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2014 Portfolio Review – What Strategies Worked & Didn’t Work

2014 is officially in the books. And while I don’t like to put too much emphasis on one year of performance, it’s always helpful to look at what has worked and what hasn’t worked. After all, if you want to know where we’re going it’s often helpful to know where we’ve been.  So let’s take a look at some of the more popular portfolio constructions and see how they did in 2014:

Global Financial Asset Portfolio (see construction here)

Total Return: 5.85%

Standard Deviation: 5.17

Sharpe Ratio: 1.8

S&P 500

Total Return: 13.46%

Standard Deviation: 11.53

Sharpe Ratio: 1.74


Total Return: -4.5%

Standard Deviation: 13.22

Sharpe Ratio: 0.53

MSCI Emerging Markets Index

Total Return: -2.2%

Standard Deviation: 15.3

Sharpe Ratio: 0.75

US Long-Term Government Bonds (TLT)

Total Return: 27.31%

Standard Deviation: 7.49

Sharpe Ratio: 2.93

Zero Coupon Bonds (EDV)

Total Return: 42.31%

Standard Deviation: 11.19

Sharpe Ratio: 2.99

Goldman Sachs Commodity Index

Total Return: -31.2%

Standard Deviation: 16.32

Sharpe Ratio: -1.14


Total Return: -3.75%

Standard Deviation: 14.16

Sharpe Ratio: -0.32


Total Return: -21.68%

Standard Deviation: 25.32

Sharpe Ratio: -0.96

The big winners were US stocks and bonds while the big losers were foreign stocks and commodities. As I’ve long expected, the “high inflation is coming” trade just continued to get clobbered in 2014. The Global Financial Asset Portfolio was a strong performer in general and beat most portfolios on a risk adjusted and nominal basis.

Let’s see how the so-called “passive indexing” strategies performed:

US 60/40 Stock/Bond Portfolio

Total Return: 10.48%

Standard Deviation: 6.79

Sharpe Ratio: 2.08

Global 60/40 Stock/Bond Portfolio

Total Return: 3.85%

Standard Deviation: 8.15

Sharpe Ratio: 1.24

Betterment 60/40 Portfolio (see here for construction)

Total Return: 6.48%

Standard Deviation: 7.4

Sharpe Ratio: 1.54

WealthFront Aggressive Portfolio (see here for construction)

Total Return: 4.83%

Standard Deviation: 11.73

Sharpe Ratio: 1.15

Boglehead 3 Fund Portfolio

Total Return: 6.91%

Standard Deviation: 7.21

Sharpe Ratio: 1.58

Those are some pretty surprising numbers. Given the returns of the GFAP these are not great risk adjusted figures with the exception of the US focused 60/40. Not surprisingly, the Robo Advisor portfolio actually result in portfolio degradation as I suspected they would when I first analyzed them earlier this year. They significantly underperformed a standard US 60/40 while taking more risk. I still fail to understand why anyone would pay 25 bps or more for these “passively” managed Robo portfolios especially given the obviously misleading claims that their portfolios generate an “estimated additional return” of 4.6% or so. They actually led to portfolio degradation of almost 4.6% in 2014.  In the case of Wealthfront’s most aggressive portfolio you actually took more risk than the S&P 500 and generated about 36% of the return. I can’t stress enough how bad that result is. The process by which many of the Robo Advisors construct their portfolios leaves much to be desired and the entire process appears to be hampered by Modern Portfolio Theory style thinking….The results speak for themselves.

The other big surprise to many people will be the global 60/40. At a time when 60/40 is growing in popularity it’s likely to experience serious headwinds going forward as I explained here.  60/40 just won’t generate the types of returns going forward that it has in the last 30 years. The math is pretty simple there.  Same basic story goes for the Boglehead 3 fund portfolio since it’s just a slightly altered version of what I used for the global 60/40.  And as I’ve shown before, even the most prominent “passive indexers” consistently underperform the GFAP in risk adjusted terms.  Their asset picking approach just isn’t that sophisticated, generally results in diworsification and, unfortunately,  it has been trumped up mostly by strawmanning stock picking closet indexing mutual funds. But at least it beats hedge fund investing where they charge you an arm and a leg for sub-optimal performance.

What about more strategically diversified portfolios?

Hedge Fund Replication HFRI Fund Weighted Composite Index (HDG)

Total Return: 2.05%

Standard Deviation: 4.2

Sharpe Ratio: 1.21

Harry Browne Permanent Portfolio 

Total Return: 9.58%

Standard Deviation: 5.31

Sharpe Ratio: 1.84

Salient Risk Parity 

Total Return: 13.99%

Standard Deviation: 17

Sharpe Ratio: 1.70

It was a pretty mixed bag for more active approaches. Closet index funds mostly underperformed (as we should all expect) and dynamic asset allocation approaches were more mixed with some beating the GFAP and others underperforming. Hedge funds did not come close to earning their fees which, like the Robo situation, leaves me wondering why people continue to pour money into so many of those strategies.

This was a pretty interesting year overall. Broadly diversified portfolios did okay if you followed the GFAP construction, but many of the most popular traditional approaches such as the Boglehead 3 fund, hedge funds and Robo Advisor portfolios underperformed.  If you didn’t have exposure to US assets you likely didn’t perform all that well. 2014 was a year where a more dynamic approach and some degree of specific asset picking was beneficial. Of course, if you’ve read my work on active vs passive investing you know that all of the portfolios above are “active” to some degree. Some of them are simply constructed more intelligently than others.  2015 will be no different and the investors who construct the best dynamic “asset picking” portfolios will again generate the best returns.  I still think the future of asset management is a battle over low fee dynamic asset allocation approaches. It’s the best of all worlds – low fee, diversified & dynamic asset allocation.

*This article was updated to account for changes in the GFAP calculation.