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Assessing the Ray Dalio/Tony Robbins Portfolio

I was intrigued by this article on Yahoo Finance by Tony Robbins who cites his interview with Ray Dalio in his upcoming book.  I ordered the book despite the fact that the blurbs in the back struck me as outlandish.  For instance, the back cover says:

“Learn how you can apply a never-before-revealed investment strategy from the world’s largest hedge fund manager that has made money even when the markets crashed”.


“Invest like the wealthy where you participate in market gains but are guaranteed to never lose when the market drops”.

Yes, my eyes are rolling.  But let’s explore this in more detail before we just shrug it off.

First, the “never-before-revealed” strategy is Ray Dalio’s All Weather strategy.  It’s most certainly been revealed and widely distributed to those who actually track this stuff so “never” revealed is obviously just catchy terminology. In fact, there are now several funds that claim to do some version of this approach.  But look at what Robbins actually recommends in the article based on Dalio’s thinking – it’s a 55% bonds, 30% stocks, 15% commodities portfolio.  So let’s assess this a bit.

First, this is not the actual All Weather portfolio.  Dalio has been known to use dozens and more non-correlating assets.  In fact, Dalio is on record saying that the key to the approach is finding 15 or more sources of non-correlated returns:

“If you have 15 or more good, uncorrelated return streams — the math of that is such that if you go from 1 to 2 uncorrelated return streams. That you will reduce your risk by about 80% at about 15. And there’s a certain math to it; there’s a certain structure to it.”

The Yahoo Finance portfolio has 3, maybe 4 drivers.  This portfolio is just cookie cutter stocks, bonds and commodities.  There’s really nothing fancy going on here at all.

Second, the All Weather portfolio utilizes leverage to achieve risk parity.  Therefore, it’s obvious that the Yahoo Finance portfolio is not using the same degree of strategic diversification that Dalio implements in the All Weather portfolio.

Third, this portfolio is just a bond heavy portfolio.  Robbins mentions how “astonished” he was by the “back-tested” results of the portfolio.  Well, of course a bond heavy portfolio will perform well during the greatest bond bull market of the last 100 years.  And as I often mention, this is one of the dangers of back-testing.  The idea that that future will necessarily look like the past is ludicrously misleading.  And yes, bonds will not come close to generating the types of returns in the coming 30 years that they have in the past 30 years.  You just need an ounce of common sense to know that.

I hate to rain on the parade here (not like it matters since the book is selling so well), but this is not a newly revealed approach and it most certainly will not “guarantee” that you make money in the future.  In fact, if I had a gun to my head I’d bet the ranch that this bond heavy portfolio with a commodity tilt generates sub-optimal returns going forward.  We know that because the math on the low bond yields and the negative real returns of commodities makes it a high probability bet.

So please be careful reading this – I know the allure of a market guru can be strong.  But this portfolio is not a true representation of Ray Dalio’s All Weather portfolio so don’t go running into this idea thinking that you’ve found some “guarantee” of high returns.  That said, I look forward to reading Tony’s book.  I am sure there are tons of valuable insights in the book.


Some Thoughts on Risk Parity

The Investor’s Conundrum

Grantham’s Prudent Investor Portfolio

I found this section of GMO’s latest quarterly letter to be of particular interest.  Grantham discusses a “prudent investor” portfolio that can provide decent risk adjusted returns in a tough environment:

“Exhibit 1 shows an example of a portfolio that might be used in a world that excludes private equity and venture capital, and for a client who can do without a benchmark and can settle for owning a (hopefully) sensible long-term efficient portfolio.  Efficient, that is, in terms of trying to minimize risk per unit of estimated returns. As always, and particularly in this type of overpriced environment, there are no guarantees of success even if every GMO recommendation were to be implemented for, regrettably, we too are often imperfect.”


Hard to say what all of that amounts to precisely, but it’s logical that “alternative” could be option based strategies since Ben Inker spent quite a bit of time earlier in the note discussing those approaches.  Cash plus is just utilizing cash like a call option in all likelihood.  It’s impossible to properly judge a portfolio like this because we don’t know the actual components, but my guess is that it would perform a lot like a 60/40 with lower returns and slightly lower risks.  But that’s just a guess.  Anyhow, lots of good moving parts there to think about.  Read the full letter here.

Industrial Production Expands at 4%

Just a quick update on some macro data.  This is the latest on industrial production:

Industrial production slowed marginally to a rate of 4% year over year in October and fell marginally on a month over month basis from its previous record high set in September.  Interestingly, the growth in industrial production in the last 5 years has averaged 3.5%.  That’s significantly better than the 2002-2007 period when industrial production averaged just 1.8% and not far from the 91-99 expansion when industrial production averaged 4.2% growth.



