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The 60/40 portfolio: what the warning signs are telling us

The 60/40 portfolio: what the warning signs are telling us post image

The first page of a Google search for the 60/40 portfolio suggests we have a problem. The headlines claim the 60/40 may need to be ‘rethought’ or ‘may not have a future’. It is no longer ‘good enough’.

So is the 60/40 portfolio dead? Dying? Should you jump ship if you’re sitting in the Vanguard LifeStrategy 60 or some other variant of the 60/40?

Well, there is certainly blood in the water.

As with any online feeding frenzy, the media sharks have sniffed out a few molecules of truth. But the meal they’ve made out of it is a clickbait chowder spiced by unsubstantiated opinion. Washed down with poor advice.

So let’s set aside those empty calories and chew on the heart of the matter.

There are reasons to be fearful. Today we’ll discuss the magnitude of the problem. In part two we’ll walk-through potential remedies.

What is a 60/40 portfolio? The classic 60/40 portfolio is named for its strategic asset allocation that splits into 60% equities and 40% bonds. The equity portion positions investors to benefit from the long-term growth prospects of global stock markets. The inherent risk of equities is offset by a diversifying allocation into high-quality government bonds. The underlying rationale for the 60/40 portfolio was provided by Modern Portfolio Theory. The split soon became a default solution for financial advisors, workplace pension schemes, and DIY investors. The simplicity, historical record, and widespread acceptance of the 60/40 makes it a useful compromise. The allocation puts investors in a reasonable spot on the risk vs reward spectrum – but without exposing the finance industry to accusations of negligence in the event of shortfall or failure.

60/40 portfolio problems

There are good reasons to think the 60/40 portfolio may be under-powered in the current environment.

High stock market valuations have historically been correlated with weaker future returns five to ten years out.

The US stock market dominates global indices. And it keeps pushing into nose-bleed territory – at least according to valuation metrics such as the cyclically-adjusted price-to-earnings (P/E) ratio (CAPE).

Meanwhile, current government bond yield-to-maturities are typically taken to be an indicator of future returns. (The correlation tends to be highest around the seven to ten-year maturity mark).

Bond yields today are still super low.

Taken together, rich valuations for US equities and negative bond real yields (that is, negative after inflation), do not augur a bountiful decade for the 60/40 portfolio.

Managing expectations

The financial industry flashes these warnings about the future via the concept of expected returns.

Usually this takes the form of a 10-year forecast of average annualised returns.

And currently those numbers fall short of the 60/40 portfolio’s historical return.

The predictions look worse still when compared to the golden age of the past decade.

How much worse? In the next two sections:

  • I’ll compare the expected returns estimates from some respected sources.
  • I’ll show you how to calculate your own expected returns.
  • We’ll conclude by talking about how accurate these prophecies are. (Spoiler Alert! Not very).

Expected returns prophesise gloom for the 60/40 portfolio

Below are three forecasts of expected returns for the 60/40 portfolio from credible industry sources. The numbers are 10-year annualised real returns, except where noted.1

Vanguard expected return: 2.6%. (4.6% nominal)

Note that 4.6% is Vanguard’s median nominal expected return for a global portfolio (bonds are 70% US Treasuries). I’ve derived the 2.6% real return by subtracting a 2% annual inflation guesstimate.

Dimson, Marsh, Staunton expected return: 1.6%

The renowned financial professors don’t say what their forecasted range is, or indicate portfolio composition. I’ve previously seen their forecasts predicated on a 20-30 year range, with developed world equities and 20-year gilts.

Research Affiliates expected return: 0.58%

Research Affiliates is a fund manager specialising in risk factor investing. I calculated the number from their expected return tool, based on global equities and gilts.

Do it yourself return hand-waving forecasting

Don’t like these numbers? Then you can calculate your own expected returns for the 60/40 portfolio…

First, let’s compute returns from the equity side of the portfolio.

Step 1 – Use an accepted valuation metric such as the Gordon Equation.

Step 2 – Grab the current dividend yield of the fund that’s the mainstay of your portfolio. (Or the weighted figure for every fund if you want to be super-precise. But it’s probably not worth it.)

For example: the dividend yield (at the time of writing) of the Vanguard FTSE All-World ETF = 1.38%

Step 3 – Add the dividend yield to a consensus real earnings growth number. I’m plugging in 1.4% for the latter, for reasons explained in the Gordon Equation article I linked to above.

So: 1.38% + 1.4% = 2.8% expected annualised return for the equity side (10-year, real return).

Now, let’s do the bonds. They’re even easier.

Step 1 – Get the 10-year gilt yield from FT.com.

Step 2 – That yield is nominal so make it real by subtracting an educated guess about annual average inflation rates.

Again: 1% (10-year gilt yield at time of writing) – 2% (my inflation rate guess) = -1% expected annualised return for the bond side (10-year, real return).

Our 60/40 portfolio’s expected return is the weighted sum of our equity and bond numbers.

  • 60% equity allocation = 2.8 x 0.6 = 1.68%
  • 40% bond allocation = -1 x 0.4 = -0.4%

Our portfolio expected’s return = 1.28%

Remember that’s an annualised, 10-year, real return.

Many unhappy returns

We now have a range of expected returns:

  • 2.6% – Cheers Vanguard!
  • 1.6% – The middle-ground from Dimson, Marsh, Staunton.
  • 1.28% – We’re glass half-full types at Monevator.
  • 0.58% – Research Affiliates is perma-pessimistic on vanilla securities.

The historical average real return for the 60/40 portfolio is 3.4%. Our middle ground forecast cuts that by more than half. That’s not good news.

And it gets even worse if you anchor to the last decade.

The Vanguard LifeStrategy 60 fund is a 60/40 portfolio that delivered 8.9% annualised over the past ten years.

That’s a nominal return. Let’s call it 6.5% after inflation. That’s almost double the historical return!

We hope you enjoyed the ride.

Could the expected return predictions be wrong?

Yes! The one thing you can expect from expected returns is that they will be wrong.

I rounded-up some 2012 and 2013 forecasts in a ye olde Monevator post.

None came close to predicting 6.5% annualised returns for the decade ahead:

60/40 portfolio expected return forecasts from 2012-14.

Sure, the ten years isn’t up. But in some cases there’s only months to go.

Moreover, these predictions weren’t typically saddled with UK bias or fund fees, unlike the Vanguard LifeStrategy 60.

My co-blogger The Investor can’t resist reminding me that he struck a more optimistic tone when writing in 2012.

But was he skillful, lucky, or is he cherry-picking his prognostications?

Maybe a bit of all three. After all, Vanguard’s research team analysed the predictive power of 15 equity forecasting metrics. They found that the best (CAPE) only explained 43% of the variance in future returns ahead of time.

Thus even CAPE left 57% of the variation unexplained.

It all means expected returns are about as reliable as UK weather forecasts.

At least they remind us that it might rain, so we should pack a brolly as well as our sunnies.

Similarly, we should not blindly assume that the glorious returns of the last decade can carry on. Especially as the downside signals are even more pronounced now than they were ten years ago.

The Bank of England expects

You could argue the expected returns circulating ten years ago were too cautious. But we couldn’t know that at the time. The process was right, despite the outcome.

The warnings today also come from credible figures. They are worth taking seriously, whatever the uncertainty.

Surprises can come in nasty flavours as well as nice. It might turn out that Research Affiliates’ 0.58% is closer to the mark than Vanguard’s 2.6%.

There’s also no law that prevents a 60/40 portfolio losing money for ten years or more.

If you’re spooked, what countermeasures can you take that aren’t counter-productive?

I’ll go through some sensible options in the next post on the 60/40 portfolio.

Suffice to say, there are some terrible ideas being spread around by big media brands. It’d be better if they made a genuine effort to help people.

Take it steady,

The Accumulator

  1. Real returns subtract inflation from your ‘nominal’ investment results. Real returns are a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns. []
{ 106 comments… add one }
  • 1 Jonathan B October 20, 2021, 10:13 am

    At the point I first decided to organise my finances and follow an investment strategy – and importantly discovered Monevator which gave huge guidance – I googled to identify options. At that point too, the first page of hits for 60:40 portfolios was how they are doomed.

    Those pessimistic forecasts had one thing in common, they were written by organisations with a vested interest in active funds. Admittedly your current estimate, and Vanguard’s, don’t fall in that category; even so if you average those they suggest a real return around the 2% mark which is better than most things at the moment. If that is what a diversified 60:40 fund gives, then history suggests active funds are going to average less than that with far more risk of under-achieving.

  • 2 ChrisA October 20, 2021, 10:40 am

    Porfolio theory analysis in isolation on one particular set of your investments isn’t very useful guide to what the individual should do with their investments. For instance you need to consider what the investment will be used for, and what the holding time will be, whether you can cut back on expenses in case of problems, and what other sources of income you have (including potential one). To state the obvious a 25 year old person investing for their house deposit is in a totally different place to a 45 year old civil service employee investing for retirement, who already has a DB pension and owns their own mortgage free house already. I would stick with cash and cash like instruments for the first case, and go with a pure equity portfolio for the second given they already have a lot of inflation protected bond like income and can probably survive well on that alone. Most financial planners don’t seem to get this, and just recommend the usual 60:40 split regardless.

  • 3 Amit October 20, 2021, 10:52 am

    I have always liked Lifestrategy and other passive multi-asset funds for rebalancing reasons. They are the closest you can get to timing the market in a rules-based manner. Even if the bond yields and returns fall, I suspect the fact that their relative fall is far muted compared to equities, will still be a good enough reason to hold it – especially if you expect markets to remain volatile even though growth may be muted. Even if the return numbers above are correct, I suspect that LS60 could outperform the projections assuming historic volatility conditions.

  • 4 Andrew October 20, 2021, 10:53 am

    I have basically run something similar to the 60/40 portfolio for a good while. That’s what I do with about 60% of my financial independence pot. The rest, equity picking, sector etf bets and comodity/crypto investing.

    It works for me because I can have a slow/steady portfolio incase I am wrong, but then also satisfy my desire to active invest/outperform, which I have done, either through luck or skill – the jury is out on that.

    My view, I wouldn’t be pessimistic on the 60/40. It serves a purpose and if you just want to set and forget it, its a reasonable allocation for most investors risk tolerance.

