We completed a major site upgrade last week. We reworked a lot of our code as part of our never-ending quest for speed and scalability, but most of that should be invisible to members.
There are, however, a couple of big changes that members will enjoy.
Buy & Hold assets may now be included in Model Portfolios:
We are proponents of blending Tactical Asset Allocation (i.e. the thing we do here at Allocate Smartly) with Buy & Hold. That might seem strange coming from a shop like ours, but it’s a belief born out of decades of investing in the real world. The reason? Significant short-term underperformance causes investors to do dumb things.
Investors say they want absolute returns, but most really want relative outperformance. Those are two very different goals. If you make 10%, but everyone else is down 10%, most investors are happy. If you make 10%, but everyone else is up 20%, most are unhappy. That runs counter to the pursuit of absolute returns which says I’m happy as long as I’m making a consistent 10%.
During strong bull markets, buy & hold often outperforms tactical, because anything other than long risk to the gills in suboptimal. During turbulent markets, tactical tends to outperform, because loss management is a core theme of TAA. If history is any guide, TAA wins out handily in the long-term, but that doesn’t matter if you’ve prematurely scrubbed your trading plan.
By balancing the two, we help to ensure that whatever market is presented to us, we don’t underperform so badly in the short-term, that we abandon our well-crafted long-term plan.
Practical details:
Members can now combine both TAA strategies and B&H assets in their Model Portfolios. All major asset classes that we cover on the site (excluding stock market sectors) can be included, as far back as 1970.
Allocation to each B&H asset is limited to 50%. Why? The data we use to simulate asset performance prior to the launch of each ETF is rarely publicly available, and in most cases, very expensive. We’ve made this investment to bring you the most realistic historical results possible (read more). Allowing users to allocate their entire portfolio to a single asset would expose that data.
Building smart buy & hold portfolios: a cautionary note
With great power comes great responsibility.
Bonds are an important part of a diversified B&H portfolio. They provide a counterbalance to equities and other riskier assets (the last few months notwithstanding), and help to smooth out short-term volatility.
The glaring problem is that it’s a mathematical certainty that treasuries and other very rate sensitive assets will not perform as well as investors have grown accustomed to over the last 40 years.
We’ve written a lot about the impact that the inevitable future of rising interest rates may have on bond returns, and how we should adjust for that in our investment plans. Some links:
- Modelling Treasury ETF Performance in an Era of Rising Rates
- The Threat of Rising Rates and the Impact on TAA vs B&H Investing
- How to Play US Treasury ETFs in an Era of Rising Rates
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From our sister site BetterBuyAndHold.com:
Buy & Hold Backtests are (Inherently) Wrong: Currentizing 16 Popular B&H Strategies
Importantly, these assets can still generate big returns in the short-term, so how we account for rising rates differs with tactical investing (which can move in and out of asset classes) versus buy & hold (which cannot).
In the case of TAA, selective exposure to capture those short-term gains is probably okay. We should just be mindful of limiting that exposure to some reasonable level. We model each strategy’s exposure to rising rates for members.
Buy & hold obviously has a much longer investment horizon measured in decades. So, if you create a Model Portfolio with significant B&H bond assets, you should bear in mind that those bond assets are unlikely to perform to the historical results shown.
Geek note: The discrepancy is likely to be greater in terms of long-term return (which is mostly a function of the coupon yield) than short-term volatility and drawdown management (which is mostly a function of short-term changes in rates, learn more).
Our own solution to this conundrum can be found at our sister site BetterBuyAndHold.com, where we “currentize” B&H backtests to reflect how they might have performed at current interest rate levels. We invite you to visit Better to learn more. Allocate Smartly members can sign up for Better for just $25 a year.
Other changes to Model Portfolios:
We’ve reworked the user experience of modifying Model Portfolios to make your research more efficient.
For example, when adding strategies, you no longer need to select the strategy, click the add button and wait for the page to refresh. That got pretty tedious when you wanted to test many variations. The entire process is more dynamic and user-friendly. Backtests also execute much more quickly.
We know this change doesn’t have the same wow factor, but after doing some tinkering in your Model Portfolios, we think you’ll appreciate the changes.
New here?
We invite you to become a member for about a $1 a day, or take our platform for a test drive with a free membership. Put the industry’s best tactical asset allocation strategies to the test, combine them into your own custom portfolio, and follow them in real-time. Learn more about what we do.