Happiness is Somewhere Between Having Too Much and Having Too Little

I can’t remember where I first saw the quote in the title of this post, but it left a lasting impression on my outlook on life.  The concept of “happiness” is a pretty vague one.  Happiness to one person could be misery to another.  But I think we can arrive at some reasonably consistent understandings when looking at modern human life within a monetary economy.  For instance:

  1. If you don’t have an income or any savings then life in a monetary economy is incredibly difficult because we all need a source of spending in order to obtain the bear minimum necessities in life.
  2. This means that having some money or access to money is an essential component of achieving some degree of “happiness”.   In other words, money has to be at least somewhat positively correlated with “happiness”.

As I’ve previously discussed, it’s useful to view this idea on a scale of monetary happiness:



Okay, so we need money to be able to pay for shelter, food, clothing, etc.  That seems pretty obvious.  But you’ll notice something interesting there.  As you ascend the scale of monetary happiness you find that the things that are likely to make you feel increasingly fulfilled are not things that money can necessarily provide for you.  Money might aid you in the process of ascending the scale, but it doesn’t necessarily provide you with things like morality, purpose, meaning, confidence, achievement, friendship, family, intimacy, etc.  In fact, money is often found to be negatively correlated with these things.

I can’t speak for everyone, but my personal experience seems to be very consistent with the scale above.  That is, as I earn more and obtain more I don’t necessarily find myself happier.  It’s true – anyone who says that having more money doesn’t make life easier is lying to you.  There is, with certainty, a level of income and financial security that makes life much easier.  In other words, it’s a lot easier to work on your friendships, family, purpose, meaning, and things higher up in the scale when you have the bottom pieces of the pyramid pretty much taken care of.  And you need money to build the base of that pyramid.  But this can also veer in the opposite direction.  It’s also easy to think that money is the solution to everything resulting in neglect of the things that matter in favor of an increasingly rapid rise in income that likely has diminishing rates of return on your personal happiness.

It makes me wonder as I get older – is happiness really about “having it all”?  It seems to be that “having it all” just brings more burdens in other strange ways.  Instead, it seems that happiness really is somewhere between having too much and having too little.  And when you get that balance right you can start focusing on all those intangible things.  And while you can’t show those intangibles off to your neighbors it’s really those intangibles that will bring more personal happiness in the long-run.

Tinkering with the Core Bond Recipe

By Alison Martier, AllianceBernstein

This is the time of year when, in almost every American household, the tinkerer in the family eyes the recipe box. Certain venerable traditions will make it to the Thanksgiving table intact. A cousin or an in-law is sure to bring an entirely new dish. And some traditional plates could use some freshening up. That’s the case with core fixed income.

Let’s start by reviewing why we would want to tinker with our traditional US-only core-bond fare by going global.

In recent posts, we established that going global diversifies interest-rate and economic risks and increases the opportunity set, and that it should help buffer some of the downside risk that US-only portfolios are likely to experience over the near term as rates begin to rise. We made a strong case for a hedged global portfolio as having a better risk-adjusted return than either unhedged global or US-only portfolios.

We also clarified why hedging out the currency exposure is key to keeping global portfolios in the targeted “core” volatility range, and that from a tactical standpoint, there’s no time like the present to make what is otherwise a strategic shift, as the US dollar is likely to trend upward in the coming months.

How much global is just right? At this point, I expect you’re asking how much of the fixed-income core mandate should be shifted into a hedged global portfolio.

As shown in the Display below, there is no sweet spot. Any incremental addition of global bonds can be beneficial to risk-adjusted returns. We’ve plotted the risk and return of portfolios with different weightings to US bonds and global bonds, ranging from 100% in US to 100% in hedged global.


The more global the portfolio, the higher the risk-adjusted return, represented by the rising diagonal line. Simply put, it just gets better. That means that as little as a 10% allocation to global can improve outcomes. In our view, a 50% allocation is a realistic target. And a 100% commitment would be commensurately better, based on historical experience.

So whether you stir a little global into your core bond recipe or completely make it over, adding global bonds should improve outcomes over the long term—but particularly in today’s environment, where they can buffer some of the interest-rate risk inherent in traditional US-only core bond strategies. Just keep in mind that the key is hedging out the currency risk, so as to keep volatility in check.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Alison Martier is Senior Portfolio Manager of Fixed Income at AllianceBernstein (NYSE:AB).

What Constitutes a Rich Life?

By Ben Carlson, A Wealth of Common Sense

When I was in college, every spring a group of friends and I would go on a canoe trip on the Manistee River in the middle of nowhere in Northern Michigan. It was something of a last hurrah before school was out for the summer.

During one of my final trips, after a long day on the Manistee, we were picked up by the owners of the canoe rental shop and driven back to our campsite. We all had a few too many Busch Lights in the sun all day on the water, so we began to wax philosophical with the rental owner, a guy in his mid-to-late 30s.

He was telling us all about his life in the wilderness with his wife. It was a simple, minimalist life. They lived in a small, beat-up trailer, didn’t have many material possessions and didn’t make a lot of money from the canoe rental business. They both had to pick up odd jobs in the winter to stay afloat.