  • 5 Wodger October 20, 2021, 11:00 am

    How does rebalancing factor into the equation? I assume that the low expected returns for equities are due to the likelihood of a major market correction in the near future. If so, wouldn’t rebalancing out of bonds and into equities after a crash make a 60/40 portfolio do better than a 100% equities portfolio?

  • 6 Bob October 20, 2021, 11:26 am

    I have a smallish, a few tens of thousands, holding with Vanguard – VLS 80, VLS 100 & VEVE. Since inception in Dec 2017, this has returned me a healthy 48% ish! (Partly due to a top up in March 2020) Recently however, the rate of increase has slowed, and there’s even been the odd tick back down. Would it be sensible to sell a chunk and crystalise the gains now, then have the cash on hand to buy back in (or buy something else) as and when there’s a correction? (I don’t have a large amount of free cash right now to top up if there is a market crash…)

    I suppose no one knows, of course. And the markets can stay irrational longer than I can stay solvent… Risk of losing out on more potential gains by not staying in, vs not having taken some profit and been prepared to reinvest if and when the markets do fall.

  • 7 Griff October 20, 2021, 11:30 am

    Ah the post I have been waiting for.
    I have just put some money into Ruffer absolute returns and looking for another safe haven( that’s what the bumf said anyway). Reading the Telegraph’s Ambrose chap on Monday he recommends Chinese bonds ????. Roll on part 2 from the Accumulator.

  • 8 weenie October 20, 2021, 11:52 am

    @Griff – I’ve just switched some of my bond allocation to Ruffer recently. I’m dithering over whether to switch over more…maybe I’ll wait to see what part 2 says, to help me decide!

  • 9 Whettam October 20, 2021, 12:12 pm

    Looking forward to part 2 already @TA. I have never had a 60 / 40 portfolio, have been 70 – 80% growth assets (not just equities though) for most of my time investing. Embarrassed to admit on monevator (and hasten to add before I found the site), that when I first decided I “needed” some bonds, I did not really understand the difference, so for about the first three years my bond allocation was Corporate Bonds, at that time worked out OK financially, but with hindsight was not providing much diversification!

    As I say interested to hear your take on the sensible options.

  • 10 Moo October 20, 2021, 1:03 pm

    There are ways that equities could have low returns without a market crash/correction, e.g. prices bumping along at current levels for a decade. However, I think you are right that rebalancing over the decade should give you a better return than the weighted average as calculated in the article. Maybe this will be brought up in Part 2? Oh the thrilling anticipation of these multi-part articles!

  • 11 NewInvestor October 20, 2021, 1:30 pm

    Well, this has whetted the appetite. Thanks, TA!

    Like others, look forward to part two, presumably next Wednesday? Cue market crash on Tuesday. 🙁

  • 12 never give up October 20, 2021, 2:08 pm

    My goodness, I’m as excited for part 2 as I was waiting for the next part in 2020’s ISA/Pension split series.

    I’m another LifeStrategy fan. I accept by following this approach I won’t make millions, but being cautious and previously timid of investing it has allowed me to get out of cash, and give myself the chance of early retirement. I still get scared by everything in the news though.

    Low bond yields terrify me. I remember reading that Jack Bogle changed his asset allocation to 35% equities in the 90’s and never changed it again. He definitely knew what was enough for him. Would he do this today though? Clearly during that era he would have had returns I would snatch your hand off for now, even with that low equity exposure.

    I’m only a novice in terms of knowledge in this space, but I do worry that the low bond yields may ‘break’ the 4% WR on a 60:40 portfolio. I’m aiming for 3% due to my fears, but I’ll look forward to learning more in the next part.

  • 13 Brod October 20, 2021, 3:17 pm

    @TA – great timing! I’ve been playing around with ERNs spreadsheet, plugging in my numbers, adding DB and SP. So I’ve reduced ERN’s default future returns from 3.5% and 1% equity and bond returns to 2.5% and -1% respectively, and my reverse glidepath still looks good! Survives 1929, 1965(!), 1973 and 2000. Can’t find the “work the wife till she drops” setting though.

    @ngu – I think the consensus is using the 4% rule might be a little risky for non-US folk anyways. Returns and inflation were more favourable for the us retiree than other countries. 3% sounds not unreasonable. (Note: personal opinion, not advice!)

    And LifeStrategy is great. But I don’t think there’s anything wrong with having another portfolio with, say, 20% all equities. That way you can say to yourself LifeStrategy is my retirement fund, the other portfolio is for play. And if it gets you to retirement earlier or richer, win-win. And if it doesn’t, it was just your play portfolio anyway…

  • 14 Whettam October 20, 2021, 4:43 pm

    @never give up and @Brod if you have not seen it highly recommend @TA’s series on decumulation, from earlier this year:


    He covers asset allocation, withdrawal rates, dynamic asset allocation and dynamic withdrawal rates.

  • 15 Stillpuzzled October 20, 2021, 5:09 pm

    Hi – could someone explain where the 60/40 came from why not 70/30? I’ve read JL Collins book and he says that 75/25 is adequate and based on the trinity study. Thanks to your other articles on bonds TA this is the only piece of the puzzle that I still don’t get – so hooray for this post !

  • 16 Ben October 20, 2021, 6:53 pm

    Warren Buffet’s 90:10 asset allocation is an interesting alternative:

    The ballast that bonds offer in a storm seems expensive to me, given the huge opportunity cost. And I’m not sure it’s even effective ballast any more, with assets of every flavour pumped up by more than a decade of QE.

    At least we’ll all go down together when the correction finally does come.

  • 17 Bal October 20, 2021, 8:43 pm

    I’ve been long dithering about LifeStrategy as I love the idea of the fund rebalancing without me sticking my oar in but was put off by the US/UK bias of VLS so I went with HSBC global strategy for my sins.

    But I keep looking at are what’s not included in these fund of funds ( VLS: no small cap and no property while HSBC no index linked bonds and small cap ) other possible diversifiers other than bonds and what’s not desirable, such as unhedged bonds (HSBC) and corporate bonds.

    I’ve contemplated a 50/50 split of VLS and fidelity multi asset allocator which maybe a lazy way to include what’s missing from VLS which also rebalances but I’ve dithered as fidelity has seemed to drag a bit behind VLS and I’m conscious I may end up including things I want to keep out.

    I have a little bit of vanguard global small cap fund running along side my HSBC global strategy but I’m sure my minor dabblings are far from ideal. As a very small investor things like Investment Trusts have costs that outway their benefits due to the small amounts I could invest in.

    What are people’s thoughts on InvestEngine? I’m wondering if I could put together a kind of DIY LifeStrategy using a few ETFs listed on their platform via the DIY option. Still prefer the set it and forgot it LifeStrategy type route so I can avoid the temptation to mess about.

    I’m also really looking forward to part 2 for any suggestions as I still like the idea of changing to Vanguard LifeStrategy.

  • 18 Jim McG October 20, 2021, 8:54 pm

    Well, nearly all of my DC pension is in a Vanguard 80/20 Lifestrategy, but I do have a similar amount sitting in a DB pension, which I’m not planning to take anytime soon. (Hardly a day passes that I don’t thank my lucky stars for taking that DB pension in the first fifteen years of my career.) I tend to take a “don’t touch” approach with the VLS, but I do fret over it now I’m in retirement. Should I move to 60/40 or even 40/60? If only there was a clear, definitive answer!

  • 19 Robin October 20, 2021, 10:06 pm

    The reasons for holding bonds include providing steady reliable income, returning a reasonable yield and acting as a counter-weight should equities crash. But given they have low to negative yields and are now positively correlated to stocks they don’t seem to add much value to a portfolio any more.

    Then given the expectations of prolonged inflation and the ratcheting up of interest rates there isn’t a great reason to invest in them today just to lose money. The 60/40 portfolio was a good idea but seems to have reached end of life. It all points to a rebalancing and a move to other asset classes.

    Question is what is the best new portfolio balance and what can replace the 40% bonds, if anything e.g. property, gold, commodities, cash, foreign currencies, very short duration bonds etc…I’m 80/20 at the moment, but am still accumulating and have a long investment horizon.

    Interesting to read part II.

  • 20 Chris October 20, 2021, 10:18 pm

    @JimMcG – there is a definitive answer. Buy an annuity.

  • 21 BeardyBillionaireBloke October 20, 2021, 10:36 pm

    My spreadsheet says if you stash about 45 times your annual budget you should survive 1% (real, whole portfolio) returns for quite a long time. But there is nothing in the known universe that will stop your mum asking whether you are well-prepared.

  • 22 never give up October 21, 2021, 7:57 am

    @Brod #13 – Yes although I assume with global diversification the UK withdrawal rate is a little less relevant. There’s a big difference too in whether someone’s 4% allows them to cut expenses by 30% relatively easily and another that would find it difficult to cut 10%.

    @Whettam #14- Thank you. Yes I have read those. It’s been a while though. I may need a refresh! I’m liability matching for my bridge to pension age which impacts the numbers a little bit. I also felt that hitting 25x expenses and then going part time for a bit to get up to 33x wasn’t a bad approach. It allows the grind of the full time rat race to be escaped earlier, while still being cautious.

    It’s the DC pension where the 60:40 discussion is so relevant to my situation.

  • 23 Jim McG October 21, 2021, 8:08 am

    @Chris – I am beginning to see the attraction of an annuity without a doubt. Or at least the concept of them. I think the problem – although I haven’t looked much into it – is that they don’t seem to offer much value, and suffer from really bad press. Maybe Monevator could re-evaluate the annuity option as a retirement strategy?

  • 24 Al Cam October 21, 2021, 9:05 am

    @Jim McG (#23):
    I assume, in due course, you will also receive your SP – could/should this not be viewed as your ultimate annuity?

  • 25 xxd09 October 21, 2021, 9:17 am

    Rather than focus on 60/40 it probably behoves us to realise that returns overall may be lower going forward ie we may have to expect lower returns on our investments and spend less in retirement
    Lots of maybes and buts in there though-we all know how good investment forecasts are!
    70/30 right through to 30/70 seems to do the business depending on your appetite for risk,age etc
    Personally 18 years retd and been 30/65/5 -(5 is cash) for many years -I will not be doing anything but probably /maybe will be spending less

  • 26 Chris October 21, 2021, 9:37 am

    @Al Cam – depends on how much your SP is at the time and also what the governments constant tinkering will do to it over time.

    @TA – Maybe in part II you could cover IT’s and their ability to provide a more stable income despite stock market movements?

    Also, whatever happened to The Greybeard? I miss him.

