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The minimal viable alternative to the 60/40 portfolio [Members]
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A very interesting read thanks. I played around with a similar approach in portfolio charts recently and found unhedged long duration US dollar government treasuries were a better diversifier than UK gilts. I surmise this is due to dollar strength / flight to safety of treasuries during recessionary periods. Could this also play into part of commodities and gold strength in that they are priced in USD?
What the world needs is either a brokerage platform that can automatically rebalance based on a punters allocation/construction, or less flexibly, LS equivalent products for PP type portfolios. A 100% bond LS product with no home bias would also be useful, something with the flavour of VGGS, but with linkers in it. I think you can get euro LS ETFs that have no home bias right? But they have at least a 20% equity component? In practice I never get round to rebalancing, even though I know I should do. It’s not really a job that is suited to manual intervention, much better fully automated. That’s why, for all their other shortcomings, LS products are so good..
very impressive piece, thank you. one thing strikes me – you mention the key point of it’s important to buy low, sell high; how does this play into influencing the best defensive construction available to buy now? eg – I have a decent slug of commodities (sadly not quite enough to fulfil a truly defensive role) which I bought ages ago, which glancing at my portfolio seem to have done really well over the last few years. presumably that means buying more now – in order to construct some version of your above portfolio – wouldn’t actually be a good idea? Ditto maybe gold? So is there a version of this analysis that goes…. starting from today’s (rough) prices, the best options for defence over the next say 10 years might be ….. ? Or have I completely misunderstood? (Quite possibly so, very new to all this)
I am very much enjoying this series from a theoretical perspective.
But they’re a bit like telling someone that they live in a flat they’ve bought, with dodgy cladding. Anxiety rises, but they can’t move out. As you acknowledge, people simply won’t be able to sustain a 60/13/13/13 portfolio with frequent rebalancing and long periods of weird performance. And gold and commodities aren’t cheap right now.
And the idea that 30%ish of invested wealth should be put in short term linkers would be a very bold, very active bet, but anyone with a mainstream target date fund is vanillarissimo. Maybe living with the ugly realities of a trad 60/40 may be bold in its own way, but is definitionally passive in every sense.
Finally, I’m just not sure that we can make assumptions about the inflationary environment of the next 20 years. Sure, bonds had a tailwind of falling rates to 2021, but rising rates are also a headwind of a sort. And who could have predicted long term inflation in 2006, and short term inflation in February 2020?
Keynes always emphasised that risk and uncertainty are two separate things, but economists too often collapse uncertainty (we simply don’t know) into risk (a bad thing could happen on x probability at y cost). The future is partly risky, but partly simply uncertain.
Just when I think I have it all worked out and am ‘happy’ with my ‘passive’ portfolio’s defensive side.
Very thought provoking piece. Maybe it’s time for me to add in some GISG and split it 50/50 with VAGP.
I’m not ready to fully ditch my nominals and I own such a small % of Commodities and Gold (For now) that I’m not tweaking them for a good few years as I reduce my Equities %
Larger emergency cash pot for sequence risk for x number of years generally smaller than a defensive allocation, ie if you were withdrawing 4% a year, 4x is probably < 40%. And of course, if x was 10 or more, equities would probably be safer
It's also just the peace of mind that cash gives for sequence risk, if safety comes from a nominal amount to know you can ride it out rather than looking at the overall pot
@Richard C – I think you’re right, the tendency for the dollar to act as a risk-off currency also increases the utility of commodities and gold for GBP investors as equity diversifiers.
I found the same thing as you re: US Treasuries:
https://monevator.com/are-us-treasuries-better-than-gilts-uk/
@Kim S – It’s best to think ‘buy low / sell high/ relative to your start point.
For all the talk, attempts to gauge the fair value of assets aren’t worth the backs of the envelopes they’re scribbled on. No-one can tell you if an asset is too cheap or expensive because it’s new information that moves the price.
For example, it’s not news that Nvidia is selling a lot of chips due to the AI boom. Currently its share price is supported by the market’s best guess of Nvidia’s future profits. If profits are higher than expected then Nvidia’s share price rises higher. If lower, then the share price falls.
Right now, investors are betting on AI transforming the world. But the technology could fall short in any number of ways, or profits could be stymied by regulation, or Nvidia outcompeted by another firm.
The next 10 years are fundamentally unpredictable. So it’s better to buy the assets you need, stay diversified, and use rebalancing to periodically take profits. There’s no law that says commodities are a worse buy now because they’ve gone up in value. Bull runs can last for years.
@George S – Thank you. I agree with your many of your points but I don’t understand why 30% linkers is an active bet but 40% nominal bonds is passive.
I’m making no assumptions about the direction of inflation or interest rates.
What I found in this piece: https://monevator.com/index-linked-bonds-replace-nominal-bonds/
Is that there was little difference between short index-linked gilts and nominal bonds during the major stock market retreats that have occurred since linkers were first issued.
So while we can be near certain that linkers will outperform nominals during an inflationary crash, they’ll likely do just fine in a demand-led recession too. They definitely won’t work as well during deflation, so I’d still keep some nominals / cash hanging around.
Essentially short linkers are likely to be good enough against both threats. I’d prefer everyone to be more diversified still but I agree that holding gold and commodities is a tall order in the teeth of an almighty drawdown.
The problem with the trad 60/40 is it isn’t a passive bet unfortunately. It’s a bet on a disinflationary, falling rate environment. My alternative suggestions don’t force you to take that bet. They have a better chance of working regardless of the prevailing regime.
