Critique my portfolio

[leostrauss]

I am a middle aged (39) investor with majority of my wealth mostly in liquid assets as opposed to residential real estate. That means I have a fair bit of money (just over $500K) invested or deposited in various accounts (tax deferred as well as taxable). My current portfolio is a hodgepodge of different ETFs that I thought were good value at the time I bought them. I thought I was doing OK because my positions were mostly in the black for the past three years or so. However, looking at the S&P500 returns and even a standard 60/40 portfolio I underperformed the market getting less than 6% in annual returns through this last roaring bull market. Thus I want to streamline my portfolio and get on a plan that I can stick with through thick and thin as opposed to the current strategy of "get a hunch bet a bunch" investing.
The thing is I don't have the stomach for large investing swings. Sitting on a couple of months of losing positions wears me out and I have been know to sell out of my holdings at the worst possible moment.
So I read a bunch about various investing strategies and now trying to decide which one to follow. I think a barbell strategy with highly volatile investments at one end and very secure investments at the other would best suit my mentality. I am usually not too concerned about my individual investments but when I see my total net worth sliding down substantially is when I start to get panicky. I am hoping that a barbell portfolio will smooth out the ride enough that I can stick with it through thick and thin.
Here is the portfolio I have devised (option 1 in the link below). It seems to backest better than the classic 60/40 and better than the Harry Browne's Permanent Portfolio. It is inspired by the work of Larry Swedroe on the Fat Tail Minimization problem. The idea being that you hold a small amount of high risk assets to compensate for limiting your exposure to the market with most of your capital. I think the idea has strong legs and reminds me of Taleb's concept of things that are 'antifragile'.
What do you think of this portfolio. Note that I'm OK with not getting every last bit of possible returns. Just want the ride up to be as smooth as possible.
Here is the portfolio against 60/40 and PP visualized:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&TotalBond2=40&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&TIPS1=10&annualOperation=0&TotalStockMarket3=25&TotalStockMarket2=60&initialAmount=10000&EmergingMarket1=10&endYear=2014&mode=2&SmallCapValue1=10&inflationAdjusted=true&annualAdjustment=0&startYear=1972&Gold1=10&Gold3=25&IntlSmall1=10&rebalanceType=1&TwoYearTBills3=25&TwoYearTBills1=50&annualPercentage=0.0&LongTermBond3=25

[forummm]

First, I think the backtests are of limited use. You can learn something from them, but the future will be different from the past. It's your risk profile that's most important going forward. So it's up to you. This is a pretty low risk and low volatility strategy. If you're OK with possibly underperforming the market in exchange for that low volatility, this could work for you. For example, short term treasuries performed very well in some parts of that backtest. I don't expect that to happen again soon. But who knows.

[leostrauss]

Would you expect such a portfolio to underperform 60/40 going forward? If so why? Doesn't the risky end of the barbell strategy lift the performance up to roughly match 60/40 over the long run?

[GGNoob]

This assumes a $10,000 deposited in 1972 and no new deposits moving forward. I adjusted it so that you start with $10,000 and add another $10,000 a year (inflation adjusted contributions). It then loses out to a 60/40 portfolio.

https://tinyurl.com/mzhzaoy

Maybe you should just invest in a balanced fund so you cannot see the losers? Target Retirement Date, Lifestrategy, or something similar.

[leostrauss]

What worries me about the 'balanced' funds is that they can and do swoon a lot in years like 2008. I don't know how I would have reacted in the midst of 2008/early 2009 if my portfolio value was down 20% or so. I didn't have any significant money in the markets at the time but my temperament tells me that I would have sold at the worst possible moment or thrashed around buying and selling depending on my and Mr Market's mood on any given day.

My concoction seems to have dealt with both the 70's inflation and the 2008 near catastrophe much better than a 60/40.

[forummm]

What worries me about the 'balanced' funds is that they can and do swoon a lot in years like 2008. I don't know how I would have reacted in the midst of 2008/early 2009 if my portfolio value was down 20% or so. I didn't have any significant money in the markets at the time but my temperament tells me that I would have sold at the worst possible moment or thrashed around buying and selling depending on my and Mr Market's mood on any given day.

My concoction seems to have dealt with both the 70's inflation and the 2008 near catastrophe much better than a 60/40.

