Is THIS the Best Portfolio?

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I have a big list of lazy portfolios on my website and people constantly ask me which one is the best portfolio or which is my favorite. In this brief video I’m going to go over one of my favorite lazy portfolios.
Invest in it here: optimizedportfolio.com/go/des...
// TIMESTAMPS:
00:00 - Intro
00:13 - What Is the Best Portfolio?
00:45 - My Criteria
01:19 - The Answer
01:44 - Risk Parity Explained
02:19 - Portfolio Discussion
02:55 - Performance and More Discussion
// SUMMARY:
There’s no single objective answer for the “best lazy portfolio.” Is “best” the highest historical return, or the highest risk-adjusted return, or the lowest volatility, or the simplest, or the one that contains every possible investable asset? Each of those criteria would suggest a very different portfolio. While it’s a boring non-answer, I maintain that the best portfolio is the one YOU can stick with for the long term through good times and bad.
Some of my important fundamental boxes to check would be low costs for the exposure we’re getting, diversification in the broadest possible sense across multiple assets, a decent expected return per unit of risk which we call risk adjusted return, and simplicity in the form of a relatively small number of components.
Considering those things, you’re probably thinking of popular names like the Bogleheads 3 Fund Portfolio, Dalio’s All Weather Portfolio, or even my Ginger Ale Portfolio. And while those would certainly fit the bill, none of them is the one I want to talk about here.
One of my favorite lazy portfolios is the Desert Portfolio from the Gyroscopic Investing forum. It looks like this: 30% stocks, 60% intermediate treasury bonds, and 10% gold.
Seasoned investors may recognize these as roughly the risk parity weights for these 3 assets. Risk parity is a weighting scheme in which each asset contributes the same volatility to the portfolio. This is arguably the most agnostic way to weight assets in a portfolio. Risk parity weights are also usually very close to what produced the highest risk-adjusted return historically.
What I love so much about this portfolio is the elegant simplicity in taking 3 uncorrelated, approachable assets and not really inserting opinions about their future expected returns in weighting them. You may recognize this portfolio as essentially being a simpler form of Ray Dalio’s All Weather Portfolio.
We know that most vastly overestimate their tolerance for risk and then panic sell during crashes. Bonds and gold can also outperform stocks for extended periods. I would submit that MOST investors would be much better suited with something more diversified like the Desert Portfolio than with 100% stocks.
#investing #portfolios #bestportfolio
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24 июл 2024

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Комментарии : 104

@OptimizedPortfolio 3 месяца назад

Do you have a favorite lazy portfolio? What do you think of the Desert Portfolio? Invest in it here: optimizedportfolio.com/go/desert-global

@surfrduede 3 месяца назад

The Desert portfolio is quite a sensible portfolio for someone who either pre-retirement (40’s, 50’s) or risk averse. I’d prefer a little less gold exposure but one could add a slice of TIPS or utilities and be just fine.

@OptimizedPortfolio 3 месяца назад

Well said. Thanks for watching and commenting!

@mere_cat 2 месяца назад

I modified this portfolio for a sinking fund used for intermediate term goals. I substituted short term treasuries for half of the bonds and added TIPs exposure. Thanks for the idea!

@OptimizedPortfolio 2 месяца назад

Thanks for sharing!

@John-mz2te 3 месяца назад

It's a good point about knowing your risk tolerance. People always worry about how to maximize returns, but rarely think about how they will behave in a big/long drawdown. I go with the Boglehead's Three Fund Portfolio with a small cap value tilt.

@OptimizedPortfolio 3 месяца назад

Indeed. Investing for retirement is about aiming for a high probability of a good outcome, not a low probability of a great outcome.

@bcd6842 3 месяца назад

Thanks for posting this vid with the rationale. I have been thinking about VT 50%, GLD 5% and Income Bond ST, MT 20% and Income Lower Risk ETFs 25% for sometime now. I am really struggling with a higher return lower risk ETF funds. Right now I have a mixture of CEF, BDC, MLP, REIT, PFF, DIV, etc., It's been hard to find an etf that has lower risk ~.5 beta and 6% annual returns.

@OptimizedPortfolio 3 месяца назад

Thanks for watching!

@Jpsantos94 3 месяца назад

Hey! I saw my comment up there! Haha. I'm just not sure about all those bonds tbh. This recent crash shows to me that bonds aren't that reliable either. If I put money into bonds in January 2021, I will still be at a loss over 3 years later.

