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Genius+High Expenses=Mediocrity

Jonathan Clements  |  July 1, 2015

MEB FABER’S “GLOBAL ASSET ALLOCATION,” available free this week through Amazon.com if you buy the e-book, offers a look at the historical performance of a fistful of portfolios, such as those recommended by Rob Arnott, Harry Browne and Ray Dalio. It’s a quick read, with just 129 pages, much of it consumed by charts.

The book’s biggest surprise? How unsurprising the results are. “As long as you have some of the main ingredients—stocks, bonds, and real assets—the exact amount really doesn’t matter all that much,” Faber writes.

Over the 40 years analyzed, the difference between the after-inflation results of the best- and worst-performing portfolio was just 1.84 percent points a year (though, compounded over four decades, that modest annual gap would mean a huge cumulative difference).

Which brings us to what Faber says “is the main point we are trying to drive home in this book.” Suppose you guessed right and bought the best-performing portfolio at the start of the 40 years, but then implemented the strategy using a financial advisor who invested your money in the average mutual fund. Result? The fees you paid would have wiped out the advantage you gained—and your results would have been worse than the return, before costs, of the poorest-performing portfolio.

As Faber writes, “Ultimately, smart investing requires that we not only monitor asset allocation, but of equal weight, we focus on the advisory fees associated with the investment strategy.”

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