  • 27 HappyHarry October 21, 2021, 10:09 am

    Great timing TA, i’m 60 and working part-time to an anticipated retirement in 2 years. I’ve managed my own SIPP for many years using IT’s but i’m still an impulsive amateur and I read far too much finance stuff. I know LS makes sense but it doesn’t seem that anyone sees the value in bonds going forward so I’m dithering moving my portfolio in that direction. Looking forward to reading your ‘sensible options’.
    I really thought the accumulation would be the hard part! Last years bump in the market was quite a shock so close to retirement so the de-accumulation bit worries me especially as I’ve (hopefully) got 25 years+ of investing decisions ahead.

  • 28 Jim McG October 21, 2021, 10:19 am

    The State Pension always makes me wonder about future household spending – how much will my DOH and I need at 67 when we receive that additional £18K per year? My mortgage will be paid off by that time and I doubt I’ll be driving a flash motor, which are two of my biggest current outgoings. When I see debates about 4% SWR I do wonder if, aged 80, I will be spending at the same levels as I was at 60? I seriously doubt it, but any debate on this is usually covered by “I might be spending a lot on health care” in old age. Which isn’t a very positive outlook. I always look at my pensions today, when we’re both healthy, and thinking “Shouldn’t we be taking more out now and enjoying it?”

  • 29 Chris October 21, 2021, 10:35 am

    @JimMcG – Couldn’t agree more. You’re comments just triggered a quote I heard many years ago which I didn’t take much note of at the time but fully resonates with me now. Don’t know if the words are accurate and can’t remember the famous businessman who said it but it went something like:-

    “I’ve spent all my life chasing the dollar and now I have enough there’s not much life left!”

  • 30 Naeclue October 21, 2021, 10:52 am

    A problem with annuities is that they provide bond level returns. If your investment horizon is 10-15 years, then that is arguably ok, but if it is 50 years, you are doing it the hard way without equity-like returns.

    Another problem with annuities (and DB pensions really) is at best they are linked to CPI. Again, over 10-15 years that is likely to be ok, but over longer stretches there is a risk that might put you in the poor house.

    IMHO, annuities have their place, but probably only for those over 75, or those with impaired life expectancy.

  • 31 Naeclue October 21, 2021, 11:07 am

    @Jim McG”When I see debates about 4% SWR I do wonder if, aged 80, I will be spending at the same levels as I was at 60?”

    That can vary a great deal. I have a couple of relatives in their 90s who did not really slow down until after about 85. I know several octogenarians who still enjoy racing their yachts (and doing well), often crewed by other octogenarians 😉 and a couple who enjoy the expensive hobby of flying. On the other hand I have nephews in their 30s who loved playing football, but now seem to have become couch potatoes.

  • 32 Al Cam October 21, 2021, 11:16 am

    @Jim McG, @Chris, @Naeclue, @xxd09:
    Research shows that: on average, UK pensioners spend less than their income and the gap grows with age. Not everybody can be – or even wants to be – average, but the average data is clear!

  • 33 Al Cam October 21, 2021, 12:34 pm

    @Naeclue (#29):
    Re DB pensions:
    Table 5 in: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/595103/security-and-sustainability-in-defined-benefit-pension-schemes.pdf
    may be of some interest.
    However, HMG’s wheeze of rebadging RPI to be CPIH from 2030 will nobble a lot of folks!

  • 34 The Accumulator October 21, 2021, 4:05 pm

    @ Wodger / Moo – the rebalancing bonus is elusive. Study after study shows rebalancing is a risk management tool (i.e. prevents equities from dominating your portfolio) but additional return is heavily timeframe dependent and not to be relied upon.

    @ Bob – when’s the next correction due? How would you know the right moment to get back in? What’s your track record of success as a market timer? This piece will help: https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    @ Griff / Weenie – what’s the appeal of Ruffer?

    The mainstream articles are all over the place on the 60/40. I’ve seen everything from Uranium to Big Tobacco recommended. There’s very few common threads between them bar the usual stuff like hedge funds and a few chinese bond mentions. Strange timing as China clamps down on its corporates and Evergrande looks like a slow motion car crash.

    @ NGU – You’re wise not to think of a 4% SWR as a failsafe. Cheers to Whettam for the links. This piece may help too:

    @ Brod – that’s hilarious. Shoddy work from ERN 😉

    @Stillpuzzled – 75/25 is pretty adventurous. It’d be anything but adequate for someone who panics in a crash because that heavy equity allocation is more than they can cope with in a crisis. By the light of the Trinity study, 75/25 may let you enjoy a 4% SWR but so can any number of portfolios. Pfau showed that a wide-range of asset allocations would have been historically optimal or within 0.1% of the historic safemax SWR. You could hit 4% with a 50/50 portfolio but the context is key: https://monevator.com/why-the-4-rule-doesnt-work/

    @ Robin – I agree that the loss of yield has undermined bonds. But correlations are never fixed. It’s the correlation during a crash that matters most given the purpose is to diversify from equities. Mid to long high-quality government bonds have a good track record of being negatively correlated with equities in this situation. They haven’t lost that.

    @ Chris – Cheers for the quote! That sums it up. Re: Investment Trusts, I think in terms of total return and have never really bought into the idea that ITs offer anything special. Extra costs, extra gearing – it’s like squeezing a balloon – the air has to come out somewhere. Perhaps @TI could arrange a Greybeard callback?

    @ Al Cam – yes, the direction of travel re: average pensioner spending seems clear. But I’ve never wanted to plan my own spending that way because I want the option of octogenarian yacht-racing as enjoyed by @Naeclue. (I’ll also have to befriend a yacht owner.)

  • 35 Al Cam October 21, 2021, 4:08 pm

    Re #33:
    For the avoidance of doubt, the referenced paper relates only to private sector DB schemes.

  • 36 weenie October 21, 2021, 6:07 pm

    @TheAccumulator – Ruffer, being defensive and focused on capital preservation, seemed to me to be a decent place to park some of my cash as an alternative to some of my bonds.

    I was also more than a little swayed by their own take on the 60/40 portfolio from last year: https://www.ruffer.co.uk/en/thinking/articles/market-views/2020-11-60-40

  • 37 Jonathan B October 21, 2021, 7:49 pm

    Thanks for the link @weenie, that is a nice summary of the worries about a 60:40 portfolio. But as @xdo9 points out, with both bonds and stocks looking vulnerable right now there are the same worries about any other mix. His (@xdo9) advice is not to have too high a proportion of either – in his case he thinks 70% is fine, I would go for somewhat less but can’t rationalise that; we would both find 60:40 or 40:60 acceptable.

    However the problem with the link is that the advice, as you might guess for a website representing a fund, is to invest in him instead. Poking around the website I found it quite difficult to find exactly what you would be investing in in that case (you might be able to tell me more precisely) but as far as I can tell it is a fairly defensive active fund where stocks and bonds (the same risky items) are combined with stakes in property and gold. I couldn’t see the proportions, and you have to trust him that his chosen stocks and bonds will do better than the ones he derides, and that property isn’t vulnerable to the same inflation-associated risks. (To be fair, gold will certainly be uncorrelated to the others though may not provide the hoped-for benefit of negative correlation).

  • 38 Gentleman's Family Fiances October 21, 2021, 7:56 pm

    The biggest problem of the 60/40 portfolio is that the bonds part will guarantee a boring ride and the 60.part is probably in boring stocks so no mega gainz or crypto millions.
    Add in a bit of uncertainty over final salary pensions, state pensions, potential inheritances and you can see why there’s not so much appetite.

    Alternatively,.my own 40% is in the form of renewable energy projects which yield around 5% per annum, Keep the NAV solid and have green credentials. Who says you need bonds?

  • 39 NewInvestor October 21, 2021, 8:08 pm

    @Jonathan B
    Most likely this is one: https://www.ruffer.co.uk/en/funds/ruffer-investment-company

    On that page it shows these asset classes / percentages:

    Index-linked gilts 12.7
    Long-dated index-linked gilts 11.0
    Non-UK index-linked 8.3
    Illiquid strategies and options 7.2
    Gold and gold equities 6.9
    Cash 6.1
    Short-dated bonds 3.2
    UK equities 22.4
    Japan equities 8.2
    Europe equities 6.1
    North America equities 6.0
    Asia ex-Japan equities 0.5
    Other equities 1.2

  • 40 Algernond October 21, 2021, 8:39 pm

    Over the last 1.5 years with all this talk and lightening progression of the Great Reset / New Normal / Build Back Better / Sustainability ..etc.. , I’ve been on a mission to change from my 70/20/10 (VWRL / Bonds /Cash) portfolio to something to weather the storm.

    After much massaging, my portfolio has finally arrived at an asset allocation which I’m going to stick with:

    42.5% Equity Tilt (Commodity & Energy producers, Various ‘defensive’ ITs, Multifactor ETF, Private Equity, REITs)
    15% Equity Market cap (VWRL)
    15% Cash
    10% Bonds (mostly $US TIPS)
    10% Precious Metal
    7.5% Commodity Futures

    Am, excited to see how much of this matches with @TA’s suggestions next week….

  • 41 Wodger October 21, 2021, 8:54 pm

    @weenie Maybe I was looking at the wrong Ruffer fact sheet, but the one I saw listed a 7.5% fund entry fee and 1.5% OCF. Ouch! Is that what you paid?

  • 42 John in Co October 21, 2021, 9:46 pm

    Regarding your calculation of 1.28%, aren’t you leaving out buybacks, and don’t those provide about 2% returns annually? So with 60% in equities, wouldn’t you be right on top of Vanguards number, about 2.5% nominal?

  • 43 Jonathan B October 21, 2021, 10:11 pm

    Thanks @NewInvestor. So a core 50:50 portfolio with added gold, cash and “alternatives”. But if @Wodger is right it needs to make 2.8% more than an index-fund based portfolio over 5 years just to maintain par (assuming around 0.2% OCF for the index funds).

    Not for me then. Particularly since there are consistent analyses showing active investing doesn’t on average add value.

  • 44 MartinT October 22, 2021, 8:42 am

    @Weenie @TA Despite largely following a passive approach, I have a good slug of my bond allocation in 3 active, wealth preservation havens – Newton Real Return, Personal Assets Trust and Capital Gearing Trust. My rationale is that I’m paying for their expertise and judgment in blending different bonds, TIPS, gold and other asset classes the intricacies of which I don’t really understand, and may not have access to. My feeling is that with bonds it’s not as simple as equities, where one simply buys the whole of the market as cheaply as possible.