Finally, it’s important to emphasise we have no idea if gold / commodities are cheap or expensive right now. We’ll only know in retrospect.
Surely the elephant in the room here is trend following. Sophisticated posters including @Finumus and @Delta Hedge seem to think it is at least a partial answer (WGEC and chill!). Despite having read the Monevator piece several times, I confess I’m none the wiser, whilst other articles indicate that, while the principle may be effective, the retail offerings are over priced and under whelming. Thoughts, anyone?
@The Accumulator. I think the difference between 40% of bonds in whatever ratios/places that Vanguard puts them, and buying 30% short-term linkers is about the level of activity, and who is making the bet. Currently, I passively accept that Vanguard probably know more about this than me (they make the bet), and they’re not charging me much, so they can have at it. They also neatly look after the whole pie. I am utterly passive.
But if I were to go with 30% linkers, I’d have to liquidate my whole 60/40 fund; choose my own various equity allocations (do I go world cap weighted, and bet on AI delivering? Do I recreate Vanguard’s home bias?). Then I have to do all the admin to move my bond money out of Vanguard, because they don’t offer short-term linkers. So I have to fill out forms at a new platform. And then somehow, over the coming years, I have to force myself to sell high-performing chunks (but from which fund?) and move the money about to get it into a short term linker fund.
Even if I simply go with Vanguard’s generic linker fund, I am still now self-managing fund choices, and self-managing balancing. When do I rebalance? With which resources? What if I forget? What if I do something stupid? It is active, in the sense of activity.
There will be a lot of people for whom your excellent analysis (I really have enjoyed reading it) is exactly the right set of choices – the fettlers, tinkerers, optimisers. But I wonder, are they currently sitting in bland 60/40 target date funds? Surely, they’ve already made their moves. I totally buy the really high-quality data analysis you’ve done – but it would take herculean efforts for me to do something with it, and it would open up lots of behavioural risk.
@Martin T #8: Thank you. I’m not sure Mrs DH thinks I’m sophisticated!! 😉
With each of Winton Trend Enhanced Global Equity Fund (WTEGE) (for 100% Trend Following/100% Global Equity tracker, using return stacking, with the TF on the full range across bonds, commodities, precious metals, FX, interest rates, and a separately run sleeve for long/short equities) and now with AQR Delphi Fusion Fund (100% in a Equity Market Neutral (EME) strategy/100% in a Global Equity Tracker) at, respectively, 110 basis points (1.1%) p.a. Ongoing Charges Figure (OCF) and 93 bps (0.93%) p.a.: You have, I think, to look both at what you get, and not just what you pay.
A magnificent maisonette in Mayfair or a pretty pied-à-terre in Pimico isn’t going to cost the same as a tardy town house in Tadcaster or a flimsy flat in Fife.
For a start, you’re getting (via rolling futures) 200% exposure in each fund; so, arguably, you should look at fees per 100% equivalent exposure, which then starts to look much more reasonable on pricing.
Then you need to compare that equivalent figure, I think, with an unlevered active fund given that the EME and TF strategies are indeed both “sophisticated” and complex (albeit systematic, rules based, algorithmically delivered; and not human discretion, as with a conventional active fund) and Winton (for WTEGE) is a hedge fund.
Pricing starts to look much more reasonable then.
As for WGEC ETF (90%/60% Equities and Bonds, so 1.5x a 60% equity/40% bonds ‘classic’ mix, with the managed futures on the bonds, and the equities held physically) the OCF is only 25 bps (0.25%) p.a. That’s comparable with many plain vanilla trackers. I wouldn’t sweat the difference between 10 bps and 25 bps annually. Over 30 years a 0.15% annual difference compounds to less than 5% cumulatively. Every little only helps a little. Every lot will help a lot.
@Delta Hedge #10 Thank you. I get that, if you’re getting 200% coverage, the fees are effectively halved per 100%. It’s understanding the jargon, and what it does, that loses me – managed futures, return stacking, separate equity sleeve etc etc! I’ve yet to find a concise primer that explains it all!
Plus, where do they fit into a portfolio? Are they a ‘one stop shop’, along the lines of a more sophisticated Life Strategy fund, or something that can be used as an adjunct to Bonds in a (say) 60/40, which is what TA is searching for in this (and other) articles.
@George S – Great response. What you’ve said goes to the heart of the matter for me, so I’ll pushback a bit in the interest of furthering the debate (I hope).
My ideal solution would be for Vanguard and other fund managers to offer multi-asset funds that acknowledge the inflationary side of the risk coin. They could for, example, offer one featuring the Bogleheads’ ultimate passivista solution: split your 40% equally between linkers and nominal bonds.
They don’t seem in any rush to do so. LifeStrategy 60 contents itself with a tokenistic nod to diversification with a 1.5% allocation to linkers. That is window dressing.
Before multi-asset funds came along, the simplest 60/40 solution for passive investors was:
60% World equities
20% nominal bonds
20% index-linked bonds
Rebalance annually to maintain those allocations.
It’s straightforward, completely doable. Just pick short duration bond funds.
A multi-asset fund is even easier to operate but unfortunately a worse product from a risk perspective.
Sadly Vanguard aren’t taking the bet on the outcome, you are. It’s your money and your future.
Vanguard have made a commercial decision not to offer a product which retail investors need. Have always needed. From that perspective, Vanguard’s interests are not the same as their customers.
