10/08/2010
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Gibson's 5 Equal Asset Allocation Strategy comes from Roger Gibson’s widely read "Asset Allocation: Balancing Financial Risks." In it, Gibson outlined a simple yet diversified asset allocation model: putting equal amount of investment into 5 asset classes: US Equity, International Equity, REIT, Commodity, Fixed Income. For Fixed Income, he further outlined a 70%/30% US domestic/international bond investment.
The most noticeable feature in this model portfolio is its heavy weight into commodity asset class.
Recent studies suggest that managed futures in commodity could be an excellent diversifier with equity like positive returns. The recent representative study is a research paper by Yale Professors.
| Fund |
Weight |
Ticker |
ETF |
| US Equity |
20% |
VFINX |
VTI |
| International Equity |
20% |
VDMIX |
EFA |
| Real Estate |
20% |
VGSIX |
RWX |
| Commodity |
20% |
CRSAX |
DBC |
| US Bonds |
14% |
VBMFX |
AGG |
| International Bonds |
6% |
OIBAX |
BWX |
This is a well diversified four asset class portfolio with an aggressive profile. It is a little unusual to have commodities as an asset class before emerging markets,
This lazy portfolio will be compared with the same funds with a balanced (i.e. all equity asset classes equally weighted) buy and hold with monthly rebalancing and the ability to rotate styles within the asset classes. This will look at what difference alternative fund balances contribute to the results. We will look at a Five asset class SIB with Strategic Asset Allocation that will shed light on the benefits of extra asset classes.
Then we will compare the impact of tactical asset allocation on the Aronson funds and also a five asset class SIB to examine the returns delivered by a TAA strategy applied to Aronson and broader funds.
We would expect the performance of this portfolio to match the 5 asset SIB reasonably closely as they have the same weights.
Notable elements of the results
The original lazy portfolio has relatively low volatility but the returns are disappointing. Using the same funds with a more traditional spread gives a better return. This is one data point that balanced assets make a better portfolio. The five asset class SIB has even better results. The five asset SIB has emerging markets rather than commodities which has been a better selection in recent history. From previous articles a six asset SIB will also have good returns and that includes both emerging markets and commodities.
Tactical asset allocation delivers the best results and, again, the asset class selection of the SIB beats the Gibson choice (and again the six SIB which combines both is even better).
The tradeoff is being involved monthly with your portfolio to squeeze out better returns compared to an annual review; once a month seems a reasonable level of effort to put extra money in your pocket. The spread of 5 year returns is around 14% which is significant in terms of having a bigger nest egg.
Takeaways
- Tactical Asset Allocation reduces downside risk and that wins in the current uncertain environment
- The Gibson five lazy portfolio has returns that can be improved upon
- ETF’s can readily be used to implement these portfolios with good performance
- A 14% spread means that it’s worth looking at alternatives
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