Book Summary – Global Asset Allocation

“I believe in the discipline of mastering the best that other people have already figured out. I don’t believe in just sitting there and trying to dream it up all yourself. Nobody’s that smart.” – Charlie Munger

This article is a short summary of an extensive research thesis done on Global Asset Allocation by Meb Faber.

Diversification reduces risk. It is important to not only diversify across stocks but also across different asset classes. Meb’s study measures performance across 3 asset classes, Stocks, Bonds, and Real Assets. Real Assets include precious metals (like gold and silver) and real estate (REITs).

The study different portfolio suggested by guru investors like Ray Dalio, Warren Buffet etc.

Here are the different portfolios and the details of its allocation:

Here is a table of the results each strategy’s performance in different time periods. The table also shows real returns and nominal returns. Nominal returns are CAGR returns while, real returns are nominal returns – inflation.

As you can see the best performing portfolio had a nominal return of 10.45% while the worst performing had nominal returns of 8.53%. The difference between the best and worst performing portfolio strategies is shockingly small.

Here is what Meb concludes about Asset Allocation:

Cooking often reminds me of asset allocation and investing. As long as you have some flour, baking soda, sugar, eggs, butter, and chocolate chips – the exact amount really doesn’t matter. Some people like vanilla in the recipe, other people nuts, and some even more chocolate. But as long as you have some of all of the main ingredients, the results are usually similar, and delicious. 

Investing is similar. As long as you have some of the main ingredients –stocks, bonds, and real assets- the exact amount really doesn’t matter all that much. Does adding small allocations to emerging bonds (nuts), frontier markets (vanilla), or more chocolate chips (stocks) vastly change the outcome? Not really. The only thing that does really alter the outcome is if you go and mess with all the ingredients while they are cooking – a sure recipe for disaster. The single biggest take away from this book is to not ruin your allocation by paying too much in fees.

Any asset by itself can experience catastrophic losses.

In conclusion:

  • Diversifying your portfolio by including uncorrelated assets is truly the only free lunch.
  • 60/40 has been a decent benchmark, but due to current valuations, it is unlikely to deliver strong returns going forward.
  • At a minimum, an investor should consider moving to a global 60/40 portfolio to reflect the global market capitalization, especially right now due to lower valuations in foreign markets.
  • Consider including real assets such as commodities, real estate, and TIPS in your portfolio.
  • Once you have determined your asset allocation mix or policy portfolio, stick with it.
  • The exact percentage allocations don’t matter that much.
  • Make sure to implement the portfolio with a focus on fees and taxes.
  • Rebalance once a year
  • Go live your life and don’t worry about your portfolio!

For detail information and sources of the data, I highly recommend Meb’s book Global Asset Allocation which is available for free here: http://www.derpreport.com/wp-content/uploads/2017/02/GAA_Book.pdf

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