“There will be a lot of people for whom your excellent analysis (I really have enjoyed reading it) is exactly the right set of choices – the fettlers, tinkerers, optimisers. But I wonder, are they currently sitting in bland 60/40 target date funds? Surely, they’ve already made their moves.”
You have precisely identified my personal dilemma when writing this piece.
I think that Monevator’s audience is split across both types of investor. I feel the need to serve them both. Indeed I represent a hybrid case. I’m passive at heart but I’m prepared to step in when I believe I should. I guess I’m more interventionist than you but nothing like the blur of motion represented by say @Delta Hedge.
This post was the one that solved the risk averse side of the coin for me:
https://monevator.com/index-linked-bonds-replace-nominal-bonds/
I didn’t know before I started the analysis how well short linkers were going to hold up. I’m satisfied now that the risk solution (for people who can’t stand volatility) lies in short duration bonds and ensuring that a substantial wedge are of the index-linked variety. Essentially the Bogleheads had it right but they should have shouted louder about keeping your duration short. (Me too!)
I know that’s more complicated than buying a LifeStrategy fund but the evidence tells me it’s the right thing to do for many.
Put it another way, I used to rec LS60 for friends and family when I thought it appropriate. I couldn’t do that now. And if that’s the case for them, I really gotta bring it to the attention of any Monevator readers who need a similar solution.
Re: Optimisers vs satisficers
This post is for someone who sits somewhere on that spectrum.
I could now live with the 30% short-linker portfolio but what’s the alternative?
The alternative is the all-weather portfolio which looks great but is a big ask when you really dig into the numbers. (The more I dig, the more apparent that becomes.)
I now have an all-weather portfolio. I eat my own cooking. I own 60% World equities plus gold, commodities, nominal bonds and linkers. In other words, my carve-outs aren’t as bold as a one-third split – which I think goes a long way to solving the risk problem (at least for me.)
The one-third split was just a necessary simplification. Because when discussing the all-weather I needed to try and debunk the notion that there’s some magical combo out there that rules them all.
So this post is for anyone who’s more hands-on, or engaged with investing, while remaining consonant with a passive investing philosophy and the evidence.
An interesting article, and a great discussion so far, so thanks to all for that. I suspect I’m somewhere in the middle of the audience spectrum that TA talks about. Up to now I’ve simply had my investments in Lifestrategy (gradually moving up through the equity allocations over time); but I’ve recently started tinkering with the aim of building in some of the (perceived) shortfalls of LS. My SIPP is currently LS60 45%, LS80 45%, Emerging markets 5%, and Global small cap 5% (my ISA stuff is a separate matter, and much more defensive). Those little tweaks have done ok for me so far, but it does feel a little more luck over judgement. For what it’s worth, this article has got me thinking about something more like LS80 75%, Cmdts 15%, gold 10%. I’d be interested to know what more experienced people than me think about that. Cheers.
I would reiterate how good and pertinent this article and it’s siblings are.
So if you were to summarise these portfolios in a style similar to:
https://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/
What would they look like? Difference being the linked article actually specifies financial products and the table layout is really easy to read. Apologies if already done in one of linked articles, but there is so much info I can’t hold it in memory. That link above btw is my favourite and most influential MV post of all time!
@Rhino – if we start with two-fund options, for simplicity, how about 75% in an 80% equity fund (like Lifestrategy) and 25% in iShares index linked gilts (up to 10 years) ?
That gives you 60% equity, 15% nominal bonds and 25% index-linked. Not bad for only one extra fund to think about.
Well I really enjoyed this and previous articles. Rebalancing is my shortfall. Wonder how a static allocation would fare. Personally, as growth isnt a big issue, I aim for 40% equities and have direct holdings in IL gilts and IL trackers plus some gold and commodities. Of course a lot of commodity funds also hold precious metals so you have to avoid double counting.
I haven’t the stomach for long bonds though. These seem to be an interest rate punt.
@LCD – good thinking, sounds pretty reasonable. Wonder if that iShares duration is too long though.
Was just looking at the newer global life strategy bond component breakdown and that’s only 0.3% linkers. Makes you wonder why they bother?
Just going back to previous @TA comment on not recommending LS any more. You probably want to frame that in the context of what would happen off the back of that recommendation? If it’s LS or do nothing, then LS still massively preferential. If it’s LS or ‘do what you suggest’ then fully agree.
I know I should be doing what you suggest, but I haven’t done it yet, and I consider myself pretty interested in the whole business, so god help anyone else! I think the mortgage issue in October will spur me to act.
@Paul – not rebalancing wins across some time periods. The 60/40 portfolio is dominated by equity outcomes so if equities outperform and you don’t rebalance then you end up ahead.
For that reason, someone could choose an all-weather intent on rebalancing, bottle it in the event, but still do fine.
@Martin T – Re: trend. This is gonna be a big area of future research for me thanks to @DH and Finumus et al.
Your comment succinctly captured two challenges that worry me:
1. Danger that some “retail offerings are over-priced and underwhelming”. And that it may be prove very hard to know which aren’t ex ante.
2. Excessive complexity or unsuitability for the set of investors I write for and belong to.
On point 1, this is a perennial problem for retail investors. The theoretical underpinning is sound but the execution is sadly lacking in some/many of the funds we can access.
It’s one thing unravelling that with transparent index trackers. But the game may not be worth the candle when trying to decode hedge funds. Complexity, opacity, asymmetry of information, high charges and big promises are the hunting grounds where retail investors get speared time and again.
I’ll give it a go, so this is no more than me sounding a cautionary note at the mo.
