Transcript
Eric Crittenden: Allocate capital intelligently, rebalance as needed, minimize taxes, minimize unnecessary trading costs, and help people be good investors. Honestly, I think that an all-weather approach is a great way to do that.
What is all-weather investing?
An all-weather portfolio is a portfolio that we think is positioned to be able to navigate changing market environments and maintain stability and balance through them. It means being prepared for all kinds of different economic conditions, being prepared in advance for deflation, for inflation, for bear markets, for more bull markets, and hopefully everything in between.
A good all-weather program that's got some long vol, some equity beta, it's got commodities, currencies, it's got even some fixed income should be, if it's weighted correctly, positioned to have no bias towards any kind of environment. That's the whole idea of removing the cyclicality and removing the dependency upon any specific type of environment.
Is an all-weather portfolio too diversified?
Is an all-weather portfolio too diversified? Because if what you're saying is that you need to be prepared for all these different market environments, presumably, that means that you've got asset classes that can do well in different market environments, which implies that the other asset classes aren't doing well in those market environments. People worry that, well, am I really just on the seesaw, where nothing can do well. If this one's doing well, this one's doing poorly.
What goes on under of the hood, how these things trade the baton back and forth and make money is very counterintuitive. Portfolio math is not an intuitive thing to people. It's not necessarily true that if these things are negatively correlated, that they cancel each other out. It is possible for the returns to stack up on top of each other, but the volatility and the drawdowns to dilute each other.
60/40 vs. All-Weather
A 60/40 portfolio is actually pretty good. It certainly performed really well, on my watch. The last 40 years, a 60/40 portfolio has done phenomenally well. Now, if you look at longer periods of time, you'll see that that was an anomaly. That's almost as good as it gets historically. Think about what happened when Reagan was president, interest rates were in the high teens.
You started off with really high interest rates. You're getting yields from the bonds, and stocks were in a bull market all during the '80s, all during the '90s, and all after 2010. A lot of bull market activity, a couple of bear markets in there too, but between bonds in stocks, people did very, very well in real wealth terms over the last 40 years, and that's what most people are paying attention to.
What we haven't had in the last 40 years are any rising interest rates or any meaningful increase in inflation. If we get either one of those or both, I think an all-weather portfolio will quickly, it'll become apparent, the advantage it has over 60/40.