But he told us that they couldn’t have been happier with their life. They got to work outside during the summer and be on the water all day. They worked together and got to spend quality time with each other every day. They didn’t have a much in the way of material possessions, but they didn’t want for much either.

This was at a time in my college experience when many of us were looking for jobs. My friends and I were all worried about much money we were going to make and what cities we would end up in. And I remember being struck by this guy and his wife, living a very simple life in the middle of nowhere, but completely satisfied with what they had. It made no sense to me at the time, but their attitude really stuck with me over the years.

I was reminded of this story when I read that the number of people with a net worth of at least  $25 million (excluding their home) reached a new record last year. And here’s what a group of these people had to say in a survey:

Yet the same survey found that those wealthy Americans still have plenty of financial concerns. Actually, they sound fairly miserable… and that’s in a survey taken well before the stock market took a recent tumble. They may travel more, go to ballgames or concerts, or buy nice jewelry, but 70 percent of those surveyed said they get more satisfaction out of saving and investing their money than from spending it. More than half said they worry about the next generation wasting the money they inherit. And almost a quarter (23 percent) said they worry “constantly” — constantly — about their financial situation.

Having a high net worth and living a rich life are two completely different things. In Simple Wealth, Inevitable Wealth, Nick Murrary says that, “No matter how much money you have, if you’re still worried, you aren’t wealthy.”

Something to think about.

The super-rich are just as miserable as the rest of us (The Week)

Further Reading:
My book review of Simple Wealth, Inevitable Wealth

More Good News for Employment

Tom McClellan – McClellan Market Report

The data on the U.S. unemployment rate have been getting progressively better over recent months, either because of or in spite of the government’s efforts, depending on one’s viewpoint.  And if this week’s chart is to be believed, then the data should continue to get better over the next several months.

What the chart shows is that the data from the University of Michigan’s Consumer Sentiment Survey acts as a leading indicator for the unemployment rate.  I am using a 10-month offset in this case, shifting the sentiment data forward by 10 months to reveal how the unemployment data tend to follow in the same footsteps.  One could make the case that 10 months is perhaps not the perfect time offset; maybe it is 6 months, or maybe a year.  But the point remains that the University of Michigan survey data do seem to lead by some amount of time.

UMich Sentiment versus unemployment rate

Back in 2009, the Fed had the fire-hose wide open, and yet the jobs market did not seem to respond.  The unemployment rate finally peaked at 10.0% in October 2009, several months after the stock market’s bottom, and also several months after the Fed started “helping”.  What had not happened yet in early 2009 was the passage of enough time following the recovery in consumer sentiment.  The University of Michigan survey had bottomed out at a reading of 56.3 back in February 2009.  So some number of months needed to have gone by before the unemployment rate could respond.

Now we have a different situation.  The latest reading for this survey data was 89.4, the highest since the summer of 2007.  It continues to trend higher, which means that the unemployment rate should continue to trend lower (remember it is inverted in the chart).

At some point, consumer sentiment will reach its peak for this cycle.  When that happens is an unknown.  I don’t have a good leading indicator for that question.  When consumer sentiment reaches its peak, then some number of months later we can expect a reversal for the unemployment rate.  The point for now, though, is that consumer sentiment says the unemployment rate should continue dropping for at least another 10 months or so.

Related Charts

Aug 28, 2014

small chart
A-D Line Foretells Job Openings

Jan 23, 2014

small chart
Important Points About The Minimum Wage

Jan 04, 2013

small chart
Employment Levels Stubbornly Unresponsive

Chart In Focus Archive

Historical, Statistical & Nonsensical….

Have you ever been watching a sporting event when they cite something like this:

“Over the course of the last 70 years the New York Giants are 10-0 when they have 3 or more sacks in a game”.

Okay.  That sounds interesting.  It certainly fills the commentary.  But is this sort of commentary even remotely useful?  In most cases it’s statistically and historically irrelevant.

First, the sample size is outrageously small.  No serious statistician would take a sample of 10 events and conclude that there’s a real meaningful deterministic output here.

Second, the history of this data makes it practically irrelevant.  The 2014 New York Giants are not the 2011 or 1986 New York Giants.

Third, the game in which this statistic might be cited is totally unique.  The previous games could have been against sub-par opponents or in unique environments.  Unless you can capture these statistical data points in a vacuum they are far more misleading than we think.

The funny thing is, we see this in the investing world almost every day.  People love to cite historical data as if it somehow means something about the future returns.  The problem is, most of this is actually useless.  The current environment is nothing like past environments.  And citing a statistical data set where we have, MAYBE, a dozen relevant business cycles hardly makes the data useful.

Probabilistic thinkers do not rely on irrelevant datasets to make choices about the future.  They might play some role, but smart probabilistic thinkers are naturally forward thinking.  They asses the world for what it is today and find highly probable outcomes based on those understandings.  Relying on historical data might give you some perspective about the future, but be very careful thinking that that alone will lead to positive future outcomes.