This is something very valuable to know about yourself. The best way to invest is the way that you will stick with, even when things get ugly. Some people say that you should decide if you're going to invest so that you will eat well or will sleep well--those tend to be somewhat opposite goals. You can move them closer together by having broadly diversified investments, balanced between stocks and bonds. But that will only get you so far.

If you are pretty sure you'd sell in a downturn, even though you know the market will come back at some point, then a very conservative strategy might work for you. But you should know that you will have to work longer and/or save more and/or spend less in order to avoid occasional downturns. For an early retirement, and 50% of your money in short term treasuries (paying about 0% right now), you will need a SWR much lower than 4%.

You can run some scenarios here to see what it might look like. The trouble is they don't have ST Treasuries as an option. But you can approximate it with 50% equities, 25% cash (earning 1% in a CD) and 25% bonds (not a terrific approximation, but it's something). When I run this with a 3.5% withdrawal rate (if you start with a million bucks you start by withdrawing $35k/year and adjusting the withdrawal for inflation) for 30 years, the portfolio succeeds 90% of the time, and the max drawdown is 24%, but 95% of the time the drawdown was less than 18%.
http://www.cfiresim.com/input.php

[GGNoob]

What worries me about the 'balanced' funds is that they can and do swoon a lot in years like 2008. I don't know how I would have reacted in the midst of 2008/early 2009 if my portfolio value was down 20% or so. I didn't have any significant money in the markets at the time but my temperament tells me that I would have sold at the worst possible moment or thrashed around buying and selling depending on my and Mr Market's mood on any given day.

My concoction seems to have dealt with both the 70's inflation and the 2008 near catastrophe much better than a 60/40.

You could go even more conservative with a balanced fund...something like the Lifestrategy Conservative Growth (40% stock and 60% bond). Even that has out performed your suggested portfolio when you actually contribute to it every year. It's worst year was -14.18% (assuming 24% US stocks, 16% international stocks, and 60% total bond market). As a comparison, the 60% stock and 40% bond portfolio earned 1% more on average and only lost 23.79% in 2008.

I feel that if you slice and dice your portfolio versus invest in a single fund, you are always going to look at those individual returns of each asset class and you may consider selling.

Where is your money currently invested (type of account and broker)? For your 401k or other work plan, what funds are available?

[leostrauss]

I'm in Canada and self direct my cash and investments. My employer doesn't match any RRSP contribution so I'm running my own RRSP. Likewise with all other accounts I have.  The money I have is split about 50/50 between tax shelters (RRSP/TFSA) and taxable accounts. The fact that I run my own portfolios is kind of a problem because I can buy and sell things at a push of a button any time the markets are open. I know this has contributed to my underperformance in the past. My investing vehicles are mostly ETFs and some mutual funds.  But funds sold in Canada are even more terrible than active funds in the USA. Wealth managers here also charge exhorbitant fees for adding little value. I'd love to have someone who can save me from myself when going gets rough but not for 2% of AUM.

As for specifics, I can buy any ETF that trades on the NYSE/NASDAQ or TSX.

[fb132]

I'm in Canada and self direct my cash and investments. My employer doesn't match any RRSP contribution so I'm running my own RRSP. Likewise with all other accounts I have.  The money I have is split about 50/50 between tax shelters (RRSP/TFSA) and taxable accounts. The fact that I run my own portfolios is kind of a problem because I can buy and sell things at a push of a button any time the markets are open. I know this has contributed to my underperformance in the past. My investing vehicles are mostly ETFs and some mutual funds.  But funds sold in Canada are even more terrible than active funds in the USA. Wealth managers here also charge exhorbitant fees for adding little value. I'd love to have someone who can save me from myself when going gets rough but not for 2% of AUM.

As for specifics, I can buy any ETF that trades on the NYSE/NASDAQ or TSX.

Why not open an account with Questrade and buy ETF's suggest from the canadian couch potato. You would have only 3 ETF's to look after and the fee's are very low.

[leostrauss]

For the reason I mentioned. I find that even a 60/40 allocation is too much volatility for me to handle. I don't trust myself to be able to sit through another 2008 and not bail out at the worst time. I'm seeking something with less gyrations. For what it's worth I'm currently running the 4 component Permanent Portfolio (stocks, LT bonds, ST bonds and gold in equal value) but even that is making me very nervous with the recent drop in LT bond prices. I'm down about 2% since I started this in April and I'm kind of stressed by those paper losses. I just don't see myself staring at 20%+ unrealized losses without bailing. I don't have investor's temperament.

