Armstrong Index-Based Lazy Portfolio Returns Study

|
 |  Includes: AGG, BND, DIA, DVY, EFA, EFG, EFV, IJJ, IJK, IJS, IUSV, IVW, IWM, IWO, IWP, IWS, IYR, IYY, MDY, ONEQ, PWC, QABA, QCLN, RWX, SCZ, SHY, SPY, VBK, VBR, VEA, VEU, VNQ, VO, VTI, VTV, VUG, VWO
by: MyPlanIQ

Frank Armstrong, author of The Informed Investor, proposed this portfolio for an MSN Money article. The two key points of the portfolio are that it has four asset classes (US, International, REIT, Bonds) and relies on market indices rather than active management.

The portfolio uses index funds because index funds eliminate manager risk. It overweights small-cap stocks as small-cap stocks have historically outperformed large caps stocks. The portfolio has a strong value tilt, based on the theory that, over the long haul, beaten-down stocks will perform better than high-flying growth stocks.

This should be a low cost, well performing portfolio.

The fund selection for testing the strategy is listed below with the ETF alternatives:
  • 9.25% in Vanguard Small Cap Value VISVX (NYSEARCA:SCZ)
  • 9.25% in Vanguard Value VIVAX (SPY, IYY)
  • 6.25% in Vanguard Small-Cap Growth VISGX (NYSEARCA:VBK)
  • 6.25% in Vanguard 500 Index VFINX (NYSEARCA:IVW)
  • 31% in Vanguard Total International Stock VGTSX (NYSEARCA:EFA)
  • 8% in Vanguard REIT VGSIX (IYR, VNQ, RWX)
  • 30% in Vanguard Short-Term Bond VBISX (BND, AGG)
Things to note about the portfolio:
  • This is designed as a lazy portfolio with limited rebalancing specified
  • With 70% in equities, this would be considered an aggressive portfolio
  • REIT is possibly underweighted
We will create historical returns of this portfolio as originally planned and then compare against strategic asset allocation (annual rebalance) and tactical asset allocation. This will measure:
  • The impact of equal weighting of the equities – bonds will be fixed at 30% -- SAA strategy
  • The impact of actively managing the equities – bonds remain fixed at 30% -- TAA strategy
We will then introduce a four asset SIB which will give a measure of the choice of funds. The SAA and TAA strategies will give the same weights to each of the funds but use simpler asset classes funds.
4 Asset SIB Breakdown with ETF alternatives
  • LARGE BLEND VTSMX (NYSEARCA:VTI)
  • Foreign Large Blend VGTSX (NYSEARCA:VEU)
  • REAL ESTATE VGSIX (NYSEARCA:VNQ)
  • Intermediate-Term Bond VBMFX (NYSEARCA:BND)
The results are shown below. There are a number of interesting things to note
  • The closest comparison of similar strategies is the Armstrong Original versus the Armstrong SAA. The Armstrong original outperforms SAA which says that overloading the US stocks towards small value is successful
  • All of the buy and hold strategies suffer from the “downturn dip” and the tactical asset allocation strategies perform much better
  • The difference between the two TAA strategies is negligible

click to enlarge

Return Comparisons of the different strategiesClick to enlarge

Annual Returns 1 Year 3 Years 5 Years
Original 8.83 -0.88 4.27
Armstrong SAA 13.91 -2.60 2.96
Armstrong TAA 12.71 7.30 10.43
4 SIB SAA 14.12 0.25 4.59
4 SIB TAA 12.32 7.15 10.21
Click to enlarge
Takeaways:
  • The Armstrong portfolio is a well constructed set of diversified assets based on market indices
  • To reduce volatility in today’s economy, it might make sense to add commodities and emerging market equities
  • The biggest impact on returns is moving to a tactical asset allocation strategy
  • The SIB portfolios which can easily be executed with ETFs perform very well and will be low cost

Disclosure: No positions