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Global Asset Allocation: A Survey of the World's Top Asset Allocation Strategies Paperback – April 20, 2015
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I thoroughly enjoyed this short book. Below are a few brief points about what I consider the highlights from each of the chapters. My personal commentary is at the end of this review.
Why it's a bad idea to hold cash long term.
There is a pretty amusing (and correct) take down of Zerohedge's dollar crash charts.
A great look across major countries returns on bills, bonds and equity vs inflation.
Nominal returns vs real returns. This is important to understand for wealth preservation.
The importance of understanding the length of time spent in drawdown.
Understanding future returns (they won't be stellar at the time of this writing).
The importance of going Global.
Why Market Cap and GDP suggest holding only 50% (or less) of your portfolio in US assets.
The Global 60/40 portfolio - increases returns and reduces volatility (by a bit).
But why just Stocks and bonds?
13 assets classes examined since 1973.
Interestingly, Gold and Commodities had by far the worst Sharpe ratio over this time.
"It is a sad fact that as an investor, you are either at an all-time high with your portfolio or in a drawdown - there is no middle ground - and the largest drawdown will always be in your future."
Figure 24 of the 13 assest class returns in different regimes is excellent and valuable.
It is now time for portfolio construction.
Chapter 4 - Risk Parity and All Seasons - Ray Dalio (Bridgewater)
Real returns in the inflationary 70's were negative (73-81).
Risk parity worked during the Bond Bull Market post 81 - what about going forward?
Bridgewater's All Weather is the largest fund in the world but you can't get in. Faber shows you how to clone it yourself (via a link to his blog).
Terrific links to background reading.
Chapter 5 - Permanent Portfolio - Harry Brown
Low real returns during the inflationary 70's and then about 5% post 81.
Consistent, low volatility performance.
Chapter 6 - Global Asset Allocation
A portfolio constructed along the lines of a global market cap weighted portfolio. Check links to research paper for more info on construction.
Positive returns post 1981.
The portfolio was altered to include commodities to the benefit of an extra 1% per annum with not much more volatility. This is an example of how diversification and back testing may improve a portfolio.
Chapters 7-10 Lots more portfolios:
These chapters show portfolios from Rob Arnott, Marc Faber (no relation to the author), Warren Buffet, Mohammad El-Arian, David Swensen, The Ivy Portfolio (Meb Faber)
Much like the previous chapters, Chapters 7-10 show nominal and real returns from 1973-2014. Over the long term, real returns are similar with the Buffett portfolio mimicking stock returns and the attendant volatility that comes with it. Not surprising considering it's 90% stocks making it the most non-diversified of the portfolios studied.
According to the author, the Marc Faber portfolio was the most consistent portfolio reported in this book.
Chapter 11 - Summary of Strategies
Make sure you read and understand this summary chapter. Indeed, the conclusion reached by the author surprised even him. At one point he states: "To me, that is astonishing". What is so astonishing? In brief, it doesn't really matter which allocation you pick. The *real* returns are nearly the same. If you take out the permanent portfolio which technically had the worst returns, the remaining portfolios are within oh, about 1/2 of 1%. And since you can't predict which portfolio will do what in the coming years, just pick one and get on with your life. An equally (if not more) important fact is costs, costs, and costs. If you pay an advisor 1-2%, you will turn the very best performing portfolio into the very worst performing portfolio. It's a simple as that. So keep your costs under control and pick a portfolio you like.
Chapter 12 - Implementation
This is a good chapter for those not familiar with what assets to actually use - or even those who do. What I like about this chapter is that it directs you to the things needed to actually build your portfolio (this is done throughout the book - also see Appendix A for pre-built portfolios from some well-known robo-advisor's). You already know the weights (and even that isn't all that significant). The other thing the author talks about is taxes. Lots of authors talk about investing or trading but they don't get into discussing the impact of taxes nearly enough. Taxes are a vital area to know about as they will take by far the biggest chunk of your earnings. If you were surprised by the impact of advisor fees (also discussed in this chapter), then you really need to understand the impact of taxes. I really appreciate it when authors use their knowledge in very specific ways. This chapter as well as other chapters in the book demonstrates that.
Chapter 13 - Summary
The author's opinions and wisdom are distilled down to 10 brief points. They are:
1. Any asset by itself can experience catastrophic losses.
2. Diversifying your portfolio by including uncorrelated assets is truly the only free lunch.
3. 60/40 has been a decent benchmark, but due to current valuations, it is unlikely to deliver strong returns going forward.