[forummm]

So if you're 60% bonds and the 40% equities part drops 40% (16% decline in your portfolio) are you panicking and selling because one fund when down a lot, or are you OK because your overall number is still only down 16%?

The reality is that stocks take dives. Frequently. But they come back and surpass where they were.

[leostrauss]

I can't predict where my breaking point would be but my gut says it would be somewhere between 10 and 15% portfolio drawdown. So I aim to keep my drawdowns much smaller than that. If that means sacrificing some returns so be it.

Also I believe that markets both stocks and bonds are too expensive these days so I want to keep the stock correction risk at bay (hence the value and foreign tilt) and the interest rate risk in check. Hence short bond duration. The TIPs and gold allocation is an inflation hedge.

[forummm]

If you want to go 40% TIPS, 30% total bond, and 30% equities (owning the global market cap index), that's incredibly conservative, and would almost never go down beyond 10-15%. You'll probably need a 3% withdrawal rate though.

[Aphalite]

It sounds like you shouldn't invest in equities period - why not look into real estate investment? You don't get daily quotations of your market value, and even if you wanted to sell, it would take a long time in down markets anyways, which would force you to hold and keep collecting those tasty rent checks

[forummm]

It sounds like you shouldn't invest in equities period - why not look into real estate investment? You don't get daily quotations of your market value, and even if you wanted to sell, it would take a long time in down markets anyways, which would force you to hold and keep collecting those tasty rent checks

This might be a good idea. If being a landlord isn't your cup of tea, you could hire a property management firm to handle things for you.

Personally, I strongly prefer having stocks instead of being a landlord. But I'm also OK with occasional market crashes.

[leostrauss]

There is no way I can get into direct ownership of real estate here in Canada. First of all it is grossly overpriced almost everywhere in the country. And where it is cheap there are no renters. Secondly the rent checks are taxed as income and there is no way to put your RE investment in any tax shelter. Finally in the province where I reside property taxes are levied at 200% on landlords pretty much sealing the deal.

I thought about buying a property in Portugal as that is where I plan to retire but I don't have anyone to look after the place in the meantime so I think this kind of remote management could prove pretty onerous.

[Aphalite]

You can also buy a private business and hire management to run it for you - but there's also risk in that too

Point is, only you know your own risk tolerance. If you can't handle the volatility of stock market and don't want to spend time finding deals in real estate (and there are deals out there), then be happy with owning either tax free municipal bonds or holding it in cash yielding savings accounts. You can't get upside without taking on some risk, so if your risk tolerance is low, then you'll have to be happy with lower upside as well

Nothing wrong with that, it's just the reality

[forummm]

Is there a Vanguard Target Retirement Fund option available to you in Canada? The VTRF Income fund is for current retirees, is very conservative, and is only 30% equities, and is diversified globally. You wouldn't see the equity component. The other funds would probably go up a little if equities go down.

You can see how well it did during the 2008 crash by scrolling down to the graph
https://personal.vanguard.com/us/funds/snapshot?FundId=0308&FundIntExt=INT#tab=1

[leostrauss]

Interesting. I don't think I can invest in American mutual funds (just ETFs). But I could replicate this through ETF selection. However, that still doesn't save me from myself as ETFs can be bought/sold at any time during the day :P

[forummm]

Could you setup automatic contributions to an account and then scramble your password so you can't ever stop it or sell or look at the balance until you're ready to retire?

[leostrauss]

Thought about doing that. I will have to open another account at a different bank because my current one displays all my accounts into a single convenient view including all investment/savings/chequing accounts etc. I have an up to the second exact value of my liquid net worth which is obviously not good for someone as neurotic as myself.

[forummm]

Bogle recommends investing automatically for decades and never looking at your balance, but to have your cardiologist's number available once you're ready to retire and check the balance because you're going to be shocked at how much money you've accumulated over the years as a passive index investor.

[gecko10x]

I know the conversation has moved a bit from the OP, but I do have some comments if you are still considering that strategy:

I attempt a portfolio with the same principles discussed in the OP and think it's a decent strategy. However, I would make some modifications:
- Short Treasuries are too conservative. Intermediates are generally considered the sweet spot for risk/return. However, I believe Swedroe actually says that LT are actually better for this type of portfolio because the typically have lower correlation to stocks.
- Gold has no long term real return, so I don't like it.