On point 2: it strikes me that Finumus and Delta Hedge are very hands-on active investors with a large appetite for risk plus the capacity to take it. I hope that’s fair, I don’t mean to misrepresent or caricature them. All the same, I think Finumus recently said he’s playing to get a high score these days.
So Finumus could probably take a big hit and shrug it off. Plus Finumus and DH are so engaged, something could happen to change their mind, they dump a position, and forget to tell us 🙂
I guess what I’m saying is that however sophisticated they are, their behaviour may not translate well for investors with quite different needs and capacities.
@Rhino – Cheers! That sounds like a good topic for a follow-up post. Absolutely agree, if the choice is LS or 100% cash then it should be LS.
My basic plan at the moment is to look into the defensive trusts next and see if they help solve the problem. @TI is pessimistic though.
@Martin T #11: you could use them as one stop shops. Noone can know of course, but I’d think there’s quite possibly some decent arguments one might make as to why they might be likely to workout better than a conservative (sold as a one stop shop) outfit like Capital Gearing Trust or Ruffer Investment Company.
The idea though with return stacking is to use the capital efficiency to create more space in the portfolio for yet more and different diversifiers (diversifying your diversifiers).
Let’s take a hypothetical example of 20% in WTEGE, 20% in AQR Delphi Fusion, and 20% in WGEC ETF. There’s 50% leverage / capital efficiency embedded there.
The remaining 40% of capital can the then be deployed elsewhere, perhaps into liquid alternatives or into global macro listed hedge funds like BHMG or Man AHL (or into infrastructure investment trusts or uncorrelated return streams like Buford Capital for litigation finance); into perhaps long duration TIPS; into a fixed allocation to a broad commodity ETF (e.g. UC15); and maybe into a fixed allocation to precious metals (gold and silver) – Let’s say, for example, 10% into each limb (so covering the remaining 40% overall).
http://www.optimizedportfolio.com is pretty good on the explanation here IIRC.
@TA: #18: check out bestfolio.app for TF and TAA approaches. I think I can send you a month’s free subscription via DM if you’re curious.
My risk appetite (for ISA) is informed by:
– Having generous DB pension benefits accrued
– Having a ~£700k SIPP to fall back on
-Being likely to qualify for a SP unless it gets means tested
– Having no children
– Being likely to inherit a decent sum as the sole heir / only child
If it were otherwise I’d be way more cautious
I could never face stock picking though as the mainstay. I keep individual companies well below 5% weighting. The amount of narrative navigation and research required is completely overwhelming. I don’t know how @TI stays sane with it.
@Weary Worker – Your load-out seems fine to me so long as you’re OK with the potential volatility of 15% commodities.
Hopefully you saw this piece. It was pretty balanced on commodities’ pluses and minuses (that was the idea anyway):
https://monevator.com/commodities-are-working/
It should be clear that a 60/40 portfolio is just way way too simplistic. Even with the most basic idea of low/high growth vs. low/high inflation you get 4 outcomes. How are just two asset classes going to cover those scenarios? It’s the equivalent of trying to solve for 4 unknowns with just two equations. You’d need to assume some level of degeneracy in those regimes for that to work.
I’m coming back to my usual gripes. First, the universe is complex. Accept that solving a complex problems requires a complex solution. Just deal with it.
Second, are people really trying to argue it’s rational to think that stock picking is wrong, yet asset class picking is fine? I know nothing about individual stocks but can decide not to own commodities or alts or whatever. That they can decide that long duration bonds are bad but short duration bonds are fine. That taking currency risk, country risk or sector risk is somehow not taking a view. This is why I see “passive investing” as just another terrible religion. Not only is it magical thinking but it’s adherents cannot even be consistent with their own dogma. I suppose they argue it’s human to be a sinner!
I’d say give up the false prophets and embrace the wonders of complexity. Give the brain a workout.
@TA. Thanks. Funnily enough, 15% in commodities doesn’t worry me as much as 10% in gold does. Can’t quite articulate why though.
@ZX As always, I’m in awe of your superior intellect, but it leaves a pretty bleak outlook for those of us who are required, by circumstance, to do our best to manage and protect our hard-earned savings into retirement, with both limited (and declining) intellect, and products available. We don’t necessarily hope to excel, simply to do enough to survive all but the most cataclysmic meltdown.
“Quest” is the kind of nerd-speak that resonates 🙂
It has taken many years to land on a portfolio I’m comfortable with and that has broadly delivered the growth-with-stability I’m looking for, through the various mini-crises in recent years (the next financial crisis will be a different level of test altogether).
I think this article is very important to a lot of people, and it’s the kind of information that is rarely (if ever) found anywhere. Maybe make this one open access?
I’d suggest that people first decide the level of stock market risk they are comfortable with. Then split the defensive part with equal proportions:
Gold, commodities, linkers, intermediate bonds/cash and hedge funds.
The latter split half/half into Global Macro and Trend. I agree with all the concerns (@TA #18) and expect moderate returns on average. But they should be (from first principles, by their construction) uncorrelated or anti-correlated with both stocks and bonds, and there is no other asset that does this.
Re the problem to hold volatile assets through drawdowns: It’s just a matter of being clear about what their job is in the portfolio. The same concern should apply to stocks. I mean, if someone gets worked up about their 10% commodities position, can they handle 60% stocks through a crash?
@MartinT. This is not about intellect. I’m not asking people to have hundreds of strategies. But just two? And two picked on what basis?
