a. Too heavy on bonds
With 55 percent of the portfolio on bonds, this portfolio bets that the stellar bond performance in the past three decades will repeat itself. However, the super performance of bonds since 1980's is due to the ongoing fall of interest rates from that 20 percent down to almost zero. As rates go down, bonds go up. Hence, this has been a unique period, one that has been especially good to fixed-income portfolios.
Ben Carlson, an investment analyst who writes the Wealth of Common Sense blog, showed that this recent bull market in bonds radically skewed the returns of Robbins’s portfolio by about 400 basis points a year. The period from 1928 to 1983 would have cut the returns of the portfolio almost in half, from 9.7 percent to 5.8 percent.
b. Wrong bet on commodities
A similar rookie mistake is made with commodities. After nearly three decades of little or no progress, gold had a spectacular run from 2001 to 2011. Then it hit a wall, losing more than a third of its value since those 2011 highs.
In real, inflation-adjusted terms, gold is unchanged since the early 1980s — the last peak in gold. However, it’s not only that one 30-year span: Lots of academic studies show commodities are a drag on portfolios. The key finding is that in real, inflation-adjusted terms, commodities add no value or performance to a set of holdings. As Cullen Roche noted, real commodity prices have been in a 130-year bear market.
In our next blog post, we will show the competing classic portfolio proposed by Barry Ritholtz.