The ‘Holy Grail’ Q&A: Answering Your Most Important Questions on the All Seasons Portfolio

May 14, 2021

Over the past several weeks, I’ve shared a simple yet powerful approach to investing that just about anyone can follow.

I’ve shown you how this “Holy Grail” portfolio — based on legendary billionaire Ray Dalio’s “All Seasons” approach — can help you to earn solid, long-term returns in any market environment. And how it can do so without the stomach-churning volatility of most traditional portfolios.

Thank you to everyone who shared feedback along the way. I’m thrilled that so many Money Talks readers found these ideas valuable.

However, I received a ton of great questions, too. So today, we’re wrapping this series up with a special All Seasons Q&A. Read on for the answers to some of your best questions from the past several weeks…

Q: “Hey Keith, thank you for sharing this information [on the All Seasons portfolio]. I have a general question regarding mutual fund investing.

“What is the optimum number of mutual funds that should be in a portfolio? I see accounts where portfolio managers have as many as 20 funds, many of which contain similar stock investments.

How do you get truly diversified and what is recommended for the optimum number of mutual funds in a portfolio?”  Money Talks reader Larry H.

Keith’s reply: Thanks for the question, Larry.

As I’ve explained in previous editions of Money Talks, I am NOT a fan of most mutual funds.

The vast majority underperform the market, and most charge ridiculous fees for that underperformance. And as you mentioned, many supposedly “diversified” funds today have huge positions in the same relatively small number of stocks.

In my opinion, the “optimal” number of mutual funds to own in a portfolio is zero (or as close to zero as possible). Holding a basket of mutual funds — particularly stock mutual funds — is usually a terrible idea. You’re almost always better off owning a diversified portfolio of high-quality individual stocks when possible.

That said, there are some potential exceptions.

For one, mutual funds can be a good way to own “generic” assets like Treasury bonds or commodities without the hassle of buying them directly. That’s why I chose them for both the “buy-and-hold” and TradeSmith versions of the All Seasons portfolio I shared in this series. You just want to be sure to choose those with low fees.

Second, I know many folks are more or less stuck with mutual funds in their 401(k)s and retirement accounts. In that case, I would urge you to follow a truly diversified, low-cost approach like the “buy-and-hold” All Seasons portfolio I shared in the April 23 edition of Money Talks.

As I hope I’ve shown you over the past several weeks, this approach can help you avoid most of the usual drawbacks of mutual fund investing.

Q: “I am still in the process of setting up the portfolio… I do have one question: What about the ETFs (VGLT and IAU) in the ‘RED ZONE’? I am pretty certain that others have this same question… [Does an ETF] being in the RED mean that [it] is not recommended to buy at this time?” — Money Talks reader David S.

Keith’s reply: Thanks for the question, David. The answer will largely depend on which version of the All Seasons you’re following.

If you’re following the “buy-and-hold” version of the All Seasons portfolio, then you would buy each of the ETFs or mutual funds in the recommended percentages regardless of their Health status in our system.

However, if you’re a TradeSmith subscriber and interested in maximizing your risk-adjusted returns, I would encourage you to follow the “TradeSmith All Seasons” approach I explained last week. With this approach, you would only buy the positions that are in the Green Zone, while leaving the initial portfolio allocations for any Yellow or Red positions in cash.

If you missed it, be sure to review last week’s May 7 edition of Money Talks, where I covered this in detail.

Q: “I am reading your All