Here's PV with Intermediates & no gold. (Portfolio 3)

And here's PV with some LT. (Portfolio 3)

That said, be careful with back-testing! It will give you a false sense of control. You may also want to look at the portfolio comparisons over shorter time frames to see how they do in different economic environments.

Also, I have to add: While I really like Swedroe's work, I do not think concentrating all your assets in SV is a good strategy- the premium has gotten smaller recently, and the lack of diversification is worrisome. My preference is to use the idea of minimizing fat tails, but diversify my risky assets as much as possible (geography, cap weight, factors, etc.) (This is reflected a bit in the portfolios I created above.)

[forummm]

Good points, Gecko. The headscratcher for me is the OP's adversion to risk. LT treasuries are obviously better for holding for long periods of time. But if interest rates go up 2% in a year (which they will at some point), those will drop about 40% in that year*. I guess that wouldn't be terrible though--maybe OP will buy stocks instead! :)

[gecko10x]

The headscratcher for me is the OP's adversion to risk.

Something else just occurred to me that might be a really good option for the OP: a good adviser. That way you would have someone talk you out of making dumb decisions, and allow you to hold a riskier mix of assets to not leave so much on the table, while still maintaining control over your assets.

I'd suggest looking at Portfolio Solutions (Rick Ferri), or Vanguard. They both charge 0.3% or less. You would however, have to meet their minimums.

[forummm]

The headscratcher for me is the OP's adversion to risk.

Something else just occurred to me that might be a really good option for the OP: a good adviser. That way you would have someone talk you out of making dumb decisions, and allow you to hold a riskier mix of assets to not leave so much on the table, while still maintaining control over your assets.

I'd suggest looking at Portfolio Solutions (Rick Ferri), or Vanguard. They both charge 0.3% or less. You would however, have to meet their minimums.

Interesting thought. Or maybe even a fee-for-service advisor that you talk to as needed.

[Kevin K.]

Just found this thread via a Google search and thought I'd chime in on the off chance the OP is still following it. My level of risk aversion is similar to yours.

I had a pretty sophisticated slice-and-dice DFA-fund based low (40%) equity portfolio from about 2005 (if you're familiar with Bob Clyatt's excellent book "Work Less, Live More" I pretty much had his very thoroughly backtested RIP portfolio). Seeing a ~23% paper loss in a portfolio that "couldn't" lose more than 8% of its value didn't make me panic, but it did make me take a hard look at alternatives, and I've been in the Permanent Portfolio since late 2009. After staying the course with that allocation for 5 years I recently cut back on the gold and switched out the treasuries to all intermediate term.

I read Swedroe's "Reducing Black Swans" book and also Bernstein's "Deep Risk," which if you haven't read it is especially worthwhile since the whole book is basically a riff on the PP and he make a really compelling case for the 4 x 25% allocation of that portfolio being a not-very-smart way to protect against the disaster scenarios it's designed to be a bunker against.

As others earlier in this thread pointed out, you have to have a lot of faith that the small cap value, international and emerging markets outperformance will continue to invest fully in one of the Larry portfolios, and you have to be able to live with the tracking error. If you can afford it (I can't) I'd seriously go with a financial advisor that can not only hold your hand during market crises but also keep your allocation up to date in light of the latest academic research and macroencomic trends. Evanson Asset Management in California is superb in a lot of ways: for one, they use DFA funds which are unquestionably the best for this kind of portfolio, and they charge a fixed fee ($2500 a year for smaller accounts) rather than a percentage of assets. It's a 500K minimum but their average client has 3 million and they do a lot of institutional and trust stuff. Their market savvy is lightyears ahead of what you're goint to get from any of the RoboAdvisors.

Failing that, what to do? I think you have to increase the equity allocation to at least 40% but no more than 50. Rick Ferri these days recommends 50% U.S., 40% International and 10% Reits for the equity allocation of an all-weather portfolio, and then you will have to decide whether to tilt to small and value or not. On the bond side, intermediate term Treasuries - period - in my book since no other type of bond benefits from the flight to safety during market panics. Bernstein says that tilting to value and international is the only viable way, cost and practicality wise, to guard against inflation. Forget about the gold for all kinds of reasons, or keep 5% if you must.

Of course if this is all too much (and for me it often is) you could just go 100% Vanguard Wellesley and try not to look at the markets (it's beaten just about every intricate slice-and-dice porfolio AND Larry's porfolios over any time period you care to measure).

Hope this helps a little.