Roger Nusbaum recently published one excellent piece. And in the spirit of efficient markets, I’ve decided to steal his title as well.
While Roger focused on the size of alternative assets, I think this is of secondary importance. The data shows that the most critical decision is not the decision weight: it is the inclusion. Before you optimize the segment, you need to own the pie.
Size is often a function of constraints: the number of funds to achieve true ‘beta’ exposure, risk metrics or ‘preferences’. Frankly, I’m baffled when I hear investors talk about “preferences” in a portfolio context. You don’t take that ETF out to dinner. What does ‘I don’t like gold’ actually mean? You don’t marry the property; you hire him to do a job. The math either works or it doesn’t. If you think an asset has a negative expected value, (sort of) fine. But “not liking” a return flow is a stupid emotional drain on your wealth.
Roger’s post reinforced my affinity with the All weather conditions philosophy. Forget the caricature of ‘leveraged bonds’; the core insight is simpler: collect as many uncorrelated return streams as possible. If you find enough reliable, independent return factors, the exact weighting matters much less than the collective diversification. You’ll be fine.
Even for my Europoor friends, the toolkit is finally robust enough to do this. To use Testfol.io for a US proxy backtest: this is what a modern, diversified portfolio might look like today:
- Global Equities (VT): The fundamental engine of capitalism. No explanation needed.
- Long Term Bonds (TLT): Specific “long term” to establish the necessary duration profile.
- Gold (GLD): The data doesn’t care whether you “like” it or not; it offers a unique risk profile.
- Trend following (DBMF): If you follow my work, you know that Trend offers a nice ‘crisis alpha’. DBMF is a solid proxy, although it is better diversified across multiple managers.
- Long/short shares (QMINX): Retail investors in Europe have access to AQR strategies. I did it myself. It is indeed active management, but it offers factor exposure that is difficult to obtain elsewhere.
- NatCat Bonds (SHRIX): From 2025 we will have the first European NatCat ETF (ticker: CATB). Insurance-related securities are the embodiment of an uncorrelated asset.
- Raw materials transport (UEQC/CRRY): I excluded these from the backtest due to a lack of US equivalent proxies, but in a real portfolio they are a phenomenal inclusion.
One final note: while UCITS-compliant versions of these strategies exist, your broker may be the sticking point. If they are too straightforward to offer these tools, that’s an operational failure on your part, not the market. We live in a world of choice, if your broker is holding back your strategy, find a new one.
This is the portfolio that inspired Roger:
My approach here is both simpler and more pragmatic than Roger’s. It’s simpler because the alternatives are equally weighted, and it’s more realistic, perhaps even better able to stay invested, because it maintains a higher core of traditional stocks and bonds.
If you’re not familiar with Roger’s current position, he is firmly “anti-duration.” He sees no point in holding long-term bonds in the current environment. While I appreciate his tactical vision, even though a ten-year horizon cannot even be called “tactical,” my goal is to evergreen portfolio.
I have no interest in a strategy that changes based on the prevailing macro narrative. That’s why TLT continues to exist. The data shows that this could hinder performance in the short to medium term, but in an evergreen model you don’t offload assets just because the current forecast looks bleak.
Despite the simplicity and naive equal weighting, the math holds up. The result is a portfolio with a Sharpe ratio of 1.0.
In the investing world, a Sharpe of 1.0 is the ‘holy grail’ of risk-adjusted returns. However, for most investors, this portfolio may be at conservative. Volatility is so well controlled that absolute returns may not meet your long-term goals.
So let’s see what happens when we apply a little pressure to turn up the volume:
8 years is a short period for a backtest. If I stop NatCat bonds, I can… live to be 10 years old 🙁
and with leverage:
I could remove QMINX to extend the backtest further into the past, but this blog is already full of analysis of the “New Permanent Portfolio” (stocks/bonds/gold/trend). We already know that works. The conclusion remains the same: All Weather’s premise is structurally sound, even for investors in Europe.
What I’m reading now:
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