You say your aim is “protect our hard-earned savings into retirement”. Sounds totally spot on. Well explain to me the clear correlation between a global equity tracker, weighted heavily toward what has worked in the last two decades – US tech stocks – and your retirement liabilities? What happens if you get reversion to the the mean, not continued momentum. Or the clear correlation between your future liabilities and a govt nominal bond tracker who weights depend on the relative debt burden of those countries. The more debt they have, the more you own. Looks like a terrible hedge.
The worst scenario for any retiree would be an extended period of low growth and high inflation. Not a short sharp recession like 2008/09, not a pulse of inflation like post COVID. I’m talking about the stock market dropping 30-50% and not coming back for two decades. Inflation at 5%+ for two decades. Yet, the 60/40 equity/bond portfolio provides no hedge for such a scenario. It wasn’t constructed to protect against that regime. Nor does it protect against so many other regimes. You need to be so more diversified than that.
Try some commods, some gold, some alts etc. In smalls. It may well help and what harm can it really do. If nothing else you will start generating some rebalancing returns. Actually turn volatility into an asset class that generates returns, rather than something to fear.
Plus, at a higher level, I just don’t see how anyone can argue that a 60/40 portfolio is somehow more “passive” than an 30 year+ index-linked ladder with a 2%+ real yield. Surely, that is the starting point for any passive portfolio that actually wants to hedge your future risks. Now, I wouldn’t go 100% for that either (sovereign credit risk is non-negligible) but at least I can see a direct correlation between my future liabilities and that. Buying an equity index tracker full of Amazon, Telsa, Apple, Meta, Nvidia, SpaceX etc. That to me is simply pure speculation. A completely active bet. I’m ok with active bets but at least admit that is what you are doing.
@DH – Thank you for the kind offer of the sub. Can I come back to you when I roll my sleeves up and finally dive in? It’ll be a while yet for one reason and another.
Incidentally, thinking about low correlations with equities – have you ever looked into reinsurance funds?
@Sparschwein – Cheers! I’ll lobby TI to open these up later on, though he’s fierce on holding the line re: membership posts.
Re: lack of correlation with stocks and bonds – gold and commodities do the job. It’s why all-weather portfolios look so good. If trend can do the same minus the heinous drawdowns then in principle I’m on board.
“can they handle 60% stocks through a crash?” Ha. This is the real elephant in the room 🙂
It’s plausible that many people have internalised the cultural ubiquity of the “Do not sell” message so will hold even if the equity market is down for a decade or so.
I talked to TI recently about this… he was invested during the Dotcom Bust so went through the entire lost decade. I only jumped in before the GFC.
You’d have found him skulking around many an investing forum at the time and his view was that people generally held it together.
Maybe that was a more informed audience?
Lots of people soured on bonds post-2022 – perhaps because they were advertised as “safe” which translated into “broken” when they plunged 40%.
My guess is that gold and commodities would be sold like a shot by disengaged investors. Because they’re less well understood as asset classes and aren’t supported by reassuring narratives such as mean reversion, buy and hold, intrinsic economic worth et al.
Maybe gold is less vulnerable because it’s generally understood that humans have loved the stuff since year dot.
I guess the money delusion may be a saving grace when it comes to staying the course, too. Equities generally bounce back reasonably fast when you view them in nominal terms.
That said the Lost Decade (2000-2020) is still the lost decade and the Great Depression keeps you underwater for over 13 years.
@TA #26: delighted to. When I posted yesterday the offer I was seeing was a month free. That’s is still the case, but later that day, after posting above, I then signed up for their referral reward programme and (full and frank disclosure here) if at the end of the free month you were to decide to subscribe to them then I’d then get a credit against the cost of my own subscription (much like Monevator’s own Moguls’ referral reward). That wasn’t the position at the time when I posted above, but it is the position now.
FYIO they’ve got 81 strategies and IIRC something like 146 variants, with daily signal warning alerts and backtests for each, with a 5,000 run multi window (up to 30 years out) Monte Carlo simulator (with median, 25%-75% and 5%-95% bands) and with 3, 6, 12 and 24 month length blocks (to create up to 20,000 (4x 5,000) runs per strategy for each forward walk time frame).
What haunts me is Dot.com (parabolic blow out top March/April 2000).
What entices me is also Dot.com (through the despair and capitulation phase of September/ October 20002).
There’s no contradiction there.
Ed Zitron’s just done another massive piece on how the whole AI shebang is a massive scam yesterday.
He could both be right and wrong.
I work professionally with GPT5.5 Thinking (Enterprise subscription), and am looking forward to 5.6 (although I wish we had access instead to Claude 4.8).
It’s both consistently brilliant, and equally and simultaneously, predictably terrible.
There is something there. But I don’t know if it’s fixable, or whether, instead, it continues awkwardly on as the IT equivalent of the front end of a Trabant welded onto the rear section of a F-22 Raptor.
The answer to that will determine if this is an interesting, but ultimately marginally relevant and currently grotesquely overpriced, tens to hundreds of billions revenues industry, or one which truly and permanently ‘changes the World’, and which, in doing so, makes all the trillions of Capex supposedly planned for the next few years look like mere chump change.
It could be a question of timing. Many pathways are possible.
Amazon only did 2,400 to 3,500 fold returns cumulative since first listing in May 1997 by first drawing down 93% en route (in 2000 to 2002).
To thrive you have first to survive.
The question therefore is how much potential equity upside exposure to give up now in order to diversity away so as to be left with adequate dry powder if there is the Mother of All Crashes in equities (and possibly in bonds in an inflationary spiral).
