The All Seasons PortfolioA group of financial instruments. reports amazing statistics about its returns.  I’d never heard of the All Seasons PortfolioA group of financial instruments., so had to check it out.  As I’ll discuss in more detail, it is an asset allocation strategy with more than 50% of the portfolioA group of financial instruments. allocated to US government bonds.  In this current environment of low interestA charge for borrowing money, most often based on a percentage of the amount owed. rates, one of my followers asked my opinion of the portfolioA group of financial instruments. as an investment strategy for the near future.  The answer is, as is almost always the case, it depends.  However, after studying the portfolioA group of financial instruments. and relevant data, I won’t be aligning my portfolioA group of financial instruments. with the All Seasons PortfolioA group of financial instruments..

In this post, I’ll define the All Season PortfolioA group of financial instruments., talk about when each of the components of the portfolioA group of financial instruments. is expected to perform well and provide a wide variety of statistics regarding its historical performance.  I’ll also talk about the need to re-balance assetsThe value of things the company owns and amounts it is owed to stay aligned with the portfolioA group of financial instruments. and the impact of income taxes on your investment returns.  I’ll close with how I’ve changed my portfolioA group of financial instruments. based on this analysis.

All Seasons Portfolio

Ray Dalio is an extremely successful hedge fund manager.  If you have more than $5 billion in investable assetsThe value of things the company owns and amounts it is owed, he might consider accepting you as a client.  His fund is famous for the All Weather investment strategy.  According to Tony Robbins, in his book MONEY Master the Game, the annual returns on the All Weather portfolioA group of financial instruments. exceed 21%![1]

Composition of Portfolio

In an interview with Robbins, Dalio described a much simpler version of the All Weather portfolioA group of financial instruments. for the rest of us.  This asset allocation is called the All Seasons portfolioA group of financial instruments..  The allocation in the All Season portfolioA group of financial instruments.[2] is:

• 40% in Long-Term US Bonds (20+ years), using the iShares Barclays 20+ Year Treasury BondA bond issued by the US government with a fixed interest rate and a maturity of more than 10 years. fund (ticker symbol TLT)
• 15% in Intermediate US Bonds (7-10 years), using the iShares Barclays 7-10 Year Treasury BondA bond issued by the US government with a fixed interest rate and a maturity of more than 10 years. fund (ticker symbol IEF)
• 5% in Gold, using the SPDR Gold Trust (ticker symbol GLD)
• 5% in CommoditiesBasic goods often used as inputs to the production of other goods or services. The primary categories in which commodities fall are metals, energy, livestock and agricultural products., using the PowerShares DB Commodity Index Tracking fund (ticker symbol DBC)
• 30% in the S&P 500

This allocation is illustrated in the pie chart below.

Economic Indicators

The portfolio’s name, All Seasons, refers not to the four seasons of the calendar year but to four indicators of the economic cycle.  These four indicators are:

1. Higher than expected growth (often measured using gross domestic product or GDP)
2. Lower than expected growth
3. Higher than expected inflation (often measured using the consumer price index or CPI)
4. Lower than expected inflation

I note that there is overlap between the first pair of characteristics and the second pair.  That is, a period of higher than expected growth can have either higher or lower than expected inflation.

The chart below shows which of the five components of the portfolioA group of financial instruments. are expected to perform well in each part of the economic cycle, according to Robbins.[3]

Historical Performance

According to Robbins[4], the All Seasons portfolioA group of financial instruments. had a compounded annual average return of 9.7%, net of fees, from 1984 to 2013.  By comparison, I calculate the corresponding value for the S&P 500 to be 8.4%.  In addition, the All Seasons portfolioA group of financial instruments. had much lower volatilityThe possibility that something will deviate from its expected or average value, including both good and bad results., with a standard deviationA standard deviation is a (slightly messy) statistical calculation that results in a positive number that measures how much the possible results differ from the average result.  For those of you who ... More of 7.6%, as compared to the S&P 500 which had a standard deviationA standard deviation is a (slightly messy) statistical calculation that results in a positive number that measures how much the possible results differ from the average result.  For those of you who ... More of 17%.  So, at first glance, the All Seasons portfolioA group of financial instruments. seems to be a terrific option – higher return for lower riskThe possibility that something bad will happen..

My Estimate of Returns

There are many challenges to calculating the returns on the All Seasons portfolioA group of financial instruments..[5]  I made many assumptions to better understand the returns, so do not consider the statistics I’ve calculated as accurate, but I think they are close enough to be informative.

The chart below shows the annual returns on the S&P 500 and my approximation of the returns on the All Seasons portfolioA group of financial instruments. from 1963 to 2019.

