Asset Allocation Strategies Deconstructed

Includes: GLD, LQD, VNQ
by: Marius Bausys

One of my favorite websites for investment ideas is the investment blog maintained by Mebane Faber - a portfolio manager who's also an author of some well-known articles and books. A recent post on his blog contains a list of 9 popular asset allocation strategies (60/40, Ivy Portfolio, Risk Parity Portfolio, etc.) designed by some renowned investors. Interestingly, the conclusion of the article is that all these strategies have performed relatively similar over the long term, demonstrating average annualized returns within 200 basis points from each other. However, the composition of portfolios looks quite diverse, thus I decided to check their risk parameters using a freely available investor resource InvestSpy.

To replicate these portfolios, I selected ETFs that most closely matched the defined categories, prioritizing the largest and most liquid securities with a price history of at least 5 years. The statistics provided below are for the period covering the last 5 years:


Swensen Portfolio

El-Erian Portfolio

Arnott Portfolio

Permanent Portfolio

Andrew Tobias Portfolio

William Bernstein Portfolio

Ivy Portfolio

Risk Parity Portfolio

The tables above should give you a better feel of these well-known asset allocation strategies and their risk sources. One interesting observation is that in 7 out of 9 strategies over 70% of the risk comes from equities. Meanwhile, the two remaining portfolios (Permanent and Risk Parity) rely heavily on corporate bonds (NYSEARCA:LQD) and gold (NYSEARCA:GLD), both of which have posted stellar returns over the last 10 years. Therefore, the similar historical long run performance of all these strategies is probably not that striking.

It is also notable how different asset classes affect portfolio risk. For instance, real estate (NYSEARCA:VNQ) risk contribution is at least 1.8x higher than its actual weight in each portfolio that features this asset class. In contrast, bonds have almost negligible impact on total portfolio risk in all portfolios except for the Risk Parity, which is 70% invested in fixed income.

You may also want to identify the strategy that is the most similar to your own portfolio. At the very least, it is always useful to analyze what the most successful people in the field of your interest have done.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.