Global Macro: In Case Your Time Horizon Is Not 45 Years

Cliff Asness recently posted an excellent review of Modern Portfolio Theory (MPT) that included some very interesting charts of the return and volatility of stocks, bond, and commodities from 1970-November 2014.  Over this 45-year period of time the efficient frontier of those three asset classes was as follows:


Probably, what most would expect.  Stocks had higher returns than bonds and commodities, with more volatility than bonds, but less volatility than commodities.  Nothing too shocking in that picture.  However, the fun really starts when you look at the efficient frontier in 5-year increments:










Pretty shocking, huh!  The long-term (45-year in this case) average returns and volatility of stocks, bonds, and commodities tell you very little about their return and volatility characteristics in any 5-year period.  Stay the course, focus on the long term, don’t sweat the small stuff, don’t make knee-jerk reactions…all those maxims aren’t going to work with your clients.  Those aren’t calming to a client, they are offensive!  Imagine saying that to a 65-year old investor who has just retired.  This investor sits down with you, their trusted financial advisor, and takes a look at their entire portfolio.  This is all they have.  This client is not planning on going back to work.  They have worked hard to amass this money and they need it to work for them for the next few decades of their life.  If their portfolio has a devastating 5 or 10 years this is not just an inconvenience for them, this will degrade their standard of living in a major way.

This is why we are big advocates of global tactical asset allocation.  Expand the investment universe to include not just U.S. Stocks, U.S. Bonds, and Commodities, but also Real Estate, International Equities, Currencies, and even Inverse Equities.  The table below shows just how flexible our Global Macro portfolio can be.  We believe that this type of flexibility is prudent given the significant variability on display in the above efficient frontiers.


To learn more about this relative strength-driven approach to global asset allocation, click here for a fact sheet.  This portfolio is available on the Masters and DMA platforms at Wells Fargo Advisors and on SMA platforms at many other firms.  The strategy is also available as The Arrow DWA Tactical Fund (DWTFX and DWAT).

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  See for more information.  Click here for disclosures.

One Response to Global Macro: In Case Your Time Horizon Is Not 45 Years

  1. […] looking at 50 years worth of data is one thing.  Having an appreciation for just how much variability there can be, decade to decade, in asset class returns, volatilities, and correlations ….  If asset classes go through bull and bear markets, and they do, will investors have enough […]