@OptimizedPortfolio 3 месяца назад

Thanks for commenting again, Josh! What recent crash? ;) 2022 was more of a slow bleed. Look at any major sudden crash in history like '08 to see treasuries' "crisis alpha." Depends on what bonds you bought. That's why we say match duration to the investing horizon. But remember this is also supposed to be a long-term portfolio.

@christianaviles6608 3 месяца назад

Great video!!!👍 How would you do a 80/20 on a 3 fund portfolio??

@OptimizedPortfolio 3 месяца назад

Do you mean the Bogleheads 3 Fund Portfolio? I explained that in that video: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-w36sJdbsBhA.html

@PsychologyMadeClear 3 месяца назад

Very nice analysis and rational. Have you considered a market portfolio that included 56% Bonds, 43% stocks and 1% of commodities? based on statistical analysis of the past this one has the highest Sortino based on R.Doeswijk and T.Lam calculations (idea first revealed by J.Tobin and W.Sharp. More precise allocation looks as follow: 20 (USA Large cap), 15 (develop market equity ex US), 4 (emerging market equity) 17 US treasury bonds, 20 US enterprise bonds, 1 commodities, 4 real estate, 17 develop market treasury bond ex US, US bonds linked to the infliation.

@OptimizedPortfolio 3 месяца назад

Thanks. Sounds like overfitting. I certainly wouldn't get that specific with MVO to inform future allocations. 1% anything is doing basically nothing.

@zzzzzzzzzzz6 3 месяца назад

I can't wait for margin to become more efficient and comprehensible for retail investors over time I feel like that's really the main thing holding people back, is that many of us have higher risk tolerances which would be better served by just adding margin to a portfolio like this The hassle, perceived complexity and risk prevent us

@OptimizedPortfolio 3 месяца назад

Good point. Would probably agree. I think with newer platforms like M1 and newer products emerging like NTSX, RSSB, etc., it has definitely become more accessible in recent years.

@jacksmith2911 3 месяца назад

Interesting. Could you compare to the 2 Larry Portfolios that are "kind of" in same style of what you are doing here? (the 70 bonds -30 SCV) and the other (70 bonds and 30 w/3 stock funds).

@OptimizedPortfolio 3 месяца назад

Thanks for the suggestion.

@Michael-DS 3 месяца назад

Hi, I am very interested in that portfolio. How did you manage to backtest so far, before the IAUM fund that's listed in your M1 link?

@OptimizedPortfolio 3 месяца назад

Using older mutual funds for the same asset classes.

@Michael-DS 3 месяца назад

@@OptimizedPortfolio thank you.

@OptimizedPortfolio 3 месяца назад

@@Michael-DS Anytime! :)

@AK-47ISTHEWAY 3 месяца назад

"You're probably thinking of popular names like the Ginger Ale portfolio." I have been investing since 2003, and I've never heard of the "Ginger Ale" portfolio before.

@greg5892 3 месяца назад

I think that’s a joke. It’s what he calls his personal portfolio because there happened to be a can of ginger ale on his desk or something like that.

@OptimizedPortfolio 3 месяца назад

I just wrote it up several years ago: www.optimizedportfolio.com/ginger-ale-portfolio/

@tadrenaline 3 месяца назад

Is gold in the portfolio for the diversification benefit or does it actually have a real return?

@OptimizedPortfolio 3 месяца назад

Both, I suppose, though objectively speaking, more the former. Gold technically has no implicit value so we'd expect it to have a real return (return adjusted for inflation) of around zero. It has been a bit more than that historically at about 7% nominal, 4% real IIRC.

@mattinterweb 18 дней назад

There's a reason China are buying up all the Gold...

@AidanJeavons 3 месяца назад

It’s a good feeling watching a video discussing the “best portfolio” and it’s your DIY portfolio exactly 😂

@grigorirasputin425 3 месяца назад

Doubles every 48 years?

@OptimizedPortfolio 3 месяца назад

Love it, Aidan! Thanks for sharing.

@AidanJeavons 3 месяца назад

@@grigorirasputin425 If it was any quicker, I’d be displeased

@grigorirasputin425 3 месяца назад

@@AidanJeavons 😂😂😂👍🏻

@AidanJeavons 3 месяца назад

@@OptimizedPortfolio Likewise! I’ve started reading the Gyroscopic forum discussions you mention in this video and it will be a lot of fun to go over in-depth over the next few days. Out of curiosity, what’s your sentiment on this portfolio’s high allocation to ITT/bonds?

@mmabagain Месяц назад

As a retiree, I like this.

@OptimizedPortfolio Месяц назад

Thanks for watching!

