Is There Hope For A One Fund Portfolio?
Meb Faber retweeted advisor Rick Ferri who said "I'm really warming up to the idea of one fund and you're done for most individual investors. Owning one low-cost balanced index fund is simple, efficient, and effective. These funds may not have a perfect asset allocation or be super tax-efficient, but they solve the riddle." Meb retweeted as he likes the idea too, his firm, Cambria offers the Trinity ETF (TRTY) which seeks to offer an all in one solution. TRTY is a mix of equities, fixed income and alternatives including precious metals and managed futures. It's actively managed based on diversification and trend following. The trend following is interesting because the fund right now appears to be very light in equities.
According to a chart on ETF.com comparing the fund to an S&P 500 ETF it was flat for the first couple of months of 2020 while the S&P 500 ETF was up. It then went down less than the S&P 500, 20% per the chart versus 30% for the index and YTD it is down a little more than the S&P 500. I would describe the chart as showing a smoother ride to a similar return. For the last 12 months, ETF.com's chart shows TRTY down about 10% versus flat for the SPX. TRTY's inception date was in September 2018. It looks like it avoided the December 2018 but it has traded sideways, mostly missing the huge gains of 2019. Meb, if this makes your radar and I have it wrong, feel free to comment. If you want to learn more you can check out the fund's website.
The reason to explore TRTY a little bit, aside from be curious to learn about something new, is to give an example of how difficult it can be to find a fund that will offer reasonable equity market participation without just being an equity fund. The Vanguard Balanced Fund (VBIAX) is a five star fund with a roughly 60/40 equity fixed income split. At its low point during this crash it was down 22% from its peak compared to 33% or 34% for the S&P 500. The rest of the time it has offered reasonable equity market participation to the upside. In the context of a one portfolio portfolio if you had it all in one fund and it dropped 22%, would you panic and sell? That's not a gotcha question it's a you need to know yourself and what you can tolerate question.
The Amplify Black Swan ETF (SWAN) is a fund I'd written about a couple of times and was very wrong about. It owns a lot of treasuries and a few equity index call options in an attempt to offer muted downside and reasonable upside. It's low was a couple of days before the S&P 500. It was down about 10% versus 33-34% for the S&P 500. That's certainly promising in the context of this conversation. It also had reasonable upcapture in 2019. It will show a noticeable lag which happened in January of 2019 because it did not fall anywhere near as much as the broad market in December 2018 so it had nothing to snap back from in January 2019. I bought a few shares of this one in my HSA quite a few months ago. The risk here is that it owns some long dated treasuries. It could get caught wrong footed if interest rates ever go up. In terms of owning just one fund, maybe it will do well most of the time but one massive interest rate spike, even if it is tough to see from here, could undo a lot gains.
This exercise could be repeated for countless funds. They could function as one fund portfolio for the rest of your life but they will all have drawbacks. Even just buying a total market index fund, we're somewhere in the middle of one of those drawbacks now. The market went down a lot, has bounced back close to 50% and while no one knows what comes next we might want to be suspicious of that fast snapback.
The one fund concept is intriguing but I don't think it is ideal. It would be preferable to have smaller exposures to these various drawbacks than have your entire portfolio exposed to one drawback, especially if that drawback becomes ground zero for some sort of market-wide calamity.
One possible out here could be to have several years of cash set aside. Take a $1 million portfolio withdrawing 4% per year, it could set aside five years worth of cash or $200,000, leaving the other $800,000 in some sort of total market equity fund. Without trying to make a prediction, it is a reasonable bet that five years from now we will have recovered most, if not all, if not be far ahead of the previous high water mark. It hasn't even been a month and we've recovered half of what we dropped.
In that scenario, all you need to do is not panic sell. Simple but not easy.