Is a perfectly balanced portfolio possible? What would it look like? How would it perform?

bostonerimus

adindas said:

Nothing is perfect.

But one quite close to that is proposed by one of the well know hedge fund Ray Dalio. It is called "all whether portfolio".  With such portfolio it will be less volatile, less risky, less intervention is needed but you are sacrificing the potential return. The return is more likely to be lower than the market, the S&P500.

https://portfolioslab.com/portfolio/ray-dalio-all-weather

Here is how the so called "balanced portfolio", "all whether portfolio" is performing against the market S&P500

Volatility has a correlation with the reward (e.g return).  The less volatile your portfolio is (e.g balance port folio, all weather port folio) the less reward you will likely to get. It is represented by a ratio called "Treynor Ratio"

https://www.investopedia.com/terms/t/treynorratio.asp

Another one is the ratio of the return of your investment vs the risk you are willing to take which is already mentioned above formulated by William F. Sharpe called "Sharpe Ratio"

https://www.investopedia.com/terms/s/sharperatio.asp

Unless you are lucky, the "Balanced portfolio", "All whether portfolio"are less volatile, less risky than S&P500 (say) but are more likely to produce a lower return.

Now we are in Boglehead "four fund" territory. Personally I have income covered by things like DB pensions, an annuity, and rent and the rest is mostly in a couple of equity index trackers that give me a vaguely cap weighted global equity portfolio.

Prism

bostonerimus said:

Now we are in Boglehead "four fund" territory. Personally I have income covered by things like DB pensions, an annuity, and rent and the rest is mostly in a couple of equity index trackers that give me a vaguely cap weighted global equity portfolio.

What tends to set these types of all weather portfolios aside from the Boglehead ones is the inclusion of general commodities, gold and REITs - the last two being quite popular. The cost can still be very low but the inclusion of other elements than equities and bonds has, at least historically, given a better outcome for someone taking income from their pot - i.e. a retiree.

LHW99

Surely if it was "perfectly balanced" by some definition at 10:00:00 on some particular day, it wouldn't be by 10::01:00 because some one (or more) of its constituents would have gone up or down relative to the rest.

BritishInvestor

Prism said:

bostonerimus said:

Now we are in Boglehead "four fund" territory. Personally I have income covered by things like DB pensions, an annuity, and rent and the rest is mostly in a couple of equity index trackers that give me a vaguely cap weighted global equity portfolio.

What tends to set these types of all weather portfolios aside from the Boglehead ones is the inclusion of general commodities, gold and REITs - the last two being quite popular. The cost can still be very low but the inclusion of other elements than equities and bonds has, at least historically, given a better outcome for someone taking income from their pot - i.e. a retiree.

Would be good to see some evidence for this from a non-U.S. perspective.

BritishInvestor

adindas said:

Volatility has a correlation with the reward (e.g return).  The less volatile your portfolio is (e.g balance port folio, all weather port folio) the less reward you will likely to get.

Not always that clear cut

https://www.aqr.com/Insights/Datasets/Betting-Against-Beta-Equity-Factors-Monthly

https://twitter.com/dsraer/status/1081972598039183361?lang=en

adindas

BritishInvestor said:

adindas said:

Volatility has a correlation with the reward (e.g return).  The less volatile your portfolio is (e.g balance port folio, all weather port folio) the less reward you will likely to get.

Not always that clear cut

https://www.aqr.com/Insights/Datasets/Betting-Against-Beta-Equity-Factors-Monthly

https://twitter.com/dsraer/status/1081972598039183361?lang=en

Well that has never been any clear cut in the market. But theoretically that is what is formulated in the "Treynor Ratio". Treynor Ratio is a function of "Beta" of the asset. the Beta Value could easily be found from the summary sheet.

How accurate the Treynor ratio is highly dependent on how accurate and benchmarks use to measure beta value. As the paper above the value of Beta is not always be that accurate.

Also treynor ratio is backward-looking. Any asset and/or Investments are likely to perform and behave differently in the future than they did in the past.

george4064

A portfolio you describe containing loads of equity, bond , commodity etc trackers, would most likely perform just like a multi-asset fund (but with much more effort required and most likely higher fees).

All in all, an investor would be more suited to buy a multi-asset fund as their core holding and maybe a few satellite funds if investor wants exposure to more niche areas.