@ZX’s 20 year inflation bear market example here seems to me eminently plausible when you consider that the US was in a reflationary regime from rearming in 1940 through to peak Volker in 1981 (with the 10 year T bill then on nearly 16% and the prime rate at 21.5%). We then had a 40 year disinflation regime until 2021. Cycles last longer and go further than anyone predicts at their start.
I just wish it were possible in an ISA/SIPP to buy a deeply out of the money LEAP call on the SPY/QQQ and to sell a put to pay for it. Then you dial down equities, and dial up multi asset.
If SPY/QQQ surges, then, hopefully, you get an asymmetric participation via the call option.
If it crashes, you get to buy via the put contract at a strike which you’d be prospectively happy owning SPY/QQQ at.
And if it goes nowhere, then the put sale paid for the call premium and you get whatever return the multi asset mix gives you.
It’s not rocket science.
I don’t really understand why the FSA et al prevent it; just as I don’t get why they block access to non UCITS ETFs which the SEC has already long since cleared for retail in the US simply because the ETF provider has not translated the KIID into Greek or whatever.
I agree with @ZX. An equity index tracker is an active bet.
Cap weight indexation is also, IMO, an active momentum lite strategy.
As I’ve said severally before, there’s nothing wrong with that and I’ve nothing, as such, against it; but call it for what it is, and understand what you’re doing if you do follow it.
@TA
Could you please include Equity Market Neutral strategies when you look at alternatives like Trend, please?
As another alternative strategy for some of the 40 part in the 60/40 portfolio.
Equity Market Neutral might be easier for me to understand as well!
Apologies @TA. Just realised that I forgot to answer your question on reinsurance funds. In short:
1. Is their an ISA/SIPP compatible vehicle?
2. If so which?
3. How reliable is the anti correlation?
4. How does it compare to other alternatives like:
a). Financial trading platforms that do well on increased volatility (larger spread) associated with market swoons and crashes: think Plus 500, FLOW traders, CMC, even AJB?
b). Litigation finance (Buford Capital)?
c). Low sensitivity to market beta sectors like Sports ‘cartels’ (e.g. Formula One / Liberty Media (FWONK / LLYVK))?
d). Consumer staples?
In my experience things are more correlated than you hope for in a crisis.
@ZX #25. Thank you, that’s helpful. Your ‘bottom up’ approach of starting by assessing liabilities, and how to cover them, makes a lot of sense, and is an interesting contrast to the usual ‘aim for a number, and hope to eke it out via the 4% rule’.
I guess it might be an argument for a floor and upside, or similar, approach, with the floor first ensured by, say, SP, annuity, ILGs etc, with remaining assets invested according to one’s risk tolerance.
I think I’ve said it before, but I’d be interested in a fuller exposition, if you/TI were amenable.
Great series and lots of food for thought
I’m light on commodities and index linked bonds so looking to address that
If you get or will get the state pension in the next few years how would you build that into the overall asset allocation?
I read that Bogleheads suggests including it as part of your bond component.
So assume 4% yield is that 12k pa accounted for as 300,000 allocation in the Index linked pot?
How do others think of the SP in this context
FYI I’m retired , around 4 years away from SP and living off my significant investment pot mostly in GIA due to a long spell overseas
@simon1499359 (31)
I think your approach to secure income, such as the state pension, in asset allocation has to be informed by your own psychology. Personally I have secure income in the form of the state pension and a DB pension, but the idea that I can regard this as bond-like and consequently have all my investment portfolio invested in equities fills me with horror. The secure income may give me the risk capacity to see my investment portfolio potentially halve in a crash, but it certainly does not give me the risk appetite.
My preferred approach is to regard the secure income as a reduction in the income needed to be generated from your investment portfolio. You can then set the asset allocation to generate the remaining required income in line with your own risk capacity, tolerance and appetite.
@simon1499359 – I think your approach works, though I’m psychologically more comfortable with the David V method.
Planning-wise, I pegged the State Pension as a Brucie Bonus. My thinking was / is: It’s my margin of error should all my other assumptions prove wide of the mark.
True enough, my original assumptions proved wide of the mark 🙂
In good ways and bad.
@Index – I’ll pop it on the list 🙂
@DH – Thank you! Every time I glance at reinsurance I get repelled by something like the list of issues you’ve outlined 🙂
Re: AI – I’ve used Chat, Gemini and Claude. I settled on Claude but it’s riddled with the same problems you’re experiencing with Chat. Love this description btw:
“it continues awkwardly on as the IT equivalent of the front end of a Trabant welded onto the rear section of a F-22 Raptor.”
Currently I feel untroubled by AI. As a (semi) skilled human that is, not as an investor, or concerned citizen thinking about the future.
But – in the here and now – it’s not gonna replace me anytime soon performing like this.
Essentially I share your pathways view. Currently it feels like the Internet circa 1996. “Blimey this is gonna change everything. Wonder when?”
@ZX #25
‘… the clear correlation between your future liabilities and a govt nominal bond tracker who weights depend on the relative debt burden of those countries. The more debt they have, the more you own. Looks like a terrible hedge.’
Quite. It’s a real flaw. This retail punter consequently owns a slug of (GAAA) iShares Global Govt AAA-AA ETF. It excludes Italy and Japan for credit rating reasons and (in simple terms) caps the remainder at 20% for AAA and 10% for AA, the later adjusted for liquidity. So:
Germany 19.94
Canada 15.60
Australia 10.84
United Kingdom 10.01
United States 9.87
Netherlands 8.31
Austria 7.08
Finland 3.47
Singapore 2.80
Ireland 2.72
Switzerland 2.15
New Zealand 2.08
It ain’t perfect, but what is? FWIW I use it as a compliment to rather than a substitute for a broad developed govt bond tracker.