  • 45 Chris October 22, 2021, 8:55 am

    @Algernond – Your new portfolio is of a similar theme to the John Baron portfolios, one of which I follow for part of my SIPP. Just wondered if you (or anyone else) followed any of them?

  • 46 Barney October 22, 2021, 10:04 am

    Like the others before me, I’m also waiting for the next 60/40 instalment after the TA lobbed his Stun Grenade, which so far has produced 44 posts. It’s a bit like waiting for the next episode of Dick Barton (you gotta be an Oldie to appreciate that one) I can hear the strains of the “Devils Galop” in the background.

    Anyway, I have a passive portfolio with Vanguard and 75/25 active with Fidelity.
    Which, up until March 2020, had 5 active corporate bonds all minimum Morningstar 4 star and better to provide and protect from market collapse. But in March 2020 all 5 bonds fell, some by almost 50% which was worse than my active funds. I’ve since switched from those bonds into vanguard ftse dev world ex uk which has so far done well. The only active bond that I have now (apart from the 60/4o fund) is shroder sterling corp bond z, which so far has returned 8.6%.
    So, am I right in thinking that you should hold short duration UK govt gilts, with no yield, to protect and increase in value whenever a correction/flight to safety occurs?. I did hold 50k of gilts before March 2020 with increased value of 12.5% in six weeks which I promptly switched to vanguard dev world. The small balance of the UK gils are now showing a loss.

    I now find bonds more complicated than active or passive funds and with the TA’s Stun Grenade, I don’t know whether to switch out of bonds altogether and hold cash in lieu, or switch into short duration active/passive global bonds that the TA espoused a few weeks ago such as the Royal London which he has now added to his slow and steady portfolio.

    As I wrote at the beginning, I can’t wait for the next instalment but if anyone has any info on the subject it would certainly be appreciated. And I can still hear the strains of the Devils Galop.

  • 47 The Accumulator October 22, 2021, 10:04 am

    Thanks NewInvestor and Weenie for the Ruffer links.

    I can see they’ve had a great year: 15.54%. Over ten years, not so much: 5.56% annualised.

    They’re an alternative to bonds only if your first step is to take half ​your defensive bond money and put it into equities.

    The strategic asset allocation is:
    48% equities
    32% index-linked bonds
    9% cash and short bonds
    7% alts of some description
    3.5% gold*

    I’m struggling to see what you couldn’t do yourself here for a tenth of the 1.2% OCF Ruffer are charging.

    Alts wise: given the track record of this kind of stuff, you could just see this as your fun money and put it into whatever you’d like to take a flutter on.

    They’re well positioned against inflation, but you can do this yourself. The only truly big call here is to say you have no more use for intermediate / long bonds because you’re certain that a deflationary recession won’t happen.

    FWIW, Ruffer’s ten year 5.56% return compares with 8.85% for Vanguard Lifestrategy 60.



    *They lump gold and gold miners together into a 7% allocation. Those two are not the the same, so I’ve just split this 50:50 and put the miners in with other equities. The missing 0.5% is rounding errors.

    @ John in Co – The real earnings growth number is adjusted to incorporate buybacks.

  • 48 weenie October 22, 2021, 10:05 am


    Yes, it’s not a cheap investment trust in any sense, but I thought I would try with part of my bond allocation to see how it goes. I didn’t pay a fund entry fee however.

  • 49 The Accumulator October 22, 2021, 10:11 am

    @ Barney – I love the Devil’s Gallop! Check this out:

    Longer high-quality government bonds (e.g. gilts) are best to benefit from a flight to safety. Here’s some pieces that chart the phenomenon:



    Index-linked gilts do not provide the same counterweight in a crisis but they work best when inflation escalates.

  • 50 The Investor October 22, 2021, 10:26 am

    I’m struggling to see what you couldn’t do yourself here for a tenth of the 1.2% OCF Ruffer are charging.

    It’s a very fair point. 🙂

    However I’d argue that with wealth preservation active fund managers like Ruffer you’re not just paying for their static allocation today. You’re also pay for their purported skill in shifting between assets and taking evasive action, including market timing.

    Can they do this and is it worth paying up for? Well obviously their track record of the last 10 years as has been highlighted suggests not.

    If they were true savants they’d have been very long equities enjoyed the bull run, then only shifted into bonds for the crashes. Wouldn’t that be nice?

    Obviously that’s very unrealistic. 🙂 Rather like the rest of us they have to ’tilt’ and recalibrate as the winds blow.

    Ruffer and other similar defensive funds (say Personal Assets and Capital Gearing trust, and arguably RIT Capital) have seen the same ‘overvalued’ equities many of us have seen for 5-10 years, switched to a defensive posture accordingly, and been defied by the relentless bull market that has taken US equities, in particular, near to all-time high multiples on valuation grounds.

    In other words it was the market’s fault! 😉 😉

    Now I do think it’s entirely appropriate for a passive-minded investor to say there’s no evidence of skill here — or at least not strong enough evidence of enough skill to say it’s not worth paying a hefty premium for exposure to it.

    But equally, it’s been a confounding market for several years now, and I can understand the impulse some have to want to outsource these difficult decisions in the face of these difficult markets to someone else to get it wrong 😉

    I’ve not covered Ruffer on the site, but back in the day wrote about Capital Gearing:


    I have a particular soft spot for CGT and its manager, but whenever I have the pang to buy and hold for any length of time (as an active investor) I usually reach the same conclusion as @TA and think if I really wanted to own a lot of index-linked US bonds etc I can just go shopping at iShares myself.

    But of course not everybody has the confidence to put together their own portfolio. And while we all know they’ll probably be best off in a 60/40 or 40/60 passive portfolio, maybe an all-in-one job that auto-rebalances, I don’t begrudge the tiny handful of trusts like Ruffer and CGT and their investors the attempt to do better.

    You must add any such allocation though knowing that, as has been highlighted, it *definitely* doesn’t always pay off, however fine the reasoning and the shareholder letters! 🙂

    In terms of an allocation to a Ruffer or a CGT, personally I wouldn’t necessarily think of that ‘slug’ as coming from my equities OR my bonds, just based on whatever they are holding when I buy.

    That’s because as discussed above I’d know the asset allocation would change — and I’m paying my fee to have them manage those decisions for me.

    I’d be more likely to do something like 25% into Ruffer, 25% into CGT, and the other 50% of my portfolio into whatever cheap passive configuration I deem appropriate, such as a 60/40.

    (Note that I don’t do this at all. I’m just saying if I was going down that road I think that’s an intellectually coherent way to do things. 🙂 )

    Cheers for the great chat everyone!

  • 51 The Accumulator October 22, 2021, 11:03 am

    @ TI – I understand the impulse too. I succumbed myself with my extended foray into multi-factor investing which has been soundly beaten by the global index ever since.

    I’ve often wished I had ZXSpectrum48K on speed-dial so he could tell me when to wheel in and out of Emerging Market Sovereigns or Long US Treasuries.

    I believe investing skill exists but the evidence shows that the outperformance accrues to the manager and not to the investor – once you deduct costs.

    I believe you can pick a fund manager and benefit from their outperformance if you sell out before they hit the skids. But this is just the same as stock-picking. How do you identify the winner in advance and then know when to sell?

    You might as well buy into an active fund that trades active funds for you.

    Here’s a good piece you wrote on why profiting from this is so damn difficult: https://monevator.com/is-investing-a-zero-sum-game/

    Even diversifying along these lines is fraught. I wrote this piece to show someone who diversified across 25 active funds (recommended by mainstream sources) and only made themselves poorer and active managers richer: https://monevator.com/portfolio-case-study/

    As you say, everyone wants to do better. I only labour the counterpoint because mostly society berates us to ‘try harder’. But sometimes the secret is to ‘try less’.

  • 52 ZXSpectrum48k October 22, 2021, 11:13 am

    I’m never subscribed to using Modern Portfolio Theory (which produces the classic 60/40 type portfolio) for my own investments. It’s not just that the model rests on dubious assumptions (efficient markets, CAPM, risk neutrality, scalability, Gaussian distributions etc) but that it simply doesn’t incorporate my long-term objectives and risks.

    I’ve never felt I could call the market in terms of where inflation or policy rates are going or what the S&P might return. What I do have though is a clear view that certain scenarios might be financially good for me and that others might be bad. So I find it easier to think in terms of selling those parts of the return distribution I don’t need, and using that to buy bits of the return distribution I do need.

    So two decades ago, it was pretty clear that globalization leading to low-inflation, low rates, lower volatility, booming internet tech would be bad for a someone in my position: young and asset poor. I needed to hedge the “Great Moderation”, as it was later, termed. So my portfolio was skewed to hedging that with tilts toward tech, duration etc.

    Now, twenty years later I’m more mature and far richer. The “Great Moderations” continuation would clearly benefit me. What would hurt me is an “Age of Instability”. Higher inflation, higher rates, higher vol, higher tax, lower PE ratios, nativism etc all just bad. So again I tilt my portfolio to hedge that.

    So I see a 60/40 portfolio as far from optimal as my passive portfolio. It’s clearly “taking a view” since it doesn’t hedge any of my primary risks at all. In fact, I think a 60/40 portfolio would increase my risk. It’s sort of Texas hedge because in an “Age of Instability” it will perform just terribly.

  • 53 Naeclue October 22, 2021, 1:07 pm

    @TA “the rebalancing bonus is elusive. Study after study shows rebalancing is a risk management tool (i.e. prevents equities from dominating your portfolio) but additional return is heavily timeframe dependent and not to be relied upon.”

    That really depends on what you mean by rebalancing bonus. There seem to be 2 definitions floating about:

    A) bonus = 60/40 performance – 0.6*equity performance – 0.4*bond performance
    B) bonus = 60/40 performance – 100/0 performance

    Definition A is reasonably reliable, and is simply a consequence of volatility and correlation. Definition B is certainly not reliable and is only really positive over periods of poor stock market performance.

    That brings me to “Our 60/40 portfolio’s expected return is the weighted sum of our equity and bond numbers.”

    I would say that was too pesimistic. Both portfolio theory and historical observations show that it is reasonable to expect a rebalancing bonus (by definition A), so I would add in another 0.2% as a prudent estimate, maybe 0.3% as a reasonable average for 60/40.