@鱼眼儿看美股 3 месяца назад

Sadly, my 401k account do not have option to invest Gold. Thanks for your information

@AK-47ISTHEWAY 3 месяца назад

T.I.P.S. (Treasury Inflation Protected Securities) are a good alternative to gold. See if you have a T.I.P.S fund in your 401k.

@OptimizedPortfolio 3 месяца назад

Makes sense. I don't think mine does either. You could maybe put the gold in an IRA.

@鱼眼儿看美股 3 месяца назад

@@OptimizedPortfolio Yes, I have #IAUM in IRA due to the lowest fee.

@Omar-et7sb 3 месяца назад

May be a blessing in disguise since gold is a terrible investment for your accumulation phase (and I'd argue, like Warren Buffet, for any phase).

@OptimizedPortfolio 3 месяца назад

@@Omar-et7sb I do agree gold makes little logical sense for a young accumulator with a long horizon.

@GregK235 3 месяца назад

GA portfolio is still my preferred core. Interesting to see how the small-cap value components contribute under different market conditions. Still, good to learn about risk parity. Thanks.

@OptimizedPortfolio 3 месяца назад

Thanks, Greg! Indeed, we'll see what the future holds.

@GregK235 3 месяца назад

@@OptimizedPortfolio Been meaning to ask, would you still go with DGS over AVES in the GA portfolio? According to the Morningstar fund analyzer, AVES looks to be heavier in mid-caps compared to DGS; so, I've stuck to the original ETF line-up.

@OptimizedPortfolio 3 месяца назад

@@GregK235 Yes. If I change my opinion on it, I'll post about it and update my "best in class ETFs" list.

@OptimizedPortfolio 3 месяца назад

@@GregK235 I also discussed this here if you haven't seen it: www.optimizedportfolio.com/aves/

@randomjoe1131 3 месяца назад

Have you read 'The Fund'? It paints Dalio in a very different light... Even if you don't believe everything in it, it's still a great read.

@OptimizedPortfolio 3 месяца назад

I haven't. Can you link me?

@randomjoe1131 3 месяца назад

@@OptimizedPortfolio YT not letting me post a link… google it - The Fund: Ray Dalio, Bridgewater Associates, and the Unraveling of a Wall Street Legend

@jugzster 3 месяца назад

I'd rather see my portfolio go down than invest in gold. At least stocks tend to go up in the long run, unlike gold which underperforms for decades 😅

@OptimizedPortfolio 3 месяца назад

Fair enough. I'm not a big fan of gold either, but it has delivered about 8% annualized over the past half century.

@stephengerrard6412 3 месяца назад

Nice video. The main problem with bonds is that it’s impossible to know where they are heading. The data on which we all rely comes from a period during which we had a secular decline in interest rates. Right now no one knows which way the secular trend will go because so much depends on geopolitics. Most likely rates are heading higher as we have deglobalisation combined with unfavourable demographics. On the other than AI points the other way. Long term that means we can’t really measure risk.

@OptimizedPortfolio 3 месяца назад

Nah, decline in interest rates wasn't as much of a tail wind as people make it out to be: blog.thinknewfound.com/2017/04/declining-rates-actually-matter/ Starting rates are the best predictor for a bond's total return over its duration. For a bond FUND, that's [2n-1] years. The investor whose bond duration matches their investing horizon should be indifferent to interest rate changes, as doing so eliminates interest rate risk. Though of course in this specific instance with an intermediate fund that's harder to do.

@stephengerrard6412 3 месяца назад

@@OptimizedPortfolio thanks for replying and esp for taking the time to link to the article; it's much appreciated. As to you other point, you are 100% right of course that if bonds are held to maturity there is no interest rate risk. However, there is inflation and opportunity cost risk. If interest rates rise long term from here because inflation is higher than expected then bonds will turn out to have been a bad investment (at least in relative terms). My point was that unlike equities - which generally drift upwards - we don't know which way rates will go because of geopolitics. That makes them riskier than in the past when the secular trend was downwards.

@OptimizedPortfolio 3 месяца назад

@@stephengerrard6412 Interest rate changes and even directions are hard to predict. One study from Jim Bianco found that among top economists, their direction predictions twice a year from 1982 through 2006 were right less than 1/3 of the time. Bond markets also aren't as cut and dry as rates up = bonds down. For 1992-2000, interest rates rose by about 3% and long treasury bonds returned about 9% annualized for the period. Short bonds returned 6% annualized. For 2003-2007, interest rates rose by about 4% and long treasury bonds returned about 5% annualized for the period. Short bonds returned 3% annualized. For 2015-2019, interest rates rose by about 2% and long treasury bonds returned about 5% annualized for the period. Short bonds returned 1% annualized. Mark Hulbert once said: "If you think successfully timing the stock market is difficult - and it is - timing the bond market is virtually impossible."

