Sunday, December 30, 2018

Asset allocation for all seasons

Today, Ray Dalio is considered one of the world’s most successful investors. He was asked by his friend Tony Robbins to construct an ‘All Weather Portfolio Allocation’. It is well known that asset allocation is often more important than stock selection when determining portfolio performance. Ray proposed the following asset allocation, which was back tested by Tony Robbins and his team for the last 40 years. There were no major annual losses and the portfolio gained 86% of the time. The average annual return was 9.72%. Here is the allocation:

1.       30% stocks

2.       15% intermediate (7-10 year) bonds

3.       40% long-term (20-25%) year bonds

4.       7.5% gold

5.       7.5% commodities

Rebalance at least annually!
Now Ray made this mostly a paper-security portfolio, so you don’t see real estate. Kevin O’Leary says that he sees real estate similar to the fixed income asset class. Some research suggests that there is a very good correlation between Cap-rates (in real estate) and long term bond yields. Yet with inflation the prices of real estate tend to rise while those of long-term bonds fall. So, overall real estate maybe better correlated to stocks. It probably also depends on the local economy where the real estate is located. In Calgary, we see a very strong correlation between oil prices and real estate, although recently that has been muted by low interest rates. 

For me, to model my portfolio after Ray’s allocation model, I probably would exchange the long term bond component with real estate. For now. When I get older and do no-longer wish the work associated with rental apartments, I may exchange real estate for long-term bonds or just simply add more long-term bonds over time and keeping the real estate steady. 

Also, note the absence of cash in this portfolio which goes to observations on this blog where stock portfolio performance measurements like comparison to the TSX300 or S&P500 indexes don’t work because our portfolios often include a moderate to large cash position. This cash yields virtually zero return and thus ensures perpetual underperformance. Adjusting Ray’s portfolio to my own allocation would make it:

1.       30% stocks

2.       15% intermediate (7-10 year) bonds

3.       40% real estate

4.       7.5% gold

5.       7.5% commodities
Since I am becoming increasingly antsy about continued good stock performance the above Asset Allocation may be a future goal. Ray’s 9.72% annual performance would certainly be desirable. It would also encourage taking out free cash - I reserve up to a maximum of 2 x times the annual cost of living my lifestyle. When more secure of the portfolio’s annual cash flow from rents, dividends and interest, I could decrease the level of case reserve gradually as well. 

If you are interested in learning more about the detailed thinking involved in constructing Ray’s asset allocation then I recommend reading Tony Robbins' book: Money: Master The Game. Also here is a link to a You-tube interview by Tony of Ray Dalio about his investment philosophy

No comments:

Post a Comment