    That said, there is no guarantee that long bonds are the best hedge against market falls in all situations. Short bonds worked out much better in the 1970s as inflation rose. ISTM that rising inflation might be one of the primary risks facing us right now, but maybe this is straying into your next installment.

    If we really are in for a period of low returns, then it seems ever more important to bear down on costs. Hand 1.5% over to a fund manager when 60/40 is only giving us 2%? No thank you, not when I can pay under 0.1% for passive funds.

  • 54 Griff October 22, 2021, 1:09 pm

    Re Ruffer, it actually says in its bumf that it will never knock your socks off re performance but it will endeavour to not losing money should the markets tank. I didn’t pay 5 % buying fee and I suppose 1.2 percent does seem high compared to your passives but, is the era of passives over for a while. If you look at your newspaper readers comments, quite a lot say either fundsmith or vanguard is the way to go. Is this then the top of the market for this strategy. I will wait to see what the next taxi driver says to me. Incidentally I also have fundsmith.

  • 55 Bob October 22, 2021, 1:27 pm

    @ Bob – when’s the next correction due? How would you know the right moment to get back in? What’s your track record of success as a market timer? This piece will help: https://monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

    I don’t know. I don’t know. Variable at best! But maybe this time, I’m right… 😀 No, I shall be strong, and hold. And top up on the dips, if they appear and if I can afford to. Time in the market is better than trying to time the market…

  • 56 Bob October 22, 2021, 1:28 pm

    PS- thanks for replying!

  • 57 weenie October 22, 2021, 3:18 pm

    @Jim McG

    “Maybe Monevator could re-evaluate the annuity option as a retirement strategy?”

    There was this post from 2018:


    Would be interesting to see an updated version.

  • 58 The Accumulator October 22, 2021, 4:40 pm

    Really enjoyed the open discussion on this thread. We need it because there are no easy answers to this situation.

    @ Griff, Weenie and Bob – thank you for being such good sports. I do know how you feel.

  • 59 Whettam October 22, 2021, 5:01 pm

    Sorry @TA, but I’m not sure its fair to write off alternative assets as only being suitable for fun money, because of their track record. I took a decision several years back that I wanted to diversify away from equities and now 25% of my portfolio is “alts”, either property, private equity, infrastructure or renewable energy trusts. I consider these as part of my growth allocation, but with initial idea that might add some stability. I have not held all of these for five years, but according to trustnet annualised performance of the trusts I hold in these areas, over 5 five years:

    Private Equity 17.9%
    Property 12.9%
    Renewables 10.2%
    Infrastructure 6.7%
    I think that compares pretty well with All World tracker 11.6% and UK Gilt tracker 1.5%.

    I also looked at how they all performed between Feb 2020 and now, to see how they handled the pandemic drop / recovery. My Private Equity IT dropped significantly more than listed equity, at one point -40% down, but has come back better than listed equities. Property was worst hit asset initially but is up a small amount over the period. Infrastructure and Renewables both dropped similar amount to listed equities, but both recovered faster and are both positive over this period. The Gilt tracker rose initially, but has lost money over that (albeit very specific) time period.

    I think on balance they are providing some growth diversification to my portfolio. I would have been better off for that 18 month period with 100% equities, but worse off if I replaced my 25% alts with gilts.

    In fairness to Ruffer it handled Feb 2020 – April 2020 marginally better than the Gilt tracker and until now is the best performer of all, up 40% since Feb 2020.

  • 60 Tyro October 22, 2021, 8:56 pm

    Ruffer might be 40% up since Feb 2020, but a chunk of that’s due to its foray into, and several months later out of, Bitcoin. The gamble paid off handsomely – this time. Whether that’s what you want in a wealth preserver, well …..

  • 61 Griff October 22, 2021, 9:52 pm

    Tyro you had me worried with that but a quick check and it seems they ‘Gambled’ 2.5% of their fund with bitcoin. A quick in and out.
    I will let them off with that.

  • 62 SLG October 23, 2021, 6:44 am

    @TA I hope you are proud of this. It is fantastic. Keep it up please:

    “As with any online feeding frenzy, the media sharks have sniffed out a few molecules of truth. But the meal they’ve made out of it is a clickbaity chowder spiced by unsubstantiated opinion. Washed down with poor advice”

  • 63 Martin T October 23, 2021, 7:17 am

    @TA Don’t know how others feel, but my feeling is that, whilst it’s relatively easy (especially with the aid of your excellent guide!) to choose a ‘file and forget’ global equity tracker, the bond side is far more complex, requiring, as it does ongoing choices about duration, currency, hedging, gilts or index linked etc, all of which depend on opinions about the macro-economic situation which I don’t feel qualified to hold (despite your recent, insightful guides). Add in complex instruments such as derivatives, shorting, foreign (especially US) holdings, many of which I can’t access, or don’t know where to start, and I really am struggling. Finally, it seems to me, bonds are facing an unprecedented crisis as a result of a previously untried global government experiment in QE, the implications of which, again, I can only grasp at. On that basis, it doesn’t feel unreasonable to pay a premium to outsource these decisions to so-called experts! Roll on Part 2!!

  • 64 Wodger October 23, 2021, 8:54 am


    “I find it easier to think in terms of selling those parts of the return distribution I don’t need, and using that to buy bits of the return distribution I do need.”

    That’s a good way to think about portfolio construction! If you were young and asset-poor today, would you still tilt towards growth and duration, or have external circumstances changed too much?

    Constructing a portfolio that adequately hedges against potential downsides is obviously much more complicated if you have accumulated substantial wealth. But how much simpler, in your opinion, can a portfolio be if you are relatively “young and asset poor”?

    For example, ERN did some accumulation glide-path modelling (equities/bonds only) and found it was optimal to be 100% in equities until 5 years into a 10-year path towards financial independence (or maybe 80–90% if CAPE was very high). That conclusion was predicated on starting with very little and contributing very aggressively.

    Do you think that approach to asset allocation is too simplistic for someone in that position? What potential downsides would you want to hedge against?

  • 65 never give up October 23, 2021, 9:23 am

    @TA #34 – Thanks for the link.

    @Martin T #63 – Yes I completely agree. I should be more worried about the equity part of my portfolio rather than the bonds. I’m not though because I have some sort of faith that equities would recover from a downturn, even if that could take many years. The cautious so called lower risk part of the portfolio terrifies me though!

    I’m gravitated towards LifeStrategy because they are well diversified on the bond side and I don’t need to think about different types of bonds. I guess it will be interesting to see if the LifeStrategy funds ever add an element for property, commodities and other things I do not know of, in order to diversify further.

    Whenever I look at funds with cautious, total return etc in their name, in order to take the place of part of the bond allocation, I also get kind of scared. Some of these funds are 60% equities. I’m not sure how that is cautious! With my personality type if I was offered a fund that was guaranteed to deliver 1-2% real I think I’d probably invest 80-90% of my portfolio in it and let my savings rate do the work.

    I probably should just passively invest in LifeStrategy and forget about it. I wish I knew nothing. Unfortunately I have a tiny bit of investing knowledge and all that does is bring me fear! I’m hoping part 2 of this post swoops in like a SWAT team to whisk me away from the dangers of inflation, QE, high fees and poor fund choices!

  • 66 The Accumulator October 23, 2021, 10:18 am

    @ Whettam – that’s great they’ve done well for you. The four sectors you list are all growth orientated so the only comparison is with global equities not gilts. Gilts are defensive, they do a different job, they’re not expected to deliver big returns.

    Diversification counts most in a crisis. If everything you hold drops like a stone in a downturn then you’re not diversified.

    In the last major crash all those ‘alts’ go down the same or worse than the broad market. So no diversification benefit and, if anything, you were exposed to more risk.

    Over a 5-year timeframe it looks like your holdings are offsetting each other relative to the All World. Property does slightly better, Renewables slightly worse. Private equity does considerably better, Infrastructure does considerably worse.

    What does the cost and complexity gain? You get three of those sectors as part of the global world tracker anyway. There’s a number of studies that show the cost, complexity and opaqueness of the private equity market makes it a minefield for ordinary investors. I link to a summary of that in the next post.

    I’m not criticising you. I’ve been here myself. Devoted a slug of my allocation to property REITs. Over the years, REITs would race ahead of the broad market at times, then be reeled in. But the diversification benefit was zip – highly correlated with the rest of my equities.

    I tracked a bunch of these ideas over 10 years including renewables and infrastructure. The results were not impressive unless you correctly guessed the massive outperformer ahead of time:

    Financial historians have tracked sector investing bets for over 100 years. It’s a crapshoot:

    Your picks may prove inspired over the next decade or even more. My role here is to surface the evidence that it’s extremely hard to beat the market, and the risks can outweigh the potential reward.

    Re: Ruffer – you’d hope it would beat a gilt tracker given its 50% in equities. You’re not comparing like with like. Why is Ruffer suddenly being talked about now? Because it’s had a stellar year. Nobody was talking about it ten years ago. Which is a good thing because it’s been mediocre over that period. To capitalise on opportunities you have to be able to see them in advance.

  • 67 The Accumulator October 23, 2021, 10:46 am

    @ Martin T and Never Give Up – I agree bonds seem like they’re more complex because we don’t feel we understand them as intuitively as equities. But you can ‘file and forget’ them. Many people do just that with the Vanguard LifeStrategy funds or by pairing their global equity tracker with an intermediate gilt tracker. Or splitting the bond allocation 50/50 between intermediate gilts and intermediate index-linked bonds.

    The macro-economic situation affects your equities but you accept you don’t need to have an opinion to choose a globally diversified fund. The same goes for bonds. You just need to be comfortable with their strategic role in your portfolio.

    I agree that bonds have been undermined by the massive fiscal stimulus enacted during the Great Recession and now due to COVID. Bonds no longer seem like a no-brainer. Moreover, we all hope against hope that there must be a way out of this. Hence, maybe some brilliant money manager will ride to the rescue. Or if I can pick the right blend of alternative funds then I can get ahead. All natural impulses but the evidence points the other way.

    The world feels more uncertain than it did. Accommodating ourselves to that is part of the answer, sadly. Anyway, more in part 2.

  • 68 The Accumulator October 23, 2021, 10:50 am

    @ SLG – thank you 🙂

  • 69 Algernond October 23, 2021, 11:16 am

    @Chris – I tried looking at the John Baron portfolios, but seems like it’s a paid subscription service now. I’ve gone commodity / precious metal heavy, due to mainly listening to the libertarian investor types over the last 1.5 years.

