{"id":2209,"date":"2022-04-03T21:40:01","date_gmt":"2022-04-04T01:40:01","guid":{"rendered":"https:\/\/howigrowmywealth.com\/?p=2209"},"modified":"2022-04-03T21:40:03","modified_gmt":"2022-04-04T01:40:03","slug":"did-your-diversified-portfolio-protect-you-in-2008","status":"publish","type":"post","link":"https:\/\/howigrowmywealth.com\/did-your-diversified-portfolio-protect-you-in-2008\/","title":{"rendered":"Did Your ‘Diversified Portfolio’ Protect You in 2008?"},"content":{"rendered":"

Back when I was an impressionable college student I was shown an asset allocation rubric. The rubric was a list of asset classes with a recommended percent of funds to be invested in each asset type. The result would be a diversified portfolio.<\/p>\n

It was my first exposure to asset allocation and it made a lot of sense.<\/p>\n

The allocation I was presented was very similar what I have listed below and I’ll call it “Portfolio 1”.<\/p>\n

Asset Allocation Portfolio 1<\/h2>\n

\"\"<\/p>\n

The problem with this portfolio is that is dropped over 55% in the 2008 financial crisis.<\/p>\n

Without any bonds (or gold)<\/a> this portfolio was subject to a massive drawdown.<\/p>\n

Since January of 2007 to January of 2017 this portfolio has a compound annual growth rate<\/a> (CAGR) of just 5.58%.<\/p>\n

Plus the correlation with US stocks is .98.<\/p>\n

In fact an investor would have been better off just buying the Vanguard Total Stock Market Index (VTSMX) and calling it a day. The “Just Buy VTSMX” strategy would have had a 7.25% CAGR with a lower maximum drawdown<\/a> of around 50%.<\/p>\n

Asset Allocation: Portfolio 2 (Add Bonds)<\/h2>\n

To be fair, the allocation actually calls for a 40% allocation to short term bonds. Adding 40% bonds would have limited the maximum drawdown to a much more manageable 33.72% with a CAGR of 4.77%.<\/p>\n

Correlation of this portfolio is still .98.<\/p>\n

\"\"<\/p>\n

HIGMW Asset Allocation<\/h2>\n

But enduring a 33% drawdown for a a 4.77% return doesn’t seem stellar to me. So I’m been experimenting with different asset allocations using portfoliovisualizer.com.<\/p>\n

\"\"<\/p>\n

The HIGMW Asset Allocation I’ve developed would have a maximum drawdown of 28.77% with a CAGR of 7.38%. Correlation with US stocks drops below the 90s down to .87, still high, but at least lower.<\/p>\n

\"\"<\/p>\n

Now the actual investments in my allocation are listed below. I had to swap out some funds in order to get a sense of how this allocation would have performed in 2008.<\/p>\n

However, many of the funds I like did not exist in 2008.<\/p>\n

Yes, this allocation is 30% bonds. And yes, I think US stocks and bonds are in a bubble<\/a>. And yes indeed I Don’t Own US Treasuries<\/a>. But 20% of my allocation to bonds are outside the US<\/em> and the other 10% are in a fund managed by Bill Gross mainly consisting of corporate bonds and only 6% in government bonds.<\/p>\n

So my 30% allocation to these bond funds in no way contradicts my views on US debt.<\/p>\n

I also allocated 20% to gold and 10% to real estate. I think if inflation does pick up (even more) these hard assets will add some resilience to the portfolio.<\/p>\n

Small cap value stocks have outperformed over the last 45 year so I’m overweight small cap value. 10% is allocated to international small cap value stocks and 10% to small cap value stocks in the US. The 20% allocation to the First Trust Dorsey Wright Dynamic Focus 5 ETF is an interesting ETF in that it is somewhat trend following. Combine these three funds and 40% of this allocation is to stocks.<\/p>\n

Gold doesn’t pay a dividend or yield. But until the central banks around the world stop acting like crazy people gold will remain a large part of my portfolio.<\/p>\n

I don’t think I can be convinced that governments can continue to borrow, print and spend money without consequences.<\/p>\n","protected":false},"excerpt":{"rendered":"

Back when I was an impressionable college student I was shown an asset allocation rubric. The rubric was a list of asset classes with a recommended percent of funds to be invested in each asset type. The result would be a diversified portfolio. 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