From this graph, it appears that the biggest benefit of the All Seasons portfolioA group of financial instruments. is that the non-S&P 500 asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More diversify away a substantial portion of the significant negative returns on the S&P 500.  For example, in the three years in which the S&P 500 had returns worse than -20%, I approximated that the All Seasons portfolioA group of financial instruments. lost an average of only 0.1%!

Returns by Asset Class

I wasn’t able to get a long enough history of Commodity price data, but was able to calculate the average return on the three other asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More during those same years (1974, 2002 & 2008), as shown in the table below.

As can be seen, all three asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More had positive returns in those three years, with Gold having the most significant increase.

My Investing Goals

I retired a little over two years ago, so have changed my investing goals to make sure I can meet my cash needs as I don’t have any earned income to cover my expenses.  Specifically, now that I’ve switched from the accumulation phase to the spending phase, I have less tolerance for volatilityThe possibility that something will deviate from its expected or average value, including both good and bad results..

Goals While Accumulating

While I was accumulating assetsThe value of things the company owns and amounts it is owed, I wanted my invested asset portfolioA group of financial instruments. to produce returns that were at least as high as the overall market.  I use the S&P 500 as my metric for market performance.  During that time, I was quite willing to tolerate the ups and downs of the market because I was diversifying my risk over time.  As a confirmation of my risk tolerancePersonal preference indicating how much risk you are willing to take to achieve a higher return., I point out that I did not sell any assetsThe value of things the company owns and amounts it is owed during any of the market “crashes.”

My first market crash was October 19, 1987.  I can still remember being in the office that day.  The internet was not available to the general public, so our news came from TV and radio.  One of the senior people in the office had a TV in his office, though I suspect it had just the over-the-air channels as very few people had cable TV then either.  He told everyone what was happening in the market.  I asked him whether he was going to move his 401(k)A type of Defined Contribution Plan available in the US. There are three types of contributions that can be made to 401(k)s.
• Pre-tax - No taxes are paid on the contributions or any changes in... More money out of the market into a safer fund.  His advice was that it was already too late and that I should just hang on for the ride.  That was one of the best pieces of investing advice I’ve ever gotten.  I didn’t sell during that crash and haven’t sold during any of the crashes since.

Goals While Retired

Now that I’m retired, I am drawing down my assetsThe value of things the company owns and amounts it is owed.  I’ve made two changes to my asset mix to reflect the fact that I now need to spend my assetsThe value of things the company owns and amounts it is owed rather than add to them.

1. Instead of having a six-month emergency fund in cash, I now have several years of expenses in cash.
2. I’ve added a few individual corporate bonds (to be clear, not a bondA form of debt issued by government entities and corporations. fund) that mature in 3 to 5 years to my portfolioA group of financial instruments.. When these bonds mature, they will add to my cash balance to cover my expenses in those years.

For the rest of my invested asset portfolioA group of financial instruments., I’ve maintained the same goal – meet or beat the S&P 500.

By having several years of expenses in cash, I know I won’t have to sell any assetsThe value of things the company owns and amounts it is owed during any market turmoil, such as we are experiencing now.  As discussed in my post on reacting to the most recent crash, the market has historically recovered in less than five years (excluding the crash of 1929) and has higher than average returns during the recovery phase.  As such, I don’t want to have to sell stocks when markets are down.

How I Evaluate the All Seasons Portfolio

As I said, my goal is to earn a return close to or higher than the return on the S&P 500.  I would be willing to take a small reduction in return for less riskThe possibility that something bad will happen., but not much given the other aspects of my strategy.  Therefore, I will look at the components of the All Seasons portfolioA group of financial instruments. relative to what I can earn if I just invest in the S&P 500.

In particular, I am interested to see how these asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More perform when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates are low, as they currently are.

Bonds

Returns on bonds (unless held to maturity) and bondA form of debt issued by government entities and corporations. funds have the following characteristics:

• The total return is equal to the interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More on the bondA form of debt issued by government entities and corporations. plus the change in market value from changes in interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More levels.
• Returns are higher when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates are high or are going down.
• The total return is similar to the interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More itself when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates stay fairly stable.
• Returns are lower when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates are low or are increasing.

Bond Returns vs. Interest Rate Changes

This relationship can be seen in the chart below which compares the change in the 10-year US Treasury bondA bond issued by the US government with a fixed interest rate and a maturity of more than 10 years. interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More (yield) with the change in the market value of iShares Barclays 7-10 Year Treasury BondA bond issued by the US government with a fixed interest rate and a maturity of more than 10 years. fund (ticker symbol IEF) in each year from 2003 through 2019.

