In a previous post I put together a hypothetical benchmark global portfolio so we could take different economic schools and analyze how they might have helped us navigate the current bull market. I want to continue the series today. As a reminder, here’s the benchmark allocation and performance:
US Stocks: 20%
Foreign Stocks: 20%
REITs: 5%
Corporate Bonds: 19%
US Govt Bonds: 29%
High Yield bonds: 2%
Global Bonds: 3%
TIPS: 2%
CAGR: 9.7%
Standard Deviation: 3
Sharpe Ratio: 3.13
So, next up – the Behavioral Economists. This was more difficult to allocate because they don’t make a huge number of market prognostications, but I think this is a good approximation:
US VALUE Stocks: 20% – Behavioralists like Robert Shiller have favored equities for much of the ride higher with a tilt towards value arguing that many segments of the market are overvalued.
Foreign Stocks: 20%
REITs: 0% – Behavioralists like Shiller have generally been bearish on housing since the recovery.
Corporate Bonds: 19% – Shiller has stated on several occasions that the bond market is not in a bubble and is instead rallying because of the Fed’s forced flight to income earning instruments.
US Govt Bonds: 29% – See above.
High Yield bonds: 2% – See above.
Global Bonds: 3% – See above.
TIPS: 7% – Shiller has stated his bullishness of TIPS in recent years.
CAGR: 8.7%
Standard Deviation: 1.5
Sharpe Ratio: 5.5
Shiller and the behavioralists kill it. Although they reduce the return of the benchmark by 1% per year they substantially increase the risk adjusted returns. Using vague macro commentaries from Shiller appears to have led to a decent asset allocation over the last 5 years. Behavioral finance helps.
Next up, Market Monetarists. The Market Monetarists have had a pretty good track record over the last 5 years. They’ve repeatedly stated that inflation would remain low and their “Chief Economist” Scott Sumner has repeatedly discussed his general belief in owning a diversified stock portfolio. Of course, that works great in a bull market and we’re not analyzing the bear market here so there’s that. Anyhow, here’s the rough approximation:
US Stocks: 40% – Scott Sumner wasn’t just bullish about US stocks. He begged and pleaded for the Fed to create a stock market bubble in 2009.
Foreign Stocks: 0% – QE was super bullish for US stocks so why go into foreign markets?
REITs: 0%
Corporate Bonds: 24% – Sumner has explicitly recommended that the US government buy AAA rated bonds. Plus, MMers have said inflation and rates are likely to remain low over the last 5 years.
US Govt Bonds: 0% – Fiscal policy is a “bad idea” according to Sumner and can have unintended consequences. Skepticism over government spending would lead them to be bearish.
High Yield bonds: 31% – Just guessing here, but the portfolio reallocation effect of QE would have led MMers to be bullish on high yield bonds.
Global Bonds: 3%
TIPS: 2%
CAGR: 12.6%
Standard Deviation: 5.3
Sharpe Ratio: 2.3
Sumner and the MM guys put up some good numbers here. Their bullishness on stocks sets them apart in the nominal return category, but their risk adjusted returns suffer a little bit from being overly allocated in assets that are all highly correlated. As a result their risk adjusted returns aren’t as good as the behavioral economists, but their CAGR outpaces them by a pretty wide margin.
Tomorrow we’ll touch on the New Keynesians and the Post-Keynesians, but that’s all the time I have for today.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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