    Hello @TA – in your next post, will you be mentioning anything about systematic trend-following funds as an option for outsized returns in a bear market? I’m having difficulty understanding how effective this strategy really is, and how to access them.
    The private equity market does indeed seem a minefield. That’s why I’ve been using IPRV & XLPE to access for the last year- been pretty good so far..

  • 70 The Accumulator October 23, 2021, 11:31 am

    @ Algernond – no, I don’t think the complexity and risks of a Momentum strategy suit the ethos of an adjusted 60/40 portfolio.

    This is the best piece I’ve read on the subject, which I think gives a really good appraisal of effectiveness and trade-offs:


    A few classic posts on Precious Metals for you from (or inspired by) the incomparable William Bernstein:




  • 71 MattofCov October 23, 2021, 11:54 am

    Thanks for the article and all the interesting comments. My own approach is to keep trickling money each month into a mix of VLS60 and VLS80 in my ISA and HSBC global strategy in my SIPP (as a diversifier away from Vanguard).
    I know enough to know I don’t know enough to predict what will happen in the future so I just try to ignore the noise and keep investing.
    I’m sitting on more cash than is ideal from an investing point of view but it means I can sleep at night and have some dry powder if the correction does ever come.

  • 72 KayD October 23, 2021, 12:08 pm

    Over my 25 years of active investing I’ve only ever had about 5% max invested in gilts, I just think they are too boring/give negative returns when inflation is included. I have a few generic ITs which are so price stable that I consider them to be gilt substitutes and some cash savings for any unexpected catastrophe. When the stock market dumps which it does now and again I take the pain and watch it rise up again in the following months or year. I continue to buy stocks with any dividends throughout, it takes nerve but I find that I never seem to regret buying anything after a week or so. As I’ve aged, I’m in my mid 50’s now, the pain seems to get less.
    I think as an active investor you have to keep buying new companies to keep up as the economy evolves. I also think that the retired who don’t have any stake in the active economy by only owing annuities and gilts and not owing any any shares/funds/ITs or ETFs will slowly become poorer as they get left behind. We all live too long these days to not be invested actively or passively once we have retired.
    My partner once asked me “Don’t you think you should think about selling out now?” during the 2008 rout. I replied that “I’d sell up when he and all his mates stopped buying stuff!” I name my investing obsession my Playing With Money hobby. Hard core or what!

  • 73 Algernond October 23, 2021, 12:25 pm

    Thanks so much for those links @TA.
    The ERN article is great. I hadn’t even realised Systematic Trend Following was essentially the same as Momentum. Makes a lot of sense now.
    Now also see that the Momentum ETFs (such as iShares IWMO) are not the same at all, since they never exit out of equities.
    I bought a few PME stocks at the wrong time this year, but at least they are recovering now… Definitely in it for long term.

  • 74 never give up October 23, 2021, 1:23 pm

    Thanks TA. Makes sense. I’ll look forward to the second part.

  • 75 Whettam October 23, 2021, 3:05 pm

    Thank you @TA, I didn’t take your comments as criticism and I hope you didn’t mine either. In have really enjoyed the discussion on this post. Monevator and specifically you have influenced my planned income drawdown thinking more than anyone else, I’m still doing my own thing, but your ideas and approach have influenced my thinking, even in the areas where I intend to do something different.
    I agree that the additional assets classes I have chosen, are growth assets and that they have some correlation to equities (as you say they are included in the equity trackers). But my point was I think its wrong to dismiss them as fads, only suitable for fun portfolios. Over the pandemic crash they all behaved differently to equities. For example my Infrastructure and Renewables Trusts initially dropped, but they recovered quicker than equities, they also both continued to pay a healthy dividend, which I was able to use to buy more of my global equity tracker whilst it was still lower. Maybe incorrectly, I regard them and property as towards the more defensive end of the equity market.
    Back to the 60:40, I’m interested to hear your conclusions next week, although I do wonder if you are teasing us and your conclusion will be “stick with the plan” 😉 Mine has been to reduce bonds (I only have 15%, short dated and index linked), but I have also reduced my ‘traditional’ equity allocation to 45% and this is where I’m relaxed that my 25% alts are behaving a bit differently. I’m OK if their return is lower, but I’m hoping they maybe more stable.
    Re Ruffer I was not defending it, I don’t follow it or hold it. As @TI says we don’t know what its allocation was in Feb last year. My point was it had beaten the gilt tracker over the pandemic crash, so I assume was not 50% equity at that point. I just thought for a defensive trust it did its job well at that specific period.

  • 76 HappyHarry October 23, 2021, 8:43 pm

    @never give up

    “I probably should just passively invest in LifeStrategy and forget about it. I wish I knew nothing. Unfortunately I have a tiny bit of investing knowledge and all that does is bring me fear! I’m hoping part 2 of this post swoops in like a SWAT team to whisk me away from the dangers of inflation, QE, high fees and poor fund choices!”


  • 77 ZXSpectrum48k October 23, 2021, 11:49 pm

    @Wodger. I think it’s much easier to like a simple portfolio of equities and bonds if a) you’re young b) your earnings are on a rising path and you save a good proportion of that c) your assets are small.

    In that scenario you want higher inflation since that can only be driven sustainably by wage inflation (demand pull, not cost push), which you are intrinsically long of at that age. If interest rates rise and bonds get hammered, so be it. Your wage rises will offset that easily. Equity crashes and volatility are good since you want to buy in at cheaper levels. Fundamentally, your biggest risk when young is that your portfolio does well when you simply didn’t have capital to take advantage of it.

    This is what people seem to miss about the 70s. It was terrible for investment portfolios but utterly brilliant for the young boomers whose wages went up much faster than inflation and then found themselves in the 80s able to use that disposable income to buy Gilts at 10%+, equities at cheap valuations and properties at 2x income multiples. Happy days.

    What you don’t want inflation to fall and wages stagnate but bond yields to collapse causing house prices to rocket (80% of house price rises are explained by changes in long-dated Gilt yields). You don’t want equities valuations to run away from you as equity yields collapse.

    So an equity-bond portfolio is a good hedge when you are young and poor but have good prospects. You probably want to add some property to hedge that key liability. Tilt equity exposure toward areas that might hurt your career prospects (for me that was tech or E at the time). You want some longer duration bonds to hedge against even lower real yields and to sell when equities dump to earn a rebalancing bonus. That’s why the sort of reverse equity glidepath ERN considers can work.

    The classic Markowitz portfolio is a decent hedge early on with a few tweaks. It’s a portfolio for those looking to accumulate capital. Where I disagree is with the idea that as your objectives change, you should still stick with it. The passive portfolio needs to evolve to mirror the objectives. When I look at what my risks are, I feel that some would be better off hedged with an “anti 60/40 portfolio”, while others are still served by a 60/40 portfolio. It’s complex and thus requires a more complex solution.

  • 78 Chris October 24, 2021, 9:19 am

    @ZXSpectrum – “Winter is coming”- oooOOOOooo!

    If the answer is complex (I’m not saying it isn’t BTW) then maybe this is no longer a DIYers game. Maybe as someone else said it’s time to seek out expertise.

    @TI@TA – Would be wonderful to get a view from Lars on this. Any chance?

  • 79 never give up October 24, 2021, 10:35 am

    @HappyHarry #76

    I’m so glad I’m not alone!

  • 80 The Accumulator October 24, 2021, 12:15 pm

    @ Chris – “If the answer is complex then maybe this is no longer a DIYers game. Maybe as someone else said it’s time to seek out expertise.”

    That would represent the triumph of hope over experience. Large sections of the finance industry continue to push expensive products of questionable benefit. In researching this piece, I was shocked by the ‘ideas’ peddled by mainstream sources. No considered rationale: just a shopping list of expensive items that sound good. Why? Because they sound exclusive (the key to the club), or superficially savvy (they key into a trend or the news, however short-lived).

    We live in a ‘caveat emptor’ world. I think the best way to navigate that is to self-educate, and guard against behavioural biases that tilt towards easy solutions or white knights.

    Re: complexity – things do get trickier as you reach the end of your earning career and think about defending what you’ve got.

    One of my biggest risks now is inflation. The answer is index-linked gilts – expensive though they are.

    Longer-term I’ll hope that equity growth will outpace the inflation rate as it has historically. Plus, there’s the house.

    Stock market crash – the risk that I torpedo my portfolio’s long-term viability by selling too many equities at low prices. This is why I keep a diversified slug in government bonds.

    Higher rates – the risk that a protracted pingback of rates to the ‘old normal’ means bonds lose value like a slow puncture for the next 10 years. Or 20… I’ve trimmed my bond allocation so it’s around 10% less than it otherwise would have been. My decumulation method means bonds typically get sold first and are only replaced when equities do well.

    Stagflation hurts equities and bonds in a 1970’s style double whammy – back to index-linked gilts again. Also some cash and gold will help.

    I’d really like to diversify into broad commodities as a defence against that too. The evidence I’ve read suggests they’re a loser long-term though, and I don’t trust the available products.

    Higher tax – I guess I’ll suck it up. If tax shelters are respected then I’ll be OK.

    ZX mentioned nativism and in the past we’ve touched on the retreat of globalisation. This development has caused me to trim my exposure to emerging markets. Given the probability of Cold War II: US v China, I’d rather be less exposed to China and markets that rely on it for growth. It seems to me that the CCP is clearly reasserting itself over corporate China. As an overseas shareholder my interests are not going to be high on their list of priorities.

    The US and UK have raised trade barriers too. Plus the global economy needs to be retooled for climate change. Back to suck it up, except in elections.

    If we’re heading for an “Age of Instability” then the answer lies in being ready for anything. Understand the role of your holdings. Don’t ditch an entire asset class because of one possible scenario. Nobody knows what’s going to happen. We need every useful tool in our utility belt.

  • 81 The Accumulator October 24, 2021, 12:39 pm

    @ Whettam – All good – I’m enjoying the debate. Using the phrase ‘fun money’ was glib but I didn’t mean to dismiss all ‘alts’ (a loosely defined term) as fads. I’m a big fan of the idea of reserving a small proportion of wealth to experiment and to scratch speculative itches. Sometimes this is called fun money or a casino portfolio.

    For me, fun money is used to buy any asset class that has a dodgy track record, or no track record, or you’re likely to be on the wrong end of information asymmetry but you want to try it anyway. Psychologically-speaking, fun money is the sub-5% allocation that I’m prepared to gamble.