What Can Happen from Here

We are currently in the last situation listed above.  InterestA charge for borrowing money, most often based on a percentage of the amount owed. rates are currently quite low by historical standards.  The chart below which shows the yield on the 10-year US Treasury bondA bond issued by the US government with a fixed interest rate and a maturity of more than 10 years. from 1962 to 2020.  The last point on the chart is the interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More on July 8, 2020 of 0.65%.  It is lower than the interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More at the end of any year since 1962.

For all intents and purposes, interestA charge for borrowing money, most often based on a percentage of the amount owed. rates can do one of two things from their current levels – stay about the same or go up.  If they stay the same, the return on bonds funds will be about the same as the interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More on the bonds – currently less than 1% for 10-Year US Treasury bonds and less than 1.5% for 30-Year US Treasury bonds.  If interestA charge for borrowing money, most often based on a percentage of the amount owed. rates go up, the market value of the bonds will go down and returns will be even lower.

As such, I don’t believe the returns on bonds or bondA form of debt issued by government entities and corporations. funds in the near termThe time period over which you re-pay the loan will be high enough to be consistent with my investing objectives.  I will continue to buy individual corporate bonds that mature in the next few years to ensure that I have cash available to meet my expenses.  But, I do not plan to add any bondA form of debt issued by government entities and corporations. funds to the investment portion of my portfolioA group of financial instruments..   If I were younger and the time until I needed to draw down my investments to cover my expenses was longer, I wouldn’t invest in bonds at all in the current environment.

Gold

I am particularly interested in how gold has behaved, as it isn’t something I’ve studied much.  For the current environment, I’m interested in how gold behaves when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates are flat or rising.  The chart below shows how I defined historical periods as having interestA charge for borrowing money, most often based on a percentage of the amount owed. rates that are either flat or rising.

The line is the same line shown in the 10-Year Treasury Interest RateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More chart above.  I have shaded periods in which interestA charge for borrowing money, most often based on a percentage of the amount owed. rates have been relatively stable in blue.  The time periods in which interestA charge for borrowing money, most often based on a percentage of the amount owed. rates have increased are highlighted in green.

The chart below has the same time periods shaded as the previous chart, but the blue line shows the percentage change in the price of gold between 1971 (when the price of gold was no longer set by the US government) and today[6][7].

Looking back to the 1970s, gold prices were generally up quite significantly when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates were either relatively flat and when they increased.  While the increases in price were not as large in the period from 2003 to 2006, another time period when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates were flat, as in the 1970s, annual price increases were still generally in the 10% to 30% range, much higher than would be expected on the S&P 500.  Only in the most recent flat period are changes in gold prices not as consistently high.

Gold Funds

Buying gold means that you have to find a way to take delivery of it or pay to have it stored.  One article about the All Seasons fund suggested investing in SPDR Gold Shares[8] (ticker symbol GLD) which is an exchange-traded fund (ETF) physically backed by gold.  I compared the changes in prices of this ETF with the changes in the price of gold.  Although they generally track each other, as shown in the chart below, they are not a perfect match.  Nonetheless, this ETF appears to be a much easier alternative for investing in gold than buying gold itself.

Commodities

I wasn’t able to get a long history of returns on commoditiesBasic goods often used as inputs to the production of other goods or services. The primary categories in which commodities fall are metals, energy, livestock and agricultural products., but the table I provide earlier from Robbins’ book indicates that they are expected to behave in a manner similar to gold.

Overall Portfolio Evaluation

The chart below summarizes the annual average returns (on a compounded basis) for each of the asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More for which I could approximate returns from 1963 to 2019[9].

Over this time period, it appears that Gold has had returns similar to that of the S&P 500, but the returns on US Treasuries have dragged down my estimate of the returns on the All Seasons portfolioA group of financial instruments..

I am particularly interested in how these asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More perform when interestA charge for borrowing money, most often based on a percentage of the amount owed. rates are either flat or increasing.  The chart below illustrates these returns using the same approximations as above.

In average in both rising and flat interest rateThe percentage which, when multiplied by the face amount or principal of a financial instrument, such as a bond, savings account or loan, determines the amount of interest that will be paid to or by t... More environments, gold has historical outperformed the S&P 500.  By comparison. both categories of bonds have underperformed and, in fact, have had average returns during those periods of roughly 0%.

Re-Balancing

The performance metrics reported by Robbins and others assume that you maintain the target mix in each asset class.  To accomplish that, you need to sell asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More that have appreciated the most (or depreciated the least) and buy asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More that have not performed as well.

