Why I Don’t Hold the All Seasons Portfolio
The All Seasons PortfolioA group of financial instruments. More reports amazing statistics about its returns. I’d never heard of the All Seasons PortfolioA group of financial instruments. More, 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. More 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. More rates, one of my followers asked my opinion of the portfolioA group of financial instruments. More 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. More and relevant data, I won’t be aligning my portfolioA group of financial instruments. More with the All Seasons PortfolioA group of financial instruments. More.
In this post, I’ll define the All Season PortfolioA group of financial instruments. More, talk about when each of the components of the portfolioA group of financial instruments. More 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 More to stay aligned with the portfolioA group of financial instruments. More and the impact of income taxes on your investment returns. I’ll close with how I’ve changed my portfolioA group of financial instruments. More 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 More, 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. More 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. More for the rest of us. This asset allocation is called the All Seasons portfolioA group of financial instruments. More. The allocation in the All Season portfolioA group of financial instruments. More[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. More 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. More fund (ticker symbol IEF)
- 7.5% in Gold, using the SPDR Gold Trust (ticker symbol GLD)
- 7.5% 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. More, 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:
- Higher than expected growth (often measured using gross domestic product or GDP)
- Lower than expected growth
- Higher than expected inflation (often measured using the consumer price index or CPI)
- 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. More are expected to perform well in each part of the economic cycle, according to Robbins.[3]
| Growth | Inflation | |
| Rising | Stocks 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. More Gold | 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. More Gold |
| Falling | Treasury Bonds | Treasury Bonds Stocks |
Historical Performance
According to Robbins[4], the All Seasons portfolioA group of financial instruments. More 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. More had much lower volatilityThe possibility that something will deviate from its expected or average value, including both good and bad results. More, 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. More seems to be a terrific option – higher return for lower riskThe possibility that something bad will happen. More.
My Estimate of Returns
There are many challenges to calculating the returns on the All Seasons portfolioA group of financial instruments. More.[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. More from 1963 to 2019.
From this graph, it appears that the biggest benefit of the All Seasons portfolioA group of financial instruments. More is that the non-S&P 500 asset classesGroups 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 many 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. More 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 classesGroups 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 many investors ... More during those same years (1974, 2002 & 2008), as shown in the table below.
| Asset ClassA 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 many investors a... More | Average Return in Years when S&P 500 Return was < -20% |
| S&P 500 | -30.5% |
| 7-10 Year US Treasury Bonds | 8.0% |
| 20 Year US Treasury Bonds | 15.2% |
| Gold | 33.5% |
As can be seen, all three asset classesGroups 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 many 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. More.
Goals While Accumulating
While I was accumulating assetsThe value of things the company owns and amounts it is owed More, I wanted my invested asset portfolioA group of financial instruments. More 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. More, I point out that I did not sell any assetsThe value of things the company owns and amounts it is owed More 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 More. 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 More rather than add to them.
- Instead of having a six-month emergency fund in cash, I now have several years of expenses in cash.
- I’ve added a few individual corporate bonds (to be clear, not a bondA form of debt issued by government entities and corporations. More fund) that mature in 3 to 5 years to my portfolioA group of financial instruments. More. 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. More, 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 More 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. More, 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. More 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 classesGroups 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 many investors ... More perform when interestA charge for borrowing money, most often based on a percentage of the amount owed. More 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. More 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. More 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. More 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. More rates stay fairly stable.
- Returns are lower when interestA charge for borrowing money, most often based on a percentage of the amount owed. More 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. More 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. More 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. More 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. More 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. More 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. More 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. More funds in the near termThe time period over which you re-pay the loan More 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. More funds to the investment portion of my portfolioA group of financial instruments. More. 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. More 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. More 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. More 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. More 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. More 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. More 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. More, 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 classesGroups 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 many 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. More.
I am particularly interested in how these asset classesGroups 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 many investors ... More perform when interestA charge for borrowing money, most often based on a percentage of the amount owed. More 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 classA 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 many investors a... More. To accomplish that, you need re-balance regularly. That is, you need to to sell asset classesGroups 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 many investors ... More that have appreciated the most (or depreciated the least) and buy asset classesGroups 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 many 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. More. Your portfolioA group of financial instruments. More 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.
| Gold | Sell $44 |
| 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. More | Buy $28 |
| Stocks | Sell $451 |
| Medium TermThe time period over which you re-pay the loan More Bonds | Buy $399 |
| Long TermThe time period over which you re-pay the loan More Bonds | Buy $67 |
To attain the high returns reported by Robbins, I suspect you need to re-balance the portfolioA group of financial instruments. More 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. More depends on your personal preference, but should generally be more often when the prices of one or more of the asset classesGroups 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 many 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. More 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. More 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. More 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. More 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 More, I find it a much easier and less risky strategy than introducing bondA form of debt issued by government entities and corporations. More funds into my portfolioA group of financial instruments. More. 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. More into gold as suggested by the All Seasons portfolioA group of financial instruments. More (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. More, too). Rather, I plan to initially invest 1% to 2% of my portfolioA group of financial instruments. More 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. More.” 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. More. 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. More 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. More are not as high as were calculated by Robbins.
