known

VALUE = UNDER valued companies compared to their balance sheet
GROWTH = OVER valued companies compared to their balance sheet.

so why do i expect it to keep winning well its a group of the smallest companies with lots of assets to back up their current share price and alot of potential room to grow.

Why do i expect large growth to keep losing well its a group of large companies that have to continue to diversify into different market spaces and not become a monopoly in one or else risk being broken up and their price to book is terrible meaning they are propped up on speculation

[boarder42]

https://forum.mrmoneymustache.com/investor-alley/gme-deathwatch-how-to-profit/msg2903805/#msg2903805

here is an example of small value and why its premium will exist.  will GME figure it out i dunno but i own it in my ETF. 

[Radagast]

If you look up thread to the first post, it is 36 years of data. I asked in the first post if using the sector funds was cherry picking based on past performance and shared my thoughts on what is going to happen broadly in the economy going forward.

I have been invested in a 70/30 allocation with the 30% being treasuries since 2006. I am no longer comfortable holding treasuries/bonds and wanted to create a portfolio that gave a similar smooth ride to a 70/30 portfolio without the treasury allocation. That is tough to do since treasuries are the most negatively correlated asset classes you can buy easily.

OK, so everyone thinks you are cherry picking, even you by your own standards. So what will you do about it? Continue to invest the way you have been? Hope performance chasing works out this time? Add other allocations? You have uniformly rejected suggestions for reasons and stories. Choose different allocations? But that wouldn't look as pretty in back testing. Switch to a set-it-and-forget-it fund-of-funds?

I already said what I would do, which is add international small cap, emerging market, and long term treasury. I doubt your explanations for why those are sure to be a drag. You could add another of I-bonds, and something else, to make it an even ten slices.

[vand]

Returning to this thread.. imo it's not inaccurate to say that equity investors in the US stock market have literally never had it so good as they have over the last 10 years.

The market has delivered more return for the amount of risk taken over the last decade than it ever has done - and not just by a small amount, but by a huge margin.

I pulled up the numbers from PortfolioVisualizer for Total US Stock Market for various timeframes since 1972.

3yr annualised monthly Sharpe Ratio: 0.93
5yr annualised monthly Sharpe Ratio: 1.06
10yr annualised monthly Sharpe Ratio: 1.04

Total annualised monthly Sharpe Ratio since 1972: 0.45

It has been batting way, way, way above average in its risk adjusted reward metrics.

If we look at the past great bull market between 1982 - 2000 we see that the market only delivered Sharpe ratio of about 0.62, so in terms of delivering returns for the amount of risk, this current bull market is the greatest of them all.

I would be amazed if I ever live through another 10yr period that is as benign as the one we have just been through.

What a time to be a risk-on investor.

[ChpBstrd]

Returning to this thread.. imo it's not inaccurate to say that equity investors in the US stock market have literally never had it so good as they have over the last 10 years.

The market has delivered more return for the amount of risk taken over the last decade than it ever has done - and not just by a small amount, but by a huge margin.

I pulled up the numbers from PortfolioVisualizer for Total US Stock Market for various timeframes since 1972.

3yr annualised monthly Sharpe Ratio: 0.93
5yr annualised monthly Sharpe Ratio: 1.06
10yr annualised monthly Sharpe Ratio: 1.04

Total annualised monthly Sharpe Ratio since 1972: 0.45

It has been batting way, way, way above average in its risk adjusted reward metrics.

If we look at the past great bull market between 1982 - 2000 we see that the market only delivered Sharpe ratio of about 0.62, so in terms of delivering returns for the amount of risk, this current bull market is the greatest of them all.

I would be amazed if I ever live through another 10yr period that is as benign as the one we have just been through.

What a time to be a risk-on investor.

Steadily falling interest rates have a lot to do with those numbers. Possible outcomes for the next 10y:

1) Rates rise. There is no way equities OR bonds do well in such an environment. PE's collapse. Bonds ride the steep side of the convexity slope down.
2) Rates stay flat. Economic growth comes in at the high end of expectations, equities continue to do their compounding thing.
3) Rates fall. In this scenario, we are Japan in the mid-late 1990s. A lost decade or two, deflation fears, and lots of disruptive events discount the markets. Treasuries do OK.

Another dynamic, independent of interest rates, is whether we hit a lull in tech company earnings growth. As odd as it might sound to contemplate now, what if smartphones a decade from now do all the exact same things as smartphones today, they're no longer status symbols, and it's a race to the bottom in terms of price? What if social media and streaming services have signed up everyone in the population who will ever want to be a user of such things? What if BEVs are no more profitable than oil burners, and the overall car market decreases due to working from home? What if enterprise software platforms all look like Salesforce or Hubspot and it's sold on a pure price competition basis, like hardware is now? In these scenarios, tech companies would start to be priced as consumer staple or consumer discretionary companies, because their growth rates would be the same. That alone would tank the indices, given how dependent they are upon highly priced tech firms. 

[MustacheAndaHalf]

Returning to this thread.. imo it's not inaccurate to say that equity investors in the US stock market have literally never had it so good as they have over the last 10 years.

The market has delivered more return for the amount of risk taken over the last decade than it ever has done - and not just by a small amount, but by a huge margin.

Your first paragraph makes a general statement ("literally never had it so good"), while your second paragraph takes a very narrow approach.  Most people do not look at Sharpe ratios to decide if they "literally never had it so good", they look at returns.

2012-2021 : 15.57% CAGR
1990-1999 : 17.27% CAGR

You can't buy food or pay the rent with a Sharpe ratio, so I view 1990s as a better decade that the last 10 years.

[ChpBstrd]

Returning to this thread.. imo it's not inaccurate to say that equity investors in the US stock market have literally never had it so good as they have over the last 10 years.