    Private equity, AI ETFs, crypto, art collecting, Pokemon card trading – they all belong in the fun / casino money bucket for most people, in my view.

    If I had an edge in one of those markets – that’d be different. If I was an ace Pokemon card dealer then it’d make sense to put more into that.

    Sadly I don’t actually have a fun money portfolio. I wish I did but I ran my ship too tightly for that.

    Re: defensive end of equities spectrum – low volatility (or min variance) ETFs do seem to do a good job here every time I look at their track record. They generally lag the broad market return, but fall less dramatically during downturns. I don’t see low vol equities as a bond replacement – because they’re positively correlated with the broad market in a crisis – but they do seem to reduce risk somewhat.

  • 82 Barney October 24, 2021, 12:48 pm

    Deviation but,
    The seventies were dreadful, with the three day week, fuel price increase, endless trade union stoppages, and the “closed shop”, whilst the US held rallies and parades to collect money for the IRA coffers that killed and maimed Irish and UK citizens,

    There were no mobile phones, no computers, no pocket calculators, just 3 TV channels, Sunday shopping was illegal, pubs opened on Sunday from 12 noon until 2pm, after that you were breaking the law. With all that went almost 30% inflation.

    Much wealth was made on the backs of the financially unaware population. The one sure way to increase personal wealth was to buy a property and really struggle to meet the monthly repayments, in the knowledge that it would increase in value over a short-ish period. My first mortgage was over 35 years, but when I sat down and worked out that for a small monthly overpayment, I could reduce the term by 7 years. That was my introduction to finance and Compound Interest. The really canny would buy a property that they couldn’t afford and sell after the site completed.

    It was great, until you removed your rose tinted specs.

  • 83 The Accumulator October 24, 2021, 1:22 pm

    @ Barney: +1. My baby boomer father was scarred for life by the 1970s. He fears its return like little else. That ties in with ZX’s implied observation that those conditions were dreadful if you were particularly exposed to inflation e.g. pensioners. Bonds got smashed but I’d imagine that there were few people in the UK subsisting off their bond holdings at the time.

  • 84 Wodger October 24, 2021, 1:43 pm

    @ZXSpectrum48k – Thanks for the informative reply!

    This could be a good topic for a future Monevator article. I.e., how to take a context-dependent approach to portfolio construction, focussed on how best to hedge against scenarios that would be most detrimental to your personal circumstances. You could probably even devise a flow-chart that summarises the decision-making process!

  • 85 Barney October 24, 2021, 2:12 pm

    @TA : I was never aware of anyone living off of their bonds. Investments and personal finance as we know it today was non existent for “ordinary people” . But, ignorance is bliss, and apart from the BBC news etc, you just had whatever news paper you subscribed to for information.

    Today I can research a fund, from 10 years back, if it existed then, to performance over the last 7 days. I can check the fund manager, how long in the job, and what he majored in, (and I still get it wrong) and then check out Morningstar’s assessment. So yes, from my point of view we are so much better off today. But there has been a price to pay, the premium depending on which side of the fence you originated from.

    I didn’t mention National Service, which was a great leveller, teacher. and interruption. Companies wouldn’t take you on at 17 years because you would be called up at 18 years.

    That’s how, after training all over Germany in various theatres of war with my “Davy Crocket” 303, I finished up doing double sentry outside Buck House.

  • 86 miner 2049r October 24, 2021, 3:49 pm

    Well this has been a nice timed wakeup call.

    I’m due to give up the main stream of income called “work” next summer @48yrs old.

    Looking at my current ratio that is mix of SIPP and SSISA my figures are
    91%Equities and 9% Bonds, its time to re-balance and prepare for drawdown allocation rather than “maximise returns” to build the stash.

    There is some not included emergency cash (£50k) and a pot of buy and let sit 5 years crypto (£5k) thats due to be cashed in next year

    Need to not be greedy and workout the next move to preserve that minimum amount needed to fund a life of staring at the portfolio spreadsheet and doing all the things that i said i would, might be time to reduce some of that remaining £50k mortgage @1.64%

    ready to re-balance, eagerly awaiting pt2…..

  • 87 Barney October 24, 2021, 4:54 pm

    @miner 2049r
    Congratulations on your impending New Start next summer.
    Individually, a £50k mortgage at 1.64% is brilliant. Collectively, I feel there will be much anguish and domestic disorder when inflation stirs from its 25 year slumber. Including those “Developed” countries, who will soon have to Pay the Piper.

  • 88 The Accumulator October 24, 2021, 5:17 pm

    @ Barney – hats off to you for the National Service. Sounds like you’ve got some great stories to tell of the time.

  • 89 Barney October 24, 2021, 5:42 pm

    @ TA: Yes, lots of stories some good some not so.

    @miner2049r: I think that at 1.64%, I would stick with the mortgage and invest it, even cautiously should show a profit. And the best part is using “their” money to help your impending new era lifestyle.

  • 90 Seeking Fire October 24, 2021, 8:30 pm

    Very interesting back and forth in the comments and Accumulator @66 absolutely nails it. There’s generally no free lunch. Risk assets are well risk assets.

    It’s worth reminding oneself that the 4% rule still just about worked during the 1970’s (if you are retiring based on that rule. FWIW I am not as I am unconvinced on me having the mental fortitude to stomach the wild gyrations once I’ve pulled the plug). But it did come out ok.

    For everyone else, there is really only one almost fail safe alternative to the conundrum of risk be it declines in purchasing power due to inflation or collapsing valuations that everyone is debating about how to guard against in the comments.

    Keep on working

  • 91 Chris October 24, 2021, 8:59 pm

    @TA – Great response – thanks.

    Just out of interest I’ve always been attracted by the Bucket Fund model for decumulation where you have 3 buckets:- equities/IL Bonds/Cash, split something like 60/30/10.
    The idea is you always take your money from the cash bucket and rebalance when equities rise so you are always selling high (equities) and buying low (bonds) whilst replenishing the cash bucket.
    Just seems so simple to me – as long as we remain happy with the equity/bond correlation – which I guess takes us back to our 60/40 debate.
    Be interested in your thoughts on this.

    @miner 2049r – So next Summer you’ll be a proper “miner 49er”! (Don’t all sing at once).
    I’ll also be in a similar position (although not 49 – so well done). I have 2 SIPP’s split roughly 50/50. One is 100% IT based yielding 4.2%. The other is index tracker based roughly 70- Equities/20- Bonds/10-Cash. My ISA’s are a mix of both with the index trackers made up of LS80, HSBC Global Strategic and L&G Multi Index. So like you I need to tidy things up a bit.

    So also eagerly awaiting Part II.

  • 92 BBlimp October 24, 2021, 9:36 pm

    @TA why intermediate and not short gilts ? I would have thought the shorter the term the less volatile the guilt ?

  • 93 Whettam October 25, 2021, 10:39 am

    @TA – Interesting Re: “Private equity, AI ETFs, crypto, art collecting, Pokemon card trading – they all belong in the fun / casino money bucket for most people, in my view.”

    Totally agree on most of those, but I think your aversion to P/E is because you naturally gravitate to passives and there is not an ETF for P/E! Private equity has a longer track record than listed equities, it’s just harder to understand it. I have spent most of my working life in private companies and they have generated a lot of wealth for their owners, my current company has 40 year track record of growth and turns over approx $4 billion. I see private equity as absolutely a ‘proper’ asset class, albeit one that is hard (sometimes expensive, with additional risks) to access for private investors.

    There is lots of evidence that companies are avoiding going public, because of the extra costs / hassel it brings. This very old FT article:


    References a McKinsey report which estimated that the value of the top 150 companies in world is half that of the top 150 listed ones. So in my opinion reject P/E because you can’t access it passively, because of discount / premium risk, its high costs, its not transparent enough, private investors can’t access best opportunities, etc. But don’t reject it because it has no track record and it’s not a “valid” form of investing. I think it unarguable that over the longer term, the sector (although not necessarily the funds available to private investors), will continue to drive growth and profits for those able to hold the right assets. Arguably this growth may continue to be better than listed equities.

    I only have a 5% position, but as I said earlier in thread, it’s been the best performing asset class in my portfolio by some margin.

  • 94 The Accumulator October 25, 2021, 10:52 am

    @ Chris – the key benefit of a bucket portfolio seems to be as a psychological tool that helps retirees sleep better at night. As long as the cash cushion is there then people feel less vulnerable to a stock market crash.

    Many bucket portfolio studies show that the cash allocation is a drag on portfolios because cash returns less than equities and bonds in the long-term.

    Superficially an optimiser would think: “Hey, screw the bucket portfolio if it crimps my returns.” But the only good portfolio is one you can live with. So if that cash cushion enables someone to stick to the plan and enjoy life then that’s near priceless.

    I don’t use the bucket portfolio but I do hold cash and bonds with a rebalancing mechanism that’ll hopefully let me sleep at night.

    @ BBlimp – short gilts really are out of puff at low interest rates. They’ve got little to no chance of counterbalancing equities in a downturn. They just remain flat.

    You can see the phenomenon at work during the corona crash:
    Check out the graph in this section: ‘Bonds in a crisis: short-, intermediate-, and long-term varieties’

    The volatility of longer dated bonds is a good thing in a downturn because if there’s a flight to safety then they’ll swing to the upside while equities are selling off.

    Obviously that same volatility means they lose value if inflation spirals.

    Short bonds should do better than longer-dated varieties in that inflationary scenario as they mature and are replaced by higher-yielding debt.

    I think of cash and short bonds as pretty interchangeable but I can get higher yields on cash.

    Personally, I do still own some short bonds as part of my intermediate gilt fund. That’s got long bonds too and has a pretty high average duration for an intermediate fund. So that’s my muddy compromise.

  • 95 The Accumulator October 25, 2021, 11:17 am

    @ Whettam – there are Private Equity ETFs. I don’t reject private equity because I can’t access it passively. I’m also on the record as investing in active funds to access risk factors, linkers and even UK small value.

    I don’t invest in private equity because of – as you rightly say – a lack of transparency, lack of opportunity for small investors like me and high costs.

    The research I’ve read on private equity (as accessible by retail investors) shows its risk-adjusted track record as an asset class is disappointing. The lack of transparency also makes it easier for private equity interests to overstate their case.