Susie Q is a retired property-casualty actuaryA professional who assesses and manages the risks of financial investments, insurance policies and other potentially risky ventures. Source: www.investopedia.com/terms/a/actuary.asp More and mother of two adult children. As her children were moving from their teens into their 20s, she found she was frequently a resource on many, many financial decisions and she had insights and information she could provide to them on a wide array of financial decisions. She spent a significant portion of my career building statistical models of all of the financial risks of an insurance company and interpreting their findings to help senior management make better financial decisions. She is the primary author at Financial IQ by Susie Q and volunteers with other organizations related to financial education.
Hi Susie – great overview and assessment of this portfolio! I’d heard of it before but never really looked into to. At a glance (and from memory), it looks similar to the Swenson portfolio, but with less international exposure.
As you said, with bond yields where they are today, I’m not interested in mid or long term bonds. There’s really only one direction interest rates can go—up (unless we actually go negative yield in the US). I’ve actually been selling off my holdings in longer term bond funds and taking some decent profits recently as interest rates have rapidly declined.
AI – I agree with your strategy of thinning out positions in bond funds. I’ve bought some short term (3-5) year bonds that I plan to hold to maturity, but that is to reduce volatility as I’m drawing down my portfolio. If I had 20 years until I retired, I wouldn’t choose to be in bonds at all.
I haven’t heard of the Swensen portfolio. You are right that it has more international exposure. It also has much less in bonds (30% – still more than I like right now) and replaces gold and commodities with REITs. I had one bad experience with REITs in the 80s when I was young and and naive and haven’t been near them since. I’m sure there are some that are successful, but it isn’t an area in which I have enough expertise to invest again.
Thanks, Susie, for the explanation of this portfolio that is new to me. I especially enjoyed the overview of commodities and gold as neither of these had occurred to me as a place to invest due to my lack of knowledge and my assumption that these are highly volatile.
Kay – I hadn’t heard of it either. One of my former colleagues brought it to my attention asking if he was correct in having concerns about bonds. Obviously I agree with him.
I’ve never invested in gold or commodities before either, other than the farm we own. With that exposure, I decided to add only gold to my investment portfolio. We had a very wealthy friend who believed that you should hold something like 10% of your portfolio in gold and, if I understood right, actually had gold in a safe in his basement. I’m sticking with the gold ETF for now.
Great write up! Definitely don’t think a heavy bond portfolio holds up well in current interest rate environments but it’s interesting to look at different portfolios
Thanks, Willionaire. I enjoyed studying this portfolio and getting into the details of how bonds and bond funds perform in different environments. In the early 1980s, when I was first investing, it was a totally different environment and bonds provided amazing returns.
Thanks for writing such a thoroughly researched and well thought out post! It is great to see that you are interested in researching different portfolio types and willingness to potentially adjust your strategy.
I think, as you said at the beginning, deciding on portfolios is one big “it depends” based on a series of personal decisions. My dad and grandfather have been encouraging me to start investing in gold as a hedge against economic uncertainty… so it’s interesting to see people’s ideal portfolio change in real-time due to market uncertainty/fluctuations.
You’re welcome. I’ve always held the belief that you shouldn’t invest in anything you don’t understand. Having not looked at gold before and definitely not wanting to own physical gold, I’d avoided it for all these years. Now that I’m retired, done the research and identified gold as a hedge against the market, I was quite interested to learn about the GLD ETF.
Thanks for the excellent post. I am also considering a small allocation to gold. I see the info from chart that average return of gold when S&P 500 lost >20% is over 33% which is very useful info.. would it be possible to also add average return of gold when S&P return was in different ranges like between 0-20% loss as well as 0-10% gain, >10% gain etc.?
Harry –
Very interesting question. Over the same time period, I calculate the following returns:
When the S&P 500 had a loss between 0% and 20%, gold averaged +4.4%
When the S&P 500 had a gain between 0% and 10%, gold averaged -18.6%.
When the S&P 500 had a gain of more than 10%, gold averaged +8.4%.
The negative return on gold when the S&P 500 had a small positive return isn’t surprising, as my analysis found that gold and the S&P 500 were negatively correlated.
Let me know if you have other questions.
Susie Q
Great info. Thank you Susie.
