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The Forever Portfolio

By Alfonso PeccatielloStock MarketsOct 02, 2023 03:14AM ET
The Forever Portfolio
By Alfonso Peccatiello   |  Oct 02, 2023 03:14AM ET
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Today I am proud to announce the TMC Forever Portfolio.

This is a long-term macro ETF portfolio whose aim is to extract risk premia from markets, limit excessive drawdowns, and not be dependent on one single macro regime but equipped for many.

TMC Forever Portfolio
TMC Forever Portfolio

Wait a second: don’t we already have the 60/40 for that?

No – and for three reasons:

60/40? Or Do You Mean 85/15?

The standard 60-40 portfolio invests 60% in US equities and 40% in US intermediate maturity bonds.

While that might seem diversified, it is not: as the pie chart above shows, equities (blue) explain 85% of the overall volatility of returns of the 60-40 while bonds (orange) only account for 15% of that!

That’s because equities are more volatile than bonds to start with and because intermediate bonds have a relatively low sensitivity to interest rate changes and hence the magnitude of their ‘’diversification’’ property in the 60-40 portfolios is very modest.

Don’t focus on the notional % allocation of asset classes: watch their volatility/risk contribution to the overall portfolio and their ability to attack/defend in different macro scenarios.

The Unbalanced 60-40 Only Works in a Couple of Macro Scenarios

The last 25 years and in particular the 2010s have been exceptionally good for the 60-40 portfolio, and the chart below explains why: the uncertainty and volatility around growth and inflation were extremely low.

In a world where inflation is predictably low and growth doesn’t boom to the upside either, Central Banks can be predictably accommodative: equities do very well, and bonds retain their structural hedging properties.

But What If the Next Decade Isn’t Going to Look Like the 2010s?

What if we are going to have more volatility around growth and inflation? More boom and bust cycles?

GDP 10-Year Rolling Volatility
GDP 10-Year Rolling Volatility

Demographics, fiscal, and politics all point toward that direction.

As the left chart below shows by 2028 the majority of voters are going to be Millennials and Gen-Z and a younger electorate might push for a move away from the status quo: more wealth redistribution, more power to labor and less to capital, a faster energy transition, etc.

Couple that with the higher propensity for bigger structural deficits (right chart) and the premises for growth and inflation volatility to pick up are there.

Share of Potenial Voters
Share of Potenial Voters

In the 40s we had a very volatile growth environment, and in the 70s inflation volatility was elevated.

The 60/40 portfolio inflation-adjusted returns in these decades were close to 0% (yes: entire decades delivering no real return at all) - this portfolio is well equipped only for a couple of macro environments.

That’s why we need a truly diversified macro Forever Portfolio instead.

Your Investment Portfolio and Your Job/Business Shouldn’t All Count on One Driver: The S&P500!

If you invest your savings in the 60-40 portfolio, 85% of your return volatility comes from the S&P500.

Your job/business is also highly correlated to the S&P500: if earnings are growing and the stock market is doing great there is a good chance your job is safe and your business is doing well.

Basically, all your eggs are in one basket: your personal cash flows and your investment portfolio rely pretty much on one factor and one only.

That’s highly risky and another reason why we need a truly diversified macro portfolio instead.

Here is a more desirable investment portfolio instead: it should extract risk premia from markets with limited drawdowns, not be dependent on a single macro regime but equipped for many, and be cost-efficient and accessible to every investor via ETFs.

Over the last two decades, the TMC Forever Portfolio largely outperformed the 60/40, generated smaller drawdowns, and flexibly adapted to multiple macro environments.


Disclaimer: This article was originally published on The Macro Compass. Come join this vibrant community of macro investors, asset allocators and hedge funds - check out which subscription tier suits you the most using this link.

The Forever Portfolio

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Comments (1)
George Giakoumoglou
George Giakoumoglou Oct 02, 2023 4:37AM ET
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what does TMC stand for ?How do I distribute my options properly.Please advise.Bear in mind there are rookies like me.Thank you for your iformative articles.
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