What is Re-Balancing

Let’s look at an example.  At the beginning of a year, you invest $10,000 using the All Seasons portfolioA group of financial instruments..  Your portfolioA group of financial instruments. looks like this:

If your one-year returns were similar to those in 2019, your end of year asset allocation (light green) would not be the same as your target (dark green), as shown in the graph below.

To reach the target allocation, you would need to make the following changes.

To attain the high returns reported by Robbins, I suspect you need to re-balance the portfolioA group of financial instruments. fairly often.  In my calculations, I assumed annual re-balancing on the first of each year.  How often you re-balance the portfolioA group of financial instruments. depends on your personal preference, but should generally be more often when the prices of one or more of the asset classesA group of similar investments or things you can buy with the expectation they will hold their value, generate income and/or increase in value.  The three primary asset classes used by most investors... More is changing rapidly and no less often than annually.

Impact of Income Taxes

It is better to own portfolios you need to re-balance regularly in a tax-free or tax-deferred account.  Otherwise, you will need to pay income taxes on the net of your capital gains and capital losses.  401(k)s and IRAs are the most common tax-free and tax-deferred accounts in the US.  The Canadian counterparts are TFSAs and RRSPs.

Continuing the example above, you sell $44 of gold and $451 of stocks for a total of $495.  Without going into the details of the calculation, your cost basisThe amount you paid for something. for these two sales combined is $387, for a realized capital gain of $108.  Many Americans have a 10% tax rate on capital gains which corresponds to $11 on the capital gain of $108.  These taxes reduce your total return by 0.1 percentage point.  That might not sound like much, but it can add up.  If you make a $10,000 investment in this portfolioA group of financial instruments. and taxes reduce your return from 10.0% to 9.9%, you will have $5,000 less after 30 years.  That’s half of the amount of your initial investment!

Changes I’ll Make to My Portfolio

The analysis presented in this post has refined my thinking about my portfolioA group of financial instruments. in two ways.

First, I have confirmed my past thinking that I can maintain a substantial cash position, supplemented by some individual bonds held to maturity, as a hedge against the riskThe possibility that something bad will happen. that the stock market will have a significant downturn.  Although holding several years of expenses in cash lowers the return on my total assetsThe value of things the company owns and amounts it is owed, I find it a much easier and less risky strategy than introducing bondA form of debt issued by government entities and corporations. funds into my portfolioA group of financial instruments..  That is, although the return on money market funds where I hold my cash is low, it isn’t much lower than the current returns on US treasury or even high-quality corporate bonds.  With the significant potential that the market price of bonds will go down, I am more comfortable with my cash position.

Second, I have invested in the SPDR Gold Trust (ticker symbol GLD).  I don’t plan to immediately move as much as the 7.5% of my portfolioA group of financial instruments. into gold as suggested by the All Seasons portfolioA group of financial instruments. (15% if I use gold as a substitute for commoditiesBasic goods often used as inputs to the production of other goods or services. The primary categories in which commodities fall are metals, energy, livestock and agricultural products., too).   Rather, I plan to initially invest 1% to 2% of my portfolioA group of financial instruments. in gold and add to that position as I gain more comfort and experience investing in it.

Footnotes

[1] Robbins, Tony, MONEY Master the Game, Simon & Schuster Paperbacks, 2014, p. 391-392.

[2] “Robbins’ All-Seasons PortfolioA group of financial instruments..” TuringTrader.com, https://www.turingtrader.com/robbins-all-seasons/.  Accessed July 5, 2020.

[3] Robbins, op. cit., p. 390

[4] Robbins, op. cit., p. 395.

[5] There are many components of the calculation of returns, including assumptions regarding frequency of reinvestment and fees and the choice sources of data used to calculate the returns of the components of the portfolioA group of financial instruments..  As such, I am not able to replicate his calculations.  In fact, I found another source for returns on the All Seasons portfolioA group of financial instruments. that, in the single year for which details were provided both sources, shows a return that was 3 percentage points higher than reported by Robbins.

[6] “Historical Gold Prices.” CMI Gold & Silver, Inc, https://onlygold.com/gold-prices/historical-gold-prices/, Accessed July 7, 2020.

[7] “Gold Prices.” World Gold Council, https://www.gold.org/goldhub/data/gold-prices, Accessed July 8, 2020

[8] “Bringing the gold market to investors.” State Street Global Advisors, https://www.spdrgoldshares.com/.  Accessed July 8, 2020.

[9] As indicated above, the returns I calculated for the All Seasons portfolioA group of financial instruments. are not as high as were calculated by Robbins.