    I’ve no doubt some people make a killing in private equity. People on the wrong side of the deals get killed. That’s the knowledge asymmetry I mentioned earlier. I know which side of that trade I’d be on.

    I didn’t say anything about valid or invalid forms of investing. I think holding a deck of rare Pokemon cards or a cellar full of vintage whisky can be a valuable investment. The point is: you need to know what you’re doing.

    BTW, I was thinking of private equity when I said dodgy track record. Crypto was my point of reference for no track record i.e. no long-term track record.

  • 96 The Investor October 25, 2021, 11:25 am

    @TA @Whettam — My recollection from the research is that most Private Equity excess returns can be explained away by leverage, so there’s hidden extra risk for extra reward. I don’t have a link to hand, but perhaps a good future article?

    When it comes to listed private equity in the UK (investment trusts) some have periodically been superb returners but they are very over-correlated to general equity markets — the time to buy has typically been during crashes when they plunge at least as much as wider markets, and typically more as their premiums go to a discount. (I’ve bought at such times, but invariably sold far too soon and missed out on the bigger mid-to-late cycle gains).

    This is not to say that some particular PE shops won’t beat the market. Perhaps @Whettam you have particular skill in selecting them, due to your 40 years in the industry? I certainly believe that’s possible, if unlikely for most. 🙂

    I’m also sympathetic to your argument that companies are remaining private for longer, potentially ‘robbing’ investors in public markets of a decent chunk of value creation. Whether this is an artifact of cheap money or the ongoing network effects and power laws that are also powering up the FANG stocks in the public market is an open question, as is whether it will last. But I think your observation is demonstrably true, and indeed I wrote a bit about it a couple of years ago:


    Of course, my response (invest in EIS-raising startups likely pregnant with adverse selection) is not something I’d recommend to everyday investors and would certainly strongly qualify for @TA’s fun bucket!

    Cheers for the good chat both!

  • 97 Whettam October 25, 2021, 1:24 pm

    @TA and @TI – really interesting perspectives I’d definitely be interested in that article on P/E leverage. Both the funds I use to access this sector can gear, but interestingly neither were using gearing, the last time this information was available.

    Totally understand your reasons for avoiding sector now @TA, as I said the routes in for private investors are limited and a lot of really good private companies don’t need equity, so they will stay private. I don’t necessarily think P/E is always small companies, which I think is a common misconception. There are a lot of underperforming trust in this area. As I said my allocation is only 5% vs. 45% for listed equities, so I’m still cautious myself.

    @TI I don’t think I have any particular edge when it comes to selecting Trusts in this sector, both the Trusts I use have holding in companies I know, but also lots I don’t, so I have no particular market insight. I selected them because (1) I liked the managers approach / methodology, (2) costs are kept lowish (although one of them is a bit high if I’m honest) and (3) they have both beaten the P/E sector average and the FTSE World over 3, 5 and 10 year intervals. Your points about buying during crashes and your comment about “invariably sold far too soon” is interesting. I’m trying to avoid market timing, I set my asset allocation at start of year and changes year to year are minimal. So my P/E allocation is 5% and if needed it gets rebalanced, my last buy was a rebalance during the pandemic crash.

    I have decided P/E has a role to play in my permanent portfolio asset allocation at moment, but do understand will not be for everyone.

  • 98 Algernond October 25, 2021, 7:28 pm

    @TA, @Whettam.
    The P/E ETFs I use (as mentioned: IPRV & XLPE) are heavy in those big firms like Blackstone, Partners, Brookfield…etc.), which as well as Private Equity, are heavily invested in Real Estate & Infrastructure (even farmland!). So they seem to bring good diversification.
    And the TER for these ETFs, is only ~0.2% higher than the various Global REIT ETFs.

  • 99 ZXSpectrum48k October 26, 2021, 9:10 am

    @Whettam. I’ve got US PE funds in my portfolio because I think they provide a number of dimensions which add something to my portfolio. Your point about the ratio of listed to unlisted companies is very valid. The indexers tend to be very quiet about the fact that an increasingly large percentage of the equity market cap (and equity market growth) isn’t part of their index.

    It also adds another dimension: it’s a partial hedge against my competition/peers who might in those start-ups etc. It allows me to gain some participation in their exponential growth (whether valid or just a bubble). This is a factor many “passive purists” seem to miss. They think in terms of real returns, not relative returns.

    In many ways, it’s more important that your portfolio helps you outperform your peers. Given the choice between my portfolio returning 10% next year but my peers’ portoflio returning 50% vs. my portfolio losing 10% but my peers’ losing 50%, I’d always take the latter because I’m winning in relative terms.

    Once of my biggest concerns over the last twenty years or so, having gone into finance was being “priced out” by those who went into tech. PE, like a tilt toward tech in listed indices, is an important way to hedge that risk. I hold crypto for the same reason. It’s nothing to do with my views. It’s a relative hedge.

    Finding the balance in my porfolio between focussing on returns vs. inflation and relative returns vs. peers is one of the complexities. It’s another mark against 60:40. It simply doesn’t have the diversification to replicate my risks.

  • 100 Whettam October 26, 2021, 12:05 pm

    @ZXSpectrum48k – Thank you that’s a really interesting perspective on P/E and it’s a value as a ‘relative hedge’. I have only really considered P/E, because its a significant % of equity market. Do you think relative performance, is also relevant for private investors or just professional fund managers?

    I have never considered my peers portfolios as competitors, my portfolio “competition” has always just been my benchmarks and my ability to generate the wealth (and eventually income) that my wife and I require / want. I’ve spent 30 years in tech and have never considered my peers who went into finance as the competition. In fact I have mainly seen finance companies as my customers / market, because a fair proportion of my career has involved marketing solutions to the sector.

    Your post has made me look at this in different way, which is always good 🙂 but just interested if you think “relative hedge” is mainly for professional fund managers or also applies to individuals portfolios. When you mention “priced out” by those who went into tech, is that just a fund manager sector thing or does it apply to individuals too? Surely our personal portfolios are only ever in competition if as consumers, we are using our portfolios to fund a supply limited asset like a property? Or am I missing something?

  • 101 ZXSpectrum48k October 26, 2021, 1:29 pm

    @Whettam. The majority of us in the first world have good standard of living. We don’t want for anything important: shelter, food, basic medical care etc.

    So it quickly becomes more about relative wealth than just absolute wealth. I’m competing with my peers to buy bigger houses, childrens’ education, foreign holidays, private medical care, a nicer car, whatever. None of that is necessary. It’s discretionary spending.

    The price of that spending is being driven though by how well the aggregate of my peers are doing. If tech/banks/funds are doing badly, salaries stagnate, bonuses are down, stock values drop, then my peers tighten their belts. Conversely, tech companies booming, finance booming then salaris and bonuses move higher, wealth explodes. The price of good and services I consume goes up fast.

    We see this right now. Some segments of society that have done extraordinarily well from COVID. Tech workers, crypto investors, hedge fund managers like myself. Most of those people though tend to spend far far more freely than I do. So they cause rapid price inflation.

    So my spending is to a degree correlated with their performance. Their impact on me is far greater than the “average” person. My standard of living or personal inflation rate is not even close to represented by average earnings or CPI. So to hedge that I need, again to some degree, to participate in their success/failure. Working out how much is complex.

    I come back to the same point. A 60:40 portfolio may work for the “average” person but no specific person is average. If a portfolio doesn’t reflect your specific objectives and future liabilities, it’s not a good passive portfolio.

  • 102 Whettam October 26, 2021, 3:19 pm

    @ZXSpectrum48k – thank you I understand now. I have considered my own specific portfolio, future liabilities and objectives. But although aware of the impact on salaries / the economy as a whole on inflation and even my own inflation rate. I had not really considered the peer competition / relative performance angle to this, very interesting way of looking at it, thank you again.

  • 103 Derek October 26, 2021, 3:41 pm

    Worrying about relative wealth or any other forms of keeping up with the Joneses is foolhardy and likely to lead to disappointment. You will never have enough money because there will always be other people you think you are falling behind. You will likely find better contentment in working out what you want out of life, how best to get there, and to stop worrying about what other people have.

  • 104 BBlimp October 26, 2021, 9:58 pm

    Thanks TA

  • 105 Tom-Baker Dr Who November 10, 2021, 12:59 pm

    @Derek #103 – I see where you are coming from, but I think this is not the point that @ZXSpectrum48k #101 was making. I believe that ZX was talking about hedging the future risk of accessing services and buying goods etc that he considers important in his life. If these are scarce and wanted by many people, you will only be able to have them if you can remain within the sellect group of people who can afford to buy these goods and services. You might be one of them now, but in the future your professional niche might be left behind. Some other group of professionals (e.g., technology sector workers) might make more money than you and make those scarce goods and services beyond your reach.

    It’s a great fortune, of course, if like myself, you are a man of simple needs. I personally find very gratifying that most people place little value in most of the things I value the most. This is one of the bonuses of having diversity in the world. Unfortunately, if you are too close to the mean of the Gaussian distribution you will always have to fight your peers for the same things that everyone in the crowded mean all equally want so badly! Also, by definition of the mean, most people will find themselves among it. Consider yourself very lucky, if you find yourself near the right tail instead 😉

  • 106 Whettam February 28, 2022, 7:01 pm

    In light of the YTD performance of both equities and bonds, I thought it might be interesting to look again at this and I wanted to look specifically at how some of the alternative assets are handling 2022. @TA I said before, I regard these “Alts” as growth assets, but I said thought they might have properties, which would mean they would handle downturns differently to equities and therefore still be a useful as diversifiers. This is what I was looking at by looking at performance for last three months (all figures from Trustnet):

    – VWRL (-7.1%)
    – IGLT (-5.5%)
    – Royal London Short Duration Global Index Linked (0.2%)

    For the Alternative Assets, I used numbers for sector average IT:
    – UK Commercial Property (2.4%)
    – Renewables (0.5%)
    – UK Logistics (-0.9%)
    – Private Equity (-4.7%)
    – Infrastructure (-4.9%)
    – Property Securities (-9.8%)

    I think some of this ‘out performance’ can be attributed to some of the alts possible inflation protection qualities. But personally I think albeit just looking at performance of last 3 months they have acted as diversifiers.

    I deliberately did not look at individual trusts, some of mine have done better than the average, others worse. However thought Ruffer (which I said before I don’t hold) deserved an honourable mention, because it was discussed last time, it returned 4.7% over last three months, repeating the outperformance it showed in Feb / March 2020.

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