Thread by @MebFaber

1/ PART 2 of 4

So, yesterday we talked about the challenges of investor expectations (too high, 10%) vs. likely future US stock and bond returns (too low, 3%).

Today, I offer a potential solution - a time travelling investment genie.

More on that later...

2/ So the bad news is the US investment opportunity set is subpar.

But, we don't live in a world of just two asset choices.

Below is a chart of many different assets since 1972...Note they all move up and to the right, but zig and zag their way there (a good thing).

3/ We also have the benefit of many brilliant investors, who collectively manage in the trillions, that have stated a recommended asset allocation portfolio of these global assets.

You'll recognize a few names including @elerianm, @RayDalio / @TonyRobbins, David Swensen, etc.

4/ So we thought it would be fun to examine this asset allocation horse race, and how these portfolios would have performed since 1973.

You can download the full data set and charts in our Global Asset Allocation book here for free..

cambriainvestments.com/investing-insi…

4a/ (You can even take most of these allocations back to the 1920s if you leave out REITs...we'll add to the new book update next year)

5/ We get into full asset level granularity in the book (ie how much in gold, TIPS etc), but here is a sample of some of the portfolios broken down into three main asset classes - stocks, bonds, and real assets.

6/ What do you notice?

These gurus have MASSIVELY different allocations.

One says put half in real assets while another says none. Some have 55% in bonds, others just 10%. The stock allocation ranges from 25% to 90%!

This should have an enormous impact on returns, right?

7/ Here are the equity curves. Not bad! They all move up and to the right.

8/ And here is a real returns after inflation chart to illustrate just how hard the 1970s were with high inflation.

If you just survived that was a compliment.

Also note that if you chased the BEST performing allocation in the 1970s, that was then the worst going forward...

9/ And here are the returns, volatility, and maximum drawdown (peak to trough loss).

I also included real drawdowns after inflation too as some high bond allocation portfolios "look" safer, but in reality as just as risky, but for different reasons....

10/ Ok, this is where the investment genie comes in.

She's going to let you go back in time to 1972, and pick out the single best performing asset allocation strategy.

Amazing right?

11/ But like most genies, she has one condition.

You have to implement the portfolio with a mutual fund with the average fees of today of 1.25%.

(She's sweet though so no loads, 12b-1 fees, and you even get to put it in a non-taxable account.)

12/ How much would you pay for this genie? How much would @blackrock or @StateStreet pay? Certainly billions to have this knowledge....

Look how it turned out for Biff!

13/ However, simply by implementing the BEST performing asset allocation portfolio with AVERAGE mutual fund fees, you transform the BEST returning asset allocation strategy into nearly the WORST.

Let that sink in for a moment.

14/ Let's say you then are fairly self-aware, and know that you are an emotional investor. You always chase returns, sell at the bottom and buy at the top. So you hire a financial advisor that on average costs 1%.

15/ Congrats, you've now turned the BEST performing asset allocation into far worse than the WORST simply by implementing with average fees. (Note: this also means half of you would be paying MORE)

Average fees render the entire asset allocation process meaningless.

16/ (Aside: I love financial advisors but believe they earn their 1% not by investing through asset allocation but rather through value adds like estate planning, insurance, behavioral coaching, tax planning, etc)

17/ All this time you spend thinking about the @federalreserve, do I have too much in gold, what is @realDonaldTrump doing with XYZ, that guy on @CNBC just said stocks are expensive, should I invest in this hedge fund....

But what really matters? Something no one thinks about.

18/ @BillGates often tweets out this graphic of the world's deadliest animals.

What are most people afraid of? Sharks, lions, wolves...but they kill very few people.

What does kill people? #1 is mosquitoes, #2 other HUMANS, #3 snakes (fair they're awful), #4 man's best friend

19/ The next five are like flies, bugs, snails and worms.

The point being, what you spend your time worrying about likely doesn't matter. And what you spend your time NOT worrying about matters a lot.

20/ Here's an example. We've heard a ton about the flows into cheaper tax-inefficient funds. But I'm of the believe it hasn't even started yet.

There's about 5 asset allocation ETFs that manage a few billion that charge <0.3%...Cool.

etf.com/etfanalytics/e…

21/ But there's still > 500 mutual funds that charge more than that, many >1%, 2% that manage over a TRILLION.

Passive global asset allocation is a commodity, so you should pay as little as possible for it. But people don't know what they pay, or even care.

22/ You can now buy the global market portfolio for 0.05%.

etf.com/sections/blog/…

23/ And if you understand that many ETFs implement short lending and return that revenue to the investor, that portfolio is not only free it has a negative expense ratio! What an awesome time to be an investor...

barrons.com/articles/etfs-…

24/ To summarize.

US assets offer little future expected returns, so expand your asset allocation, and pay as little as possible for implementation.

Part 3/4 tomorrow looks at how we can improve upon this base case free asset allocation to hopefully garner higher returns...

forgot the chart!