4. At a minimum, an investor should consider moving to a global 60/40 portfolio to reflect the global market capitalization, and especially now due to lower valuations in foreign markets.
5. Consider including real assets such as commodities, real estate, and TIPS in your portfolio.
6. Once you have determined your asset allocation mix, or policy portfolio, stick with it.
7. The exact percentage allocations don't matter than much.
8. Make sure to implement the portfolio with a focus on fees and taxes.
9. Consider using an advisor or other automated investment service in order to make it easier to stick to the portfolio and rebalancing schedule.
10. Go live your life and don't worry about your portfolio!
Appendix A and B
There is good material in the FAQ and Other Portfolio appendices. Just get the book and read them.
OK, after this long-ish review, here's what I think. The book is of significant value (if you take an estimate of the value and divide it by the ridiculously paltry price, you get something of incredible value). The research is solid and the numbers unassailable. Even though I've described what I consider to be the highlights, you really need to read the book for the excellent data. Staring at the data for a while will really help you internalize the reality of asset allocation. Although not an apples-to-apple comparison (far from it), I recently read and reviewed Tony Robbin's book. That was a good book but really long. Tony is a talker - it's what he does for a living after all (and he is among the best at what he does - motivational speaking and life coaching). But there were times I was getting worn out by the length of material verses the significance of it. Not so with Meb's book. This thing is a gem. You can read it quickly and know all that you really need to know. Further, Tony was in full promotion mode for a single portfolio and an asset manager that charges too much. I commented in my Amazon review that if Tony really wanted to help people, he would have come up with a low cost solution. Amazingly, a very short time after I did that review, Meb Faber introduced the world's first no-management-fee ETF. Incredible. Meb actually did what I thought Tony should have done. Kudo's to Meb then! So grab a copy of this book and read it. The cost is essentially free (if you had to buy this quality research from and advisor or brokerage, I dare say it would be in the $100's or $1000's). Read it and you will learn something. You will be more informed about asset allocation and ultimately be better off for it.
The big argument of the book is that fees are really terrible - transform best strategy to worst. The major insight for me was not only that fees have an immediate cost but that the opportunity cost of that extra few hundred basis points of compounding is much greater over long time horizons (than even the "accounting cost" of fees).
I gave it four stars because I found 80% of it fairly predictable. Still worth it for the few critical insights.
Kudos to the author for not complicating things by having too many key messages.
While I have been thinking of writing an e-book on seasonal and quantitative studies applied to the Vietnamese stock market for years, Faber has actually gotten off his butt and made things happen. I love his short and sweet, 'Just the facts, ma'am' writing style and have eagerly read all of his books, not to mention his excellent website. I would have liked a little more advanced treatment in his current book; for example, mixing in trend-following and/or value factors, but he delivered the message that he wanted to convey, and I respect him for that.
One of the author's summary findings which I have mixed feelings about is, "an investor should consider moving to a global 60/40 portfolio to reflect the global market capitalization, especially right now due to lower valuations in foreign markets." Lower valuations and broader diversification are good things -- but before exposing half your portfolio to wild currency swings, U.S. investors should carefully consider how much of their international holdings should be currency hedged (so a rising dollar doesn't reduce the value of your investments).
In Appendix A, the author recommends hedging foreign bonds, and he links to a Vanguard paper supporting that view. But the Vanguard paper also finds that over a 28-year study period, portfolio volatility was minimized by allocating only 25-30% of equities to unhedged international stocks.
If you followed the author's suggestion and had a 50% equity exposure to an unhedged international equity fund like EFA or VXUS, one of your biggest positions was down about 5% over the last year. If you used a hedged equivalent like HEFA, it was up about 10%. So currency swings can make a big difference in a global portfolio. The Vanguard paper calls unhedged international holdings a "bearish view about the performance of the U.S. dollar." I am not willing to make a big bet on the dollar -- it would add a lot of volatility with zero expected return. But I understand that a little bit of uncorrelated volatility can reduce a portfolio's net volatility.
I hope Mr. Faber will address in future research whether there's range of hedging which has worked well historically.
I heartily recommend reading this book and absorbing its lessons. But be aware of risks it doesn't cover. A cautious investor who wants to move towards a low-cost global 60/40 portfolio might want to add international equities, splitting them about evenly between a low-cost currency hedged developed market index like HEFA, and unhedged funds for emerging markets and factor tilts. If adding international bonds, consider a hedged fund like BNDX (realizing that yields are currently less than half that of BND).
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