You’ve probably Googled a few articles for investing that may have mentioned some popular lazy portfolios. I know I have. The first rule to investing according to Warren Buffet is “don’t lose money.” So what are your options? With the current unpredictable market, you need to weigh all options before settling on an investment strategy. You want something that can help you handle today’s uncertainty and keep you on track with your long term goals. Lets look at three popular methods that you can opt to choose from to secure your future. The Three Fund, Permanent, and All-Weather Portfolios.
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A Look Inside
Let’s look inside the popular portfolios mentioned above starting with Harry Browne’s permanent portfolio. The permanent portfolio will cover you in all economic climates and is “fail-safe”. It covers inflation (gold), deflation (bonds), prosperity (stocks), and recession (cash).
Ray Dalio’s all-weather portfolio is very similar and also covers four economic climates. I was hooked on the idea when I first saw the “All Seasons” portfolio from Tony Robbin’s “MONEY Master the Game: 7 Simple Steps to Financial Freedom”. He laid out the asset allocation for an average joe to replicate and achieve results that are similar to those of Bridgewater’s All Weather fund.
A Three Fund Portfolio is a favorite among “bogleheads” like myself. It’s simple and easy. The idea is to keep things simple to make tax efficiency easier, rebalancing easier, and everything else easier. You invest in low cost index funds to get market returns vs trying to beat the market.
Portfolio Asset Allocations
Harry Browne’s strategy is about fail-safe investing. His permanent portfolio ensures financial safety and he breaks his asset allocation into four parts. 25% Stocks, 25% Bonds, 25% Cash, and 25% Gold.
Ray Dalios’ All Weather Portfolio follows the same strategy that covers four seasons, but he breaks down his asset allocation even more.
- 30% Stocks
- 40% Long-Term Bonds
- 15% Intermediate-Term Bonds
- 7.5% Gold
- 7.5% Commodities
The Three Fund Portfolio invests in the total stock market index fund, the total international stock market index fund, and the total bond index fund. It doesn’t slice and dice and keeps its simplicity. It’s up to you to choose how aggressive you want to be. How much risk can you stomach?
Analysis
Let’s dive deeper into each portfolio at a more granular level. We’ll look at the benefits of each portfolio.
Ray Dalio’s All Weather
Ray Dalio gives you the asset allocation to replicate similar results of Bridgewater’s All Weather fund. It will perform in all four economic seasons. Growth rising, growth falling, inflation rising, and inflation falling. As Ray Dalio puts it, “It means that without giving up returns, you can have a portfolio that really is safe.”
Let’s look at the 30 year period from 1984-2013 that was highlighted in Tony Robbin’s “MONEY Master the Game: 7 Simple Steps to Financial Freedom”.
- 9.7% annual returns
- Only 4 down years where you lost money
- You would have made money 86% of the time
- Average loss of just 1.9%
That sounds pretty good to me.
Harry Browne’s Permanent
Secondly, we are going to examine Harry Browne’s Permanent Portfolio.
It’s a little simpler and also tailored around the same four seasons.
Stocks for growth rising. Cash for growth falling. Gold for inflation rising. Bonds for inflation falling. Harry Browne believed that there would always be at least one asset in the permanent portfolio doing well to offset whatever might be happening in the economy.
Three Fund
Lastly, let’s look at the three fund portfolio. We’ve been discussing a lot about “seasons”, but the three fund portfolio is more tailored towards growing wealth vs preserving it. The boglehead mentality is to reap market returns and maximize your profits by using low cost index funds. This is something I completly agree with and have implemented myself for a good chunk my personal portfolio. (I only manage a portion as most of my assets are with Vanguard’s Personal Advisor Services).
An aggressive three fund portfolio would have easily outperformed both Harry Browne’s Permanent Portfolio and Ray Dalio’s All Weather Portfolio, but also would have had a lot more volatility.
Tax efficiency and the ease of rebalancing is also another huge bonus to managing only three funds. Total stock market index and total international stock market index would go in your taxable account and the rest of your total bond index would go in your tax deferred retirement accounts.
Which would you choose?
Personally I think the three fund portfolio is the best if you’re in it for the long term. It’s more tailored towards growth and it just makes everything so much easier. Rebalancing is so easy when you’re only managing three funds. As long as you can withstand the volatility when the market drops to stick to your plan and wait it out, you should be good.
The permanent and all weather portfolio’s are great for wealth preservation. If you’re already in retirement and want higher returns than holding only fixed income, then this might be a good fit. They are tailored to preserve wealth in all economic seasons and is easier to stomach since volatility will be smaller.
What’s your favorite asset allocation? Which one are you using? Are you growing wealth or preserving it?
I appreciate the article and information, however, it’s kind of a cliffhanger without the results showing the different returns of the different portfolios.
I also have come to this line of thinking after many years of chasing stocks and ideas without an overall strategy. I’ve opted for a variation of the Dogs of the Dow originator Michael O’Higgin’s MOAR (Michael O’Higgin’s Absolute Return) strategy. My allocation is far different than his, I’m doing 20% gold IAU, 10% intermediate term treasuries IEF, 10% extended duration treasuries EDV, and 60% into the Dogs of the World. Rebalance annually. CAGR from 1/1/2017 with this strategy is 12.85%, largest down year is 2008 with -18%; I’m a bit more aggressive and am ok with more volatility than the 25% into each asset class as prescribed by O’Higgins.
sorry, that should have said CAGR from 1/1/2001 through 12/31/2017 is 12.85%