The market has delivered more return for the amount of risk taken over the last decade than it ever has done - and not just by a small amount, but by a huge margin.

Your first paragraph makes a general statement ("literally never had it so good"), while your second paragraph takes a very narrow approach.  Most people do not look at Sharpe ratios to decide if they "literally never had it so good", they look at returns.

2012-2021 : 15.57% CAGR
1990-1999 : 17.27% CAGR

You can't buy food or pay the rent with a Sharpe ratio, so I view 1990s as a better decade that the last 10 years.

In the 90's you, like most people, would have had a big chunk of your portfolio in bonds safely yielding 7-8%, so you'd have missed out on some of the higher CAGR of stocks. Still, I would agree the 90's was a better decade to be an investor. The 90's featured *much* lower risk to beat inflation and generate FIRE income compared to the present era of 1.5% yields on 10y treasuries.

Any decade is a good one if you YOLO your portfolio on a high risk AA and win, just like any decade is a bad one if you YOLO and lose. But only a few decades really stand out for 60/40 or 50/50 portfolios. The good ole days were when you could have a 100% IG bond portfolio, beat inflation, fund a 4% WR, and still enjoy capital appreciation of the portfolio as interest rates fell for the next 30 years.

[MustacheAndaHalf]

Returning to this thread.. imo it's not inaccurate to say that equity investors in the US stock market have literally never had it so good as they have over the last 10 years.

The market has delivered more return for the amount of risk taken over the last decade than it ever has done - and not just by a small amount, but by a huge margin.

Your first paragraph makes a general statement ("literally never had it so good"), while your second paragraph takes a very narrow approach.  Most people do not look at Sharpe ratios to decide if they "literally never had it so good", they look at returns.

2012-2021 : 15.57% CAGR
1990-1999 : 17.27% CAGR

You can't buy food or pay the rent with a Sharpe ratio, so I view 1990s as a better decade that the last 10 years.

In the 90's you, like most people, would have had a big chunk of your portfolio in bonds safely yielding 7-8%, so you'd have missed out on some of the higher CAGR of stocks. Still, I would agree the 90's was a better decade to be an investor. The 90's featured *much* lower risk to beat inflation and generate FIRE income compared to the present era of 1.5% yields on 10y treasuries.

Any decade is a good one if you YOLO your portfolio on a high risk AA and win, just like any decade is a bad one if you YOLO and lose. But only a few decades really stand out for 60/40 or 50/50 portfolios. The good ole days were when you could have a 100% IG bond portfolio, beat inflation, fund a 4% WR, and still enjoy capital appreciation of the portfolio as interest rates fell for the next 30 years.

I won't ask where you pulled that assumption out of, but I did invest in the 1990s.  I bought mutual funds, not bonds.  So no, I would not have bought bonds - because I didn't!

As to the wider claim that everyone was buying bonds, Fed Chair Alan Greenspan warned about stock prices having "irrational exuberance".  He mentioned "higher prices of stocks" and "price/earnings ratios" before asking "But how do we know when irrational exuberance has unduly escalated asset values"
https://www.federalreserve.gov/boarddocs/speeches/1996/19961205.htm

The "Beardstown Ladies" published a book about how their circle of women in their 70s were beating the S&P 500 by stock picking (but mixed up contributions and performance).  Everyone was forming investment clubs to pick stocks.  They lumped companies like pets.com and amazon.com together, without knowing which would collapse and which would go on to dominate the retail industry.

The 1990s featured the "dot com boom", without which there's no "dot com bust" starting in 2000.  If anything, the 1980s were the decade for bond investing.  From 1980 to the end of 1985, 10-year Treasuries never dropped into single digits!  Someone earning 4.65% on those treasuries in Dec 1998 couldn't really impress someone who bought treasuries at 14-15%.
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Looking at that chart, treasuries - and bonds - are at a historical low point.  If inflation persists, yields will go up, and bonds will lose money.  If you were to say anything about my attitude towards bonds, I'd suggest saying I dislike long-term bonds.  The yields are relatively low, with an outsized risk of large losses.

[ftsu21]

Sorry may be a bit late into the game, but I think this is a very interesting portfolio. I pulled your portfolio but replaced a few tickers(BAR -> GLD) as the tool I used does not have BAR yet. Below are a few of my takeaways compared with VTI(again I don't have access to VTSAX, so use VTI as proxy):

1 Good Downside Risk and Recovery Characteristics
I looked at the 5 biggest market downturns of VTI since 2007, and compare the drawdown and recovery between your portfolio and VTI. Your portfolio certainly has less downside risk but similar recovery performance in each of the 5 periods. That certainly adds confidence when the next market meltdown happens, so thumb up to that.
https://www.flickr.com/photos/194318108@N03/51658109449/in/dateposted-public/

2. XBI is a bit risky, however, its risk contribution is OK
Looking at the risk-return characteristics of all these assets, XBI is the riskiest one: about 30% annualized volatility. However, comparing it to VGT it seems XBI has a relatively lower correlation to others, so overall it seems OK. In fact, if you look at the Risk Contribution from each asset in the portfolio, XBI and VGT are approximately the same, about 25% risk of the total portfolio, even though XBI is riskier than VGT as a standalone asset.
https://www.flickr.com/photos/194318108@N03/51657441296/in/dateposted-public/
https://www.flickr.com/photos/194318108@N03/51658109754/in/dateposted-public/

3. Sector Exposures
It is clear that your sector exposure is quite different from the benchmark. This might have been helpful in the past, but might also contribute to the recent(past 1 year) underperformance compared to VTI. I think going forward, a bit of sector tweak might not be a bad idea as the current allocation seems to be heavily tilted toward growth stocks.
https://www.flickr.com/photos/194318108@N03/51658308535/in/dateposted-public/