Very interested analysis. Thank you.
Have you looked at RPAR ETF? It is also a risk parity/all seasons portfolio with a bit more sophistication than the one you analyzed. The management used to work for Dalio, thus the similarities to his portfolio. I wonder if you could take a look. They own significant amount of bonds but using TIPS and LT treasuries, and do some adjustments when the 10 year treasuries are <1%.
Please see the ETF's excellent 3rd quarter report. https://rparetf.com/quarterly-reviews/R … w-3Q20.pdf
If you need more details, I have done some work and I can send it to you.
BTW, I am also retired
Erwin –
I’m not familiar with the RPAR ETF. I’ll take a look and provide my thoughts in a few days. (Pretty busy around here with the holidays coming up!)
Thanks for taking the time to read my post and, especially, to add your insights.
Susie Q
The addition of TIPs is really interesting, as it acts as a bit of a hedge against rising interest rates assuming they occur at the same time as rising inflation. The inception to date performance benefits from the same thing as the All Seasons portfolio because interest rates deceased in the past year. I don’t see them going down much further, so wouldn’t be thrilled with the 40%+ allocation to bonds. TIPs are something I’ve thought about researching further for my portfolio.
Thanks for bringing this portfolio to my attention. I’m always interested in seeing new things.
I read your insights regarding the portfolio charts (golden butterfly). I similarly have concerns about bond funds and feel I want bond exposure as a hedge to equities. I struggle with holding too much cash instead but don’t want the bond returns to fall which is likely. I admit I don’t understand why bond returns for bond funds should drop if interest rate rises…seems like if coupon rate increases by 10%, the bond price would drop by 10%, making it a wash if the bond funds sells the old and buys the new. Do you know how to buy a “basket of bonds” (for diversification) that would be held to maturity? Holding the basket of bonds to maturity would be like a bond fund but without the risk of bond returns falling if interest rates rise.
Mike –
You ask a lot of great questions. I’ll start simply with individual bonds and then will broaden my explanation to bond funds.
Let’s say you own a bond that has a 3% coupon, a par value of $100, a term of 3 years and it has a market price today of $100. The market price equaling the par value means that the interest rate implicit in the price is the coupon rate of 3%. The price of a bond is calculated as the present value of the future cash flows (12 quarterly payments of $0.75 = 3% of $100/4 payments per year plus the $100 in three years). If the interest rate underlying the price of this bond increased to 10%, the present value decreases from $100 to $82. $82 becomes the market price. However, if you hold the bond to maturity, you still get the same 12 quarterly payments of $0.75 plus the $100 in three years, so your financial situation is unaffected by the changes in the market price.
The issue with bond funds is that the price of the bond fund is the aggregation of the market prices of the bonds they hold. If you ever need to get your money out of the bond fund or you are just calculating your net worth, the value of the bond fund will change every day based on the changes in the market prices of the bonds it holds.
The bond fund can buy bonds that are priced based on the 10% current interest rate, but would need to sell the bonds it bought at 3% to do so. A bond with a $100 par value maturing in three years with a 3% interest rate will have a much lower market price than the same bond with a 10% interest rate. If the bond fund wants to exchange its 3% bonds for 10% bonds, it can’t buy as many. So, while the bond fund will benefit from the higher coupon payments, it will have fewer of them because of the smaller count of bonds it owns.
My strategy is to buy small positions in a lot of individual bonds and hold them to maturity. I currently own about bonds in about 15 different companies. All of them mature in the next five years and had yields to maturity (interest rates implicit in their pricing) of more than 3% when I bought them. They were all rated investment grade by at least one of S&P and Moody’s.
Susie Q
Regarding adding gold to a portfolio, do you have an opinion on the risk of losing some/all of gold ETF since it is a trust and not physical gold? Since gold is intended to be a hedge during a crisis, doesn’t investment in a trust (trust company can default?) and not buying the physical gold significantly reduce this hedge? I know the convenience and lower cost of buying gold etfs makes it very attractive (don’t have to store), but I wonder if these pros are not worth it. The company that holds the trust can default. Where I am ending up is I am thinking of buying at least 5 different gold etfs (or maybe silver as well) to limit risk if a trust defaults. However, I am not sure if I am just fooling myself since if 1 trust defaults due to crisis, the others will likely as well. Would appreciate your thoughts. Thank you
Michael –
I’m not an expert on gold ETFs,but did some research and found a few, GLD, for example, that say their shares are backed by actual gold. Buying one of these ETFs, if you are comfortable with it, or, as you suggest, diversifying your exposure by buying several gold ETFs might address some of your concerns. Of course, if you are really concerned, you could always buy actual gold. I had one very well-off friend who had gold in his basement (or so we believed).
Susie Q