I’m currently reading DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth by Gray, Vogel, and Foulke. In their chapter “A Simple Asset Allocation Model That Works” they end up recommend equal-weight portfolios, which are something I’ve written about before…
The magic of equal-weighted portfolios
In Michael McClung’s Living Off Your Money he ends up recommending equally-weighted portfolios. That is, if you have 2…
…they even base much of their recommendation on the same paper I talked about in that post.
But while reading their book, I realised how…vague…the idea of “equal weight” is. Here’s what I mean…
The authors — Gray, Vogel, Foulke (GVF) — tell you that equal weight makes sense. And then they tell you that there are 3 classes of assets to really consider: stocks, bonds, and real assets (commodities, REITs, etc).
Given the above you assume they would recommend:
- 33% stocks
- 33% bonds
- 33% real property
right? Nope. They actually recommend:
- 40% equity
- 40% real assets
- 20% bonds
At first glance, that doesn’t look equal weight at all! What’s their explanation?
Well, the portfolio is actually:
- 20% US stocks
- 20% foreign stocks
- 20% US REIT
- 20% commodities
- 20% intermediate US government bonds
So it is equal weighted…sort of.
But why are stocks split out in US and foreign?
Why aren’t REITs split into US and foreign as well?
Saying “equal weighted” is the way to go only solves part of the problem. You still need to decide what exactly you’re equal weighting…and it turns out there are all kinds of ways to twist equal weighting.
Want more equities than equal weighting provides? Just split it into “domestic” and “foreign” and poof you’ve got twice the equities!
In quasi related news…Paul Merriman’s recent article on his “Ultimate Buy & Hold Portfolio” is another example of this. (Though he doesn’t make any real arguments about equal weighting.)
His final recommended portfolio is
- 10% US large cap blend
- 10% US large cap value
- 10% US small cap blend
- 10% US small cap value
- 10% US REIT
- 10% international large cap blend
- 10% international large cap value
- 10% international small cap blend
- 10% international small cap value
- 10% emerging markets
Of course, when you add things up it is 50% US, 40% developed markets, 10% emerging markets. Or maybe it is 90% equities and 10% real property (US REITs). Or maybe it is equal weight since it is 50% US and 50% non-US?