Improving on the No-Brainer Portfolio: Add More Asset Classes

by: Lowell Herr

Yesterday, I picked up this article on Seeking Alpha titled, "Lack of REITs & Commodities Now Shows in Bernstein's No-Brainer Portfolio's Performance." I first needed to look up the Bernstein No-Brainer Portfolio and found it included four ETFs. The asset allocation is quite simple.

IVW = 25%

VB = 25%

EFA or VFA = 25% I prefer to use VEU as my international investment.

BND = 25%

When I ran a Quantext Portfolio Planner analysis, I found the projected return to be 6.6%, projected uncertainty equals 13.8% for a ratio of 0.48. The Diversification Metric (DM) is a meager 16%. While this may be a No-Brainer Portfolio, it is projected to return less than the S&P 500 without much diversity.

When I substituted TLT for the BND bond fund, projections improved slightly. With only this change, projected return increased to 7.65% or better than expected from the S&P 500. Risk or projected uncertainty actually decreased slightly to 13.7%%. DM rose to 24%.

In the Seeking Alpha article, adding REITs and Commodities implied better results. While this was true in the past, is it likely to be true in the future? One would think so. However, when I ran the QPP analysis, including VWO, DBC, and VNQ lifted the return to 7.8% or only slightly better than the No-Brainer projections. Uncertainty jumped to 16.3% and DM actually fell to 23%. The Return/Uncertainty ratio was about the same at 0.54.

Given that QPP analysis is coming up with projections, and they are not significantly different from the No-Brainer Portfolio, I would go with the portfolio that adds more asset classes.