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This secret portfolio hasn’t had a ‘lost decade’ –in at least 50 years

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What if stocks and bonds don’t come back next year, or even the year after next? What if the Federal Reserve can’t keep raising interest rates? What if it can’t bring down inflation? What if we end up in some sort of rerun of the 1970s, with a lethal combination of inflation and slow growth: stagflation?

Most important: What would that mean for your retirement portfolio — and for your retirement plans?

Can you deal with a “lost” decade of meager returns, or none at all? Will you still be on track for retirement if your investments don’t make a nickel until 2035 (even before taxes and fees)?

I am not predicting this will happen. (Like Casey Stengel, I try not to make predictions, especially about the future.) And maybe this outcome is unlikely — although & some very reasonable and well-informed people disagree. But: what if?

Back in the 1970s and early 1980s, the so-called’ balanced’ or ’60/40″ portfolio, meaning 60% stocks and 40% in Treasury bonds, was a bust. It actually lost money, in real terms, for nearly a decade. From the end of 1972 to the end of 1981, over a period of 9 years, someone in a 60/40 fund actually lost 30% of their money, after accounting for inflation. Even by the end of 1984 they were only back where they started, when measured in constant dollars. Twelve years, 0% real gains. Before taxes and fees, too.

Read: What’s the best way to take RMDs from your retirement accounts? Experts rate the top 3 strategies.

It’s this possibility that brings me back to the unusual, and simple, all-weather portfolio created by Doug Ramsey, chief investment manager at fund company Leuthold. For years, Ramsey has been quietly tracking what he calls an “All Asset No Authority” portfolio. It consists of equal amounts invested in 7 assets: U.S. large-company stocks, U.S. small-company stocks, international (excluding “emerging”) stocks, 10 year U.S. Treasury bonds, U.S. real-estate investment trusts, commodity futures, and gold.

It is incredibly simple. Just own these seven things, rebalance once a year, and forget about it. And anyone can replicate this portfolio with seven mutual funds or exchange-traded funds, such as
SPY,
+0.76%,

IWM,
+0.83%,

VEA,
+1.30%,

IEF,
+0.90%,

VNQ,
+1.85%,

DBC,
+1.65%
and
SGOL,
+1.64%.

The interesting thing about this very simple portfolio, is that it has a very good track record of making money in all markets. Even those where traditional stocks and bonds have tanked.

Read: The closer people are to retirement, the less ready they feel, survey finds

During the 1970s, while 60/40 bombed, All Asset No Authority crushed it. From the end of 1972 to the end of 1981, this portfolio beat inflation by an average of 5.2% per year. From the end of 1972 to the end of 1984 the figure was 6.1%. (Reminder: the comparative figure for 60/40 was 0%.)

The All Asset No Authority portfolio made money from the end of 1999 to the end of 2005, when 60/40, in real terms, once again made 0%. Oh, yes: And even during this year’s vale of tears, All Asset No Authority has beaten 60/40 by a clear 5 percentage points. OK, so it’s still down. But it has lost 10% so far this year, while 60/40 has lost 15%. A good five-point winning margin.

It’s not hard to see why: The inclusion of gold and commodities. Over the past 50 years, those two assets have typically done well during those periods when stocks and bonds have done badly.

This year, commodities are in the black (just). And gold is down just 2%, meaning it has pretty much kept pace with the U.S. dollar — even while the dollar has been soaring.

Doug Ramsey has run data all the way back to 1972. By his calculations, the All Asset No Authority has almost matched the S&P 500 over 50 years, and has handily beat its more appropriate benchmark, namely the 60/40 “balanced” portfolio of stocks and bonds. So it has been a long-term success even while avoiding the lost decades like the 1970s or early 2000s.

Using Ramsey’s data, plus stock, bond and inflation data from the New York University’s Stern School of Business, I’ve run some further analyses.

Over 50 years, when measured in real purchasing power terms (meaning after inflation), the All Asset No Authority portfolio has turned $1 into $13.90. The 60/40 portfolio: $11. 10. That is despite decadeslong bull markets in stocks and bonds. It has been less likely to produce a “lost” period of five or 10 years or effectively no returns (such periods have been rare, anyway).

Naturally, the caveat is that All Asset No Authority has underperformed 60/40 during periods when stocks and bonds have boomed. You didn’t want any gold or commodities in your portfolio during the 1980s and 1990s, or in the past decade. They went down.

Since 1972, over the “average” 10 year period, the 60/40 portfolio has done better: Median real gains of 91% versus 78%. Most of the time you were better off just owning stocks and bonds.

Critically, All Asset No Authority, has never lost money over a 10-year period and has hardly ever produced minuscule returns. Its worst 10-year performance (the last 10 years, interestingly) earned you a 20% gain after inflation. For the balanced portfolio the worst 10 year figure was…minus 15%.

Before taxes and fees.

Five times the 60/40 portfolio has earned you less than 20% (total, in real terms), and 12 times it has earned you less than 50%. (All Asset No Authority has done this five times.)

This is not a recommendation: Only an observation. But will the future look like the past? What are the chances the next 10 years will look more like the 1970s then, say, the 1990s? And what would that mean for us? Am I more worried about avoiding a lost decade or about underperforming a bull market?

Credit: marketwatch.com

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