@stephengerrard6412 3 месяца назад

Thanks for the detailed reply. The key takeaway is that predicting bond return is very very hard. As such over the long term this type of portfolio may be riskier - relative to inflation - than for example your Ginger Ale. Fair summary?

@OptimizedPortfolio 3 месяца назад

@@stephengerrard6412 Riskier relative to inflation, possibly. As you can see, depends on one's definition of "risk."

@JosephDickson 3 месяца назад

Insert "You probably never heard of it." hipster dog meme here. Honestly, this is interesting, I might have to look at it further. but 30% equities sounds like a tiny allocation. How did this weather recent inflation?

@OptimizedPortfolio 3 месяца назад

Not great, not terrible. I'll leave you to backtest for yourself if you want. Thanks for watching.

@jasertio 3 месяца назад

To be completely honest, I never really understood the purpose of gold in a portfolio. But this portfolio has gotten me interested, so I'll look for more details about it.

@OptimizedPortfolio 3 месяца назад

Basically, A) gold tends to be uncorrelated to both stocks and bonds, offering a potential diversification benefit, and further, if stocks and bonds are both down, gold is usually up, and B) some use it as a purported "inflation hedge." Its reliability as such is debatable: papers.ssrn.com/sol3/papers.cfm?abstract_id=2078535

@genorgeanaplaszio1246 3 месяца назад

Where is your ginger ale portfolio? Btw thank you for the desert portfolio presentation but I would never go 60% bonds, unthinkable, respectfully.

@OptimizedPortfolio 3 месяца назад

Ginger Ale Portfolio is here: www.optimizedportfolio.com/ginger-ale-portfolio/ I don't have a video on it yet. If you think 60% bonds is "unthinkable," you might be in for a rough retirement via sequence risk. Thanks for watching.

@genorgeanaplaszio1246 3 месяца назад

@@OptimizedPortfolio haha.ok it is “thinkable” but there’s such a downturn on bonds recently. You would have kicked yourself during this rally. ….ok ok it is meant to be never adjusted, I get it. Again I thank you.

@OptimizedPortfolio 3 месяца назад

@@genorgeanaplaszio1246 Recency bias, outcome bias, and tracking error regret should not inform portfolio construction. Maybe you missed my video a couple weeks ago ;) ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-xgWYvVhiL4E.html

@genorgeanaplaszio1246 3 месяца назад

@@OptimizedPortfolio no I didn’t miss it. I understand recency bias (problem is, I guess I am a slave to it).

@OptimizedPortfolio 3 месяца назад

@@genorgeanaplaszio1246 Fight against it, brother! 💪

@grigorirasputin425 3 месяца назад

My favorite lazy portfolio is 70% VOO and 30% AVUV

@OptimizedPortfolio 3 месяца назад

Thanks for sharing.

@Omar-et7sb 3 месяца назад

Nice. Mine is 50% NTSX and 50% AVGV. But I will consider RSSB to replace NTSX... going to give it a few years.

@OptimizedPortfolio 3 месяца назад

@@Omar-et7sb Niccce. 😎

@iii1938 3 месяца назад

70% VFV 30% VCE here

@MagicNash89 3 месяца назад

Problem is, long-term bonds crashed HARD 3 years ago and while they have a higher yield now, that's not much of a consolation when they are down like 40-50% (like TLT etf) and are waiting for those rate cuts and/or major stock market crash. While in the mean time stocks are on all time highs.

@AK-47ISTHEWAY 3 месяца назад

Don't worry, there's going to be a correction soon, and stocks are going to crash hard, and treasury bonds will skyrocket.

@MagicNash89 3 месяца назад

@@AK-47ISTHEWAY how much will they skyrocket? The TLT etf needs to DOUBLE, 2x, just to get back where it WERE before the crash. Not talking about a new all time high. In 2020 during Covid it rallied briefly for 40%. In 2008-2009 - about the same. And this is excluding the credit risk - shor-term or long-term of specifically US bonds. May be irrelevant today, but most agree - the path with debt right now is unsustainable. And there is little sign of it correcting.

