A large portion of the returns (near 90%) stems from which asset class and how much you allocate to them.
A small portion (10%) is the individual issues.
Which is why they say get your asset allocation wrong, unbalanced and you will have an issue.
But there are so many kinds of asset allocation out there and experts are touting that theirs are the most sound.
Mebane Faber tries to make sense of it. On this post here, he sought to consolidate all the allocation by experts, academics, university endowment funds in one post.
These are all age old asset allocation strategies through a period of high inflation and then lower inflation but sustain growth follow by a secular bear market.
This is his result:
(click image to blow it up)
It looks to me that different strategies the biggest difference is the standard deviation and Sharpe ratio. These are measurements of fluctuations from the mean.
The Permanent Portfolio and Risk Parity portfolio looks splendid in that their max portfolio draw down was 12-14%!
But I wonder how well the Risk Parity will do in a rising interest rate environment (we have 30 years of falling interest rates which is good for a bond heavy portfolio like the Risk Parity portfolio)
End of the day, all portfolios achieve good capital growth (CAGR). 100 bucks become substantial eventually.
So where does that leave us? Essentially, if a standard allocation that stood the test of time tends to revert to the mean, then what matters is more on things the investor can control.
In this case they are classified into 2 areas
- Keeping the overall cost in check. What will reduce the CAGR of these returns are the expense cost, management fees, commissions, trading fees
- Behavioral / Psychological aspect of investing. There will be much pessimistic times and euphoric times, and you are likely to do illogical thing to your portfolio. You would want to manage it well (its harder than one bullet point btw)
The ingredients (assets) that goes into wealth building have not changed much. Focus on what you can control rather than those that you cannot.
Here are additional articles that are interesting on the subject:
- Tracking the Lazy Portfolios
If you like articles like this you can go over to my resources section where I collect all these best ideas that I written in the past [Resources]
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