The main disadvantage with this is you are down big during the period that investment returns are likely to be the highest i.e. the depths of a nasty bear market. So, I think a resilient investment portfolio that is designed to be down only say 10-15% during a 50%+ bear market is superior. In most years you might make 5% rather than the 8% that a more aggressive portfolio would make, but in a 1932 or 2008 or 1974, you are almost flat when everyone else is fucked, you can then back up the truck when risk is almost zero and conservative expected annualised returns are 20-30%+. There's one other problem with a long-term buy & hold index portfolio. How do you act if you are super bearish, and your portfolio is 40-50% long stocks? Imagine being 50% long SPY in early 2008, and expecting it to fall by half. I'm not sure it makes sense to have this position - either you are bearish or bullish, if you are bearish with conviction then being long SPY is irrational.
I've been thinking about this. The reason I spend so much time researching and thinking about long-term returns in different assets is related to this. My research indicates to me that stocks are in a secular bear, on avg the bull runs are shorter and bear declines deeper, so the weighting of stocks in the portfolio should be smaller(In my case I'd be willing to go up to 20% maybe 25% if there are stocks with limited downside that are diversified like BRKB), this should protect against the big drawdowns like in 2008. Also since, hopefully, my macro bias will pickup the stock bear market, I will likely to have some shorts in stocks and perhaps longs in bonds or stuff like fed futures(Bonds as % of total increase since the macro exposure will add up to passive). This should protect the downside The commodity ETF exposure will create some problems as well. I could decrease the weight in the total portfolio, I wouldn't be to happy doing it(as one is not supposed to do that in a secular bull) but if there are not enough hedges in the macro account this becomes an option Probably a bad option, so far my attempts to stay out of commodities have given mixed results, I dodged 2008 but also missed 2009 and late 2010 rallies In the end, some downside volatility seem inevitable. A level of prediction and making educated guessing becomes inevitable as well. With stocks(secular bear) its probably fine to decrease exposures if you are afraid but with commodities its tricky, guys who were afraid of recessions in the 70's missed large run ups, the total drawdown in the CRB IIRC was 20%, could easily been offset by a bond portfolio and prudent macro shorts
Currently my exposure is 18% commodities(Mainly GLD with some Silver and a bit of GCC, this is part of my currency hedge basket as well, even though gold is not doing so well the Brazilian real is also doing terribly so it has been fine) 10% stocks(Mainly BRKB) 9% bonds(TLT) 11% money market like(BZF) This adds up to almost 50% The rest is in cash and macro positions I have about 6.5% short in HK stocks plus a little less than 1% in options(betting on big collapses in some names), plus HKD long and net positive USD exposure If everything goes 2008 again and I don't put any macro bets, I will likely have a small loss. There is definitively a case to be made for having too much cash and not enough commodities/stocks but at this point I'm playing defensively cuz I smell a risk aversion turn coming in the near-term. I could be wrong of course. At the next VIX spike I should put more cash to work
Now that I noticed, I might swap some of this cash and buy more bonds. I might be too underweight in bonds
when i have too much cash and worry about sizeable sell-off i usually buy something like VXX rather than TLT... but it is probably matter of taste rather than anything fundamental. indeed i always hated to be long treasuries - if only for the philosophical reasons... p.s. of course VXX usually works only for shorter term trades due to a rollover costs. this is especially true nowadays when with a sizeable contango it may be better to spend your money for SPY OTM puts...
I dunno, lots of people think contango is a sure money loser, taking the other side would be a sure money maker then Maybe fading contango represents some kind of risk premia that you earn by insuring people in the other side?I'm not sure it is but it is a good question
Daal, i trade the curve for a living...fighting that contango is real tough. I find long puts or calls are far better payers when you get your market move.
Kinda interesting fact. There are 7 members of the FOMC who think the FF should be at 2% or higher by year end 2014 Only 4 who think it should be unchanged that year. The 4 get their support from another 3 members who think it should be 0.5%. But the hawkish revolt is alive and well