@ZX – your point on Government Bonds is an interesting one. It reminds me of Victor Haghani’s assertion that if your objective is to fund a stream of future spending that rises with inflation, then index-linked bonds might be the lowest-risk asset (not in terms of volatility but in terms of the risk of not achieving your objective). Obviously, this is a much more compelling argument now that real yields are positive, and I can see the logic if you’ve already built up your asset base.
However, if you were accumulating, I’m not sure I’d be buying long-dated inflation-linked bonds – the liability is too distant and too uncertain.
@TA – Trend has worked in the GFC or 2022 as expected. It failed e.g. in the Covid crash, also as expected – it’s not designed for fast changes. That’s why I think the combination with global macro/long volatility makes sense. Access is still a problem with the latter though, afaik it’s basically BHMG or nothing in UK. Finumus has some US ETFs as tail hedges, but their returns have been unconvincing (CAOS) or awful (BTAL). BHMG was better on average and the better crisis hedge in 2020 too.
Disclaimer, these hedge funds are largely black boxes beyond the basic mechanics, and the jury is still out if they can justify the high costs. I think it makes sense within limits (max 10% of my portfolio), because I can go a bit higher with my stocks allocation if some of the other stuff reliably wins in a crash.
@Sparschwein – That’s interesting. I feel you’re right that about the black box nature of these things. That alone suggests caution and a cap around the 10% mark.
I also feel that events like Covid are over so fast that most people should be able to ride them out. That said, I do remember people panicking and at least some reported selling.
Also, the trad diversifiers basically worked during Covid. So if people *still* sold, my guess is it was because they were overexposed on equities. They just didn’t know it until the crisis hit.
It’s good that trend worked during the GFC and 2022. That’s very encouraging.
Well, March 2020 is a good test case for a fast crash, and the recovery may or may not follow the same path next time. It came because of rapid, gigantic, unprecedented stimulus, from both governments and central banks. I think markets have come to take for granted that central banks will keep bailing them out (and they have over the last 20 years) – until one day they won’t, or can’t.
@Sparschwein – that depends what kind of model the trend fund is running, and how short / long term the signals they use are. Interesting Winton (which is supposed to be a medium-long term model) made 5% ish in March 2020, but Schroder BlueTrend, supposed to be short term, lost money (but not much). The US Listed DBMF ETF was also very slightly up in March 2020.
In terms of what else is available to retail – in addition to BH Macro you could have a look at something like Fulcrum Diversified Absolute Return (this runs a mix of dynamic asset allocation, discretionary macro, and medium term trend), or something like Graham Macro UCITS (which appears to be available on Bestinvest and only Bestinvest as far as I can tell).
Re the US ETFs that @Finumus has – the only real alternative I could find (outside of just going out and buying put options yourself) is Aumdi Volatility World (available on Fidelity though I’ve not tried to buy it) this is a long vol fund which returned 35% in March 2020.
To make things more complicated with portfolio construction – a good diversifier doesn’t even need to have a positive expected return to improve a portfolio, it just needs to be volatile enough and uncorrelated enough, with a return that’s not too negative. This sort of suggests you don’t even need to worry about whether you think people like discretionary macro / trend managers have alpha – only that they’re decently uncorrelated and have good enough risk controls to not blow up. I’d argue that they’re one of the only asset classes that can be structurally uncorrelated (due to the ability to go short equities, bonds, currencies, commodities etc) and that alone should warrant them for consideration.
Hi,
This is my first time of posting, but I have appreciated the excellent work that you do for a long time. I have found this group of articles very thoughtful and beneficial as I’m currently reviewing my financial position.
To me the missing in this article is the time/age element ie up to age 50 you should be in 100% equities whereas at age 90 you should be 100% bonds/cash. What you are trying to do is provide a single solution for the ages between 50 and 90, which is not sensible because your risk strategy significantly changes over that period.
Is the simple answer Target Date Requirement funds? Vanguard’s Target Funds show a significant move to index linked bonds with age.
@Chav – cheers, I’m glad you’re finding the work useful.
The findings scale to whatever level of equity risk an investor is comfortable with. So whether you wish to hold 80% equities or 40% (or glide between the two) the same diversification principles apply.
What changes is that the lower your equity exposure, the lower your volatility (assuming a good mix of diversifiers). While the higher your nominal bond / cash exposure, the greater your inflation risk.
I’m not trying to present a single solution. I’ve used the 60/40 portfolio as my reference point because it’s the default for so many people.
I’ve tested different ways of cutting the pie and pointed the way to two alternatives if the article’s conclusions seem unappetising. I don’t think there’s a single one-size-fits-all solution. I hope people will just adapt or reject what I’ve found according to their own needs.
Risk is so very personal. I was 60% equities at age 50 and intend to be so at age 80, unless I’m not around or I annuitise.
Age is a useful risk metric but it’s only one part of the puzzle. Some people can’t hold a high proportion in equities at age 25 because the volatility is too much for them. Some 80 year olds will hold 100% equities because they don’t need their portfolios and are investing for the next generation. The variation is off the charts.
FWIW, I’m midway through a series on derisking:
https://monevator.com/derisking-your-portfolio-on-the-run-into-retirement/
I paused it to build the tools that helped me write this 60/40 series, so I’ll get back to derisking soon. I think this series helps inform the derisking debate, though.