@OptimizedPortfolio 3 месяца назад

1. This portfolio doesn't use long bonds. 2. Current yield is the best predictor of a bond's return over its duration. 3. By definition, a long bond that has dropped in price must now make up for that with greater yield over its lifetime of 20+ years. As the name suggest, long bonds are for long horizons. One shouldn't be concerned with their behavior over only 3 years. Don't play short-term games with long-term investments.

@MagicNash89 3 месяца назад

@@OptimizedPortfolio " This portfolio doesn't use long bonds." - My bad, I missed the "interim bonds" because of the comparison to the all weather portfolio, which is overweight in long term bonds. HOWEVER - interim bonds suffer from the exact same problem as long term bonds but on a smaller scale due to duration - take BIV etf, its down 25% from its peak in 2020, you need a 50% upside to come back to that, historically in 2008-2011 it rose at best about 20%. As for your 2. and 3. - if we are talking about 20+ year investment horizon how is the expected return here comparable to stocks? By all metrics, average historical return on stocks havs been higher than any type of bonds. There is no rational point for a buy and hold investor for 20+ years to thus hold any bonds. This is a portfolio for a potential panic seller/beginner, who is afraid of volatility. As for the "only 3 years" - I stated there Great Financial crisis crash as an example here, both TLT and BIV performed poorly compared to the SP500 otherwise. There is a looming threat over bonds in the long-run which is not being addressed properly right now on top of all that. Not to mention long-term sticky inflation fears, which destroy bond etf value. There is just so much against bonds right now and even worse for the future...to recommend a 60% allocation.

@ddduva4440 3 месяца назад

60% bonds is death to great returns over the long term.

@OptimizedPortfolio 3 месяца назад

We don't know that with certainty. That's sort of the entire point of this portfolio - to avoid making guesses about an unknowable future. Plenty of extended periods where bonds - and more importantly, a diversified portfolio of stocks AND bonds - beat stocks. This portfolio doesn't use long bonds, but long bonds just beat stocks for the 2-decade period 2000-2019. We can only know the optimal portfolio in hindsight. That's why, again, this one stays pretty agnostic toward 3 different uncorrelated assets.

@Omar-et7sb 3 месяца назад

This would be a terrible portfolio for a long term buy and hold investor. Considering the behavioral risk of drawdowns but not considering the behavioral risk associated with watching every other "lazy investor" portfolio out gain you (which creates serious FOMO) is a disastrous oversight. Yes, most younger folks (started investing last decade or so) investors have yet to live through a real, prolonged bear market, but assuming that freaking out when one happens and thus making bad timing decisions but not considering the tracking error (to an SP or Total market portfolio)? Probably my hardest, vehement disagree with you so far, but still - great website and channel!

@OptimizedPortfolio 3 месяца назад

You sort of make my point for me. "Terrible" is subjective. As noted, there would be extended periods where this portfolio beats 100% stocks. I'm a fan of simplicity to prevent tinkering. Tracking error regret is real, certainly, but so is risk tolerance, and most severely overestimate it. Not an oversight at all. I would submit the latter is potentially far more detrimental. An investor may panic sell during a crash, fear re-entry, and then be afraid of stocks entirely thereafter. I maintain that most are better suited with a well-diversified, multi-asset portfolio. Does that mean it has to be this one? Of course not. But I'm actually surprised that this portfolio - and Dalio's All Weather - has performed as well as it has historically relative to 100% stocks.

@surfrduede 3 месяца назад

I didn’t hear him mention an age range. Yes, young people would probably be best served with a more aggressive mix but it’s a solid portfolio for someone in their 40’s, 50’s, 60’s.

@Omar-et7sb 3 месяца назад

@@OptimizedPortfolio You would have gotten me to be less skeptical if you said this was more of a wealth preservation portfolio. Something to use IN retirement... :-) Besides, last I looked, Ray Dalio's biggest position was Emerging Markets... So I don't think he uses "his own" all weather portfolio.

@OptimizedPortfolio 3 месяца назад

@@Omar-et7sb I suppose one can use it how/when they want. But you perhaps continue to forget that young investors can still have a low emotional tolerance for risk, in which case this may be a perfectly suitable portfolio. Dalio's proposed All Weather Portfolio from the Tony Robbins interview is not meant to perfectly match Bridgewater's All Weather Fund. Bridgewater also offer other hedge funds.

@Omar-et7sb 3 месяца назад

@@OptimizedPortfolio How would you measure that risk vs the risk of a portfolio not compounding/growing enough to replace income in the future? Even heavy-bond users like Larry Swedroe do it with a counter-weighted risky position with high expected returns (in his case, SCV).