This Is Only a Test

Michael Flack

I RECENTLY READ AN article in Barron’s that inadvertently revealed two more reasons investing in broad-based index funds is the only sensible course of action.

The article, titled “This ‘Crazy’ Retirement Portfolio Has Just Beaten Wall Street for 50 Years,” touted the “All Asset No Authority” (AANA) portfolio. This “simple portfolio” consists of splitting your money equally among U.S. large-company stocks (S&P 500), U.S. small-company stocks (Russell 2000), developed international stocks (MSCI’s Europe, Australasia and Far East index, or EAFE), gold, commodities, U.S. real-estate investment trusts and 10-year Treasury notes, with the portfolio rebalanced annually.

This brainchild of Doug Ramsey just marked its 50th anniversary. During that time, it’s earned a 9.8% average annual return, which is about 0.5 percentage point a year less than the S&P 500 but 0.7 percentage point more than a standard 60% stock-40% bond portfolio. Its main benefit is it had substantially less volatility, with no “lost decades.”

Sounds great, doesn’t it? Not to me. I have two big issues with AANA.

As I read the article, which also appeared on MarketWatch, the first thing I noticed about the portfolio’s 50-year-old record wasn’t its performance, volatility or catchy name. It’s that I wasn’t sure that Mr. Ramsey was, in fact, that old. After a little research, I determined the article was referring to Doug Ramsey, not the renowned financial radio host Dave Ramsey.

Doug is younger than Dave and, at 56 years old, it would mean that he created AANA when he was in the early years of grade school. All this quickly led me to realize that AANA was manufactured by back testing—data-mining numerous permutations of different asset classes until one was found with superior risk and return numbers.

It reminded me of hedge fund manager Ray Dalio’s All Weather Portfolio. It consists of 40% long-term U.S. bonds, 30% U.S. stocks, 15% intermediate-term U.S. bonds, 7.5% gold and 7.5% commodities, all rebalanced annually. It also had superior historical performance numbers, which have lately been rather underwhelming, averaging about 8% annually since February 2006.

Hey, what if I came up with an All Flack Fund that significantly outperformed the S&P 500 since 1973 and consisted of investing 13% in stocks starting with the letter “F,” 10% in stocks with dividend yields between 2.2% and 3.3%, 17% in AA-rated bonds with a maturity of 6.2 to 8.88 years, 29% palladium and 31% betting on the National League to win the All-Star Game, rebalanced triennially? Would you invest?

Such nonsense is more akin to alchemy than investing.

The second big issue: Barron’s mentions various performance figures for the portfolio and then says, “And it’s done so with way less risk.” The writer adds, “While Wall Street floundered, AANA has earned respectable returns.” And there’s this: “According to Ramsey’s calculations, it has earned an average annual return of 9.8% a year.”

It all sounds so wonderful. But since there is no reference data, there’s no way for me to corroborate any of the performance figures. I guess I could just take Barron’s or Ramsey at their word. But hey, can’t they at least throw me a bone?

I’m reminded of the Beardstown Ladies, who ran what appeared to be a very successful investment club in the 1980s, notching 23.4% average annual returns since inception. They were so successful that they wrote numerous bestselling books and became minor celebrities. It was resounding proof that active investing could beat the market—until a PricewaterhouseCoopers audit revealed that the ladies’ performance was grossly overstated, and their actual results were just a little less than the S&P 500.

Beating the market may not be impossible, but it’s mighty difficult. Investors need to overcome fees, taxes, psychology and some pretty smart people who work 80-hour weeks on Wall Street. And just when you think you’ve found a formula that works, you could discover it might be based on dubious back-testing.

Michael Flack blogs at He’s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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