I still love the simplicity of these derisking rules-of-thumb t00:
https://monevator.com/asset-allocation-strategy-rules-of-thumb/
Re: Target Retirement Funds – I definitely do think they can help.
They don’t solve the problem of over-exposure to nominal bonds by themselves which is a weakness. For example, index-linked bonds don’t show up on Vanguard’s TRF glidepath until about age 63. Looks like they’re 5-10% by age 68 with the other 30% or so in nominals.
However, if a high proportion of your retirement income is index-linked State Pension, and we count that as part of your defensive diversification, then that could redress the balance when thinking about inflationary threats.
Plenty of people will be in that boat, so yes, I think you make a very good point about Target Date funds when they’re aligned with the State Pension under those circumstances.
Cheers, Chav. You’ve helped me think through that angle much more clearly.
@SkinnyJames – fair point, let’s say that Trend can’t be relied on in a fast crash. In part that’s by design, many trend models have longer timeframes. In part it’s the difficulty to know what exactly we own with any given fund.
When I started out with Trend, the plan was to mix short-ish and medium-long time horizons, with Bluetrend as the “short” funds. But it kept losing in absolute terms and against its peers, so I eventually ditched it. FWIW I now use Aspect Diversified Trends with models from a few days to six months or more (2026 disclosure) and AQR Alternative Trends with an unknown timeframe, for exposure to niche markets.
Data on the funds’ models is hard to find (I wonder if institutional investors get more transparency). From a recent query with GPT 5.6: 5/10 well known Trend funds either had no published information on trend-signal horizon, or it was outdated by 5+ years.
Good funds research and adjust trend following speed, e.g. interesting read from Winton:
https://web.archive.org/web/20221030052608/https://www.winton.com/research/trend-following-speed-winton
Thanks for the funds you mentioned, I’ll investigate.
> they’re one of the only asset classes that can be structurally uncorrelated – Spot on.
Re target date funds and automatic glidepaths, afaik most of them still load up on nominal bonds and so come with a big inflation risk.
Kudos to the GSK pension managers. In 2020 (!) they decided to change their pre-retirement de-risking funds from stocks-nominal bonds “multi”asset to 60% “multi”asset and 40% hedge funds. 20% each in Fulcrum Diversified Absolute Return (@SkinnyJames mentioned this one) and the Man Group Alternative Risk Premia. I shifted some of my partner’s pension into this.
Any thoughts on using CLOs as inflation protection?
I know liquidity can be a risk with CLO funds, but something fixed income which is pegged to a reference rate (SOFR or Euribor) feels useful, using one/both of those as a proxy for UK inflation.
Specifically thinking of ICLA (SOFR pegged, USD-denominated, GBP-hedged) or CLOX (Euribor pegged, EUR-denominated, GBP-hedged). Both are 80%AAA/20%AA, have a reasonable TER of 0.25% (so not paying heavily for active magement), though neither have a long track record (both lauched ~1 year ago in 2025).
CLOs fared well during the GFC, unlike – and not to be confused with – the similarly named CDOs, so hoping that they’d similarly weather whatever next storm appears.
Crazy thinking or rational option to consider?
@Chav – Target retirement fund update – Thinking about this some more, while you potentially have enough inflation-protected income in retirement (due to index-linked State Pension) the nominal bond problem still exists in accumulation.
So if you’re hit by a big stagflationary bear market in the 5 to 10 years before retirement, you scarcely own any anti-inflation assets and don’t have much time to make good the shortfall. In that scenario, you either delay retirement, retire on less, or need to shovel more money into your pension pot.
As @Rhino mentioned re: LifeStrategy, TRF funds are a much better option that not investing. Still they’re saddled with a clear vulnerability that I think needs to be corrected.
@TA#18
Thanks.
The problems I have with rebalancing systematically are,
1. I am not investing just for me, there is also my wife. Although we are both retired there are differences in objectives. I assume she will outlive me by perhaps a decade and when I die she loses a big chunk of my dB income ( and all of my state pension). So although we are fine for income currently, she will need to switch on other income streams from investments. She wont be comfortable making those changes.
2. We have a lot of holdings across 1x SIPP, 2xISA for me, 2x ISA for her.
So two different investment requirements, 5 holdings ( excluding cash ISA, NI certs etc.)
Not to mention bequest desires and IHT…..
So now rebalance across that lot !
Yes, it’s a lot for someone who’s not engaged. Mrs TA would be in the same boat if I go first.
The ultimate solution is a joint annuity. If that’s part of a floor and upside strategy then there’s no need to rebalance.
Alternatively, if the bulk of the portfolio was boiled down to, for example, 50/50 equities/short linkers in every account then rebalancing would be easy.
@TimO – they look interesting, but I’m a bit suspicious of the smooth, up-and-to-the-right straight line! I assume there’s a bit of volatility laundering going on in these.
@TimO – I was curious and had a look at ICLO. A few notes:
– Too short on the market to gauge behaviour during stress.
– The underlying is company debt, so if corporate credit spreads rise in a crisis (as they do) then these CLOs should drop. Not what I want in a defensive position
– And frankly I don’t really understand them, which is my also my main reason to walk away. Transparency. How to know what exactly these funds own, and have an independent view of the risks? We know since the GFC that credit ratings can be bogus.
I think a linker ladder does the job, is transparent and boring in the best possible way. If UK credit risk is a concern, maybe add some TIPS and German linkers (there are still 3 on the market, albeit at lower real rates than UK and US).