Best is to include those assets that both i) are accessible to the public and ii) you can exercise control over and use for re-balancing.
You can neither control your Pension Funds Asset Allocation and Interest nor can you use it to re-balance against Shares. Further, your pension funds asset is nothing anyone else could invest into - what does it help me if there is a fund that yields 20% p.a. but I can’t access it, nor do I know how long I would stillbe able to keep the Investment (change of job => major change to the investment, its risk and return).
Meaning that I would count self-invested FZ invested e.g. at Viac and 3a, as well 1e but not Pension Fund Assets as such. Would as well remove non-vested Stock options; shares with a lock-up beeing the borderline case.
6% CAGR with no more than a 30% drawdown seems like a big hurdle. I don’t see the Golden Butterfly or the All Weather reliably beating the CAGR burden, the 60/40 would probably struggle with the max drawdown.
I don’t because they’re not a very efficient investment for a swiss investor: high taxable yield and high TER. My own parameters also allow for bigger drawdowns, so I can afford a high stocks allocation, which is better mixed with higher quality bonds.
I’d consider junk bonds as behaving like a mix of stocks and bonds. There’s probably a tax premium somewhere in there because for many investors (at least US and Switzerland), the high coupons are taxed higher than capital gains would so I guess investors would want higher returns to compensate for that. I would consider them fine for an investor still wanting some level of returns with a lowish volatility.
They’re what came to my mind given the specific conditions of this poll and since a 100% allocation to them has historically been (since 1979) a bit too close to the 30% drawdown to my liking, I’ve tried to tame them a bit. Gold is in my usual trifecta of uncorrellated assets of stocks, investment grade bonds and gold so I’ve used it for that since stocklike and bondlike behavior was already kind of included into the mix.
I’m fairly confident it can hold up to the challenge.
Given the environment we currently are in - this is probably the only way how you could secure 6% (nominal, USD) with no more than 30% max draw down.
Coonsider that the fund selection was not ideal - there are both better Convertibles, AT1 and ILS Funds in the UCITS Area - but they can not be drawn into Portfolio Visualizer. Please don’t try this but if you do - you will need to replace a few of these funds with better alternatives. And if you did so - I would as well add 10% for Swiss Real Estate Shares, probably at the expense of 5% VT and 5% on the ILS one.
Slightly tweaked the asset allocation aka swapped the ILS fund to a product that was closer to what we as UCITS investors would buy.
Further, please find the rationale behind it below:
We want to maintain medium duration aka interest rate change (iquidity) sensitivity of 3-5 years. We further want to have a low dependency on economic growth / macro-economics (50% of the Portfolio is agnostic to economic growth or outlook).
Duration / Economic Growth
The challenge is truly the constraint of no more than 30% max draw down. Reason being is that I think that both the Corona Dip and the 2022 dip have shown us less than 50% of the loss potential we would face in a real, cyclic downwards market. Assuming we don‘t hit another 2007-2009 but just a normal market cycle low, I would have said that our max draw-down was the double from what we saw in the last few years. Hence, a max- draw down in thew last 10 years or so should be no more than roughly 15%.
You can as well take it this way that approx. 50% of the Portfolio was agnostic to Economy Growth or changes thereto, that Economic Growth had a pain potential of 60% and that the Portfolio was low Duration (aka no material duration risk on top). So unless Economic Growth Risks AND Duration Risks materialize together (aka 2022) and unless that happens in a major down-turn, we should not exceed the -30%.
From a performance point of view, a nominal view doesn’t make much sense but there, one could assume that the last 10 years were roughly representative of nominal returns (but I doubt that real returns going forward would be as high as they were the last 10 years).
Did I already mention that this is black magic and no-one should invest based on such a Portfolio? You better accept a higher max-draw-down and refer to more “traditional” asset classes that come with less long tail risk. Such asset allocation will give you a relatively smooth ride up (low downwards risk) until things go completely wrong and you experience larger risks than you could have ever imagined (but this probably only in 50 years - or already tomorrow). There is no free Lunch, if you want reduced down-wards risk, you take on loads of black swan (aka long tail) risks.
If you want, you can get a comparable return by investing into 82% Vanguard Balanced and 18% USD Cash. That demonstrates that Efficient Market Theory was still at the working and that the funds chosen were somewhat efficient - yet, such asset allocation just sounds less exciting and won’t make me look as brillant as the other one . Plus such simple Portfolio comes with a slightly higher Duration Risk (as it materialized in 2022).
Gold only works if you re-balance it systematically and at low cost. Personally, I learnt that I faily to re-balance gold in my personal portfolio. Physical gold comes with very high transaction cost and even on paper gold, my emotions often come in my way as you generally re-balance gold in times of distress. Hence loads of investor risk that you start to fiddle around with your asset allocation. Therefore, I only hold gold in my 3rd Pillar - where I have an automatic set and forget re-balancing logic at zero/no fees. There, Gold works for me.
The question however is if you trully need gold. My sample portfolio above serves a second purpose - I used very strange assets and essentially just equal weighted them, gold beeing part of them. The outcome pretty much matches a combination of Shares, Bonds and Money Market. So long story short: Efficient Market Hypothesis works - you can pretty much replicate any asset with a combination of most assets with a combination of Shares, Bonds and Money Market.
This implies that you can’t win much with gold - but you take on loads of idiosyncrotic risk related to it. Therefore, I even in my 3rd Pillar keep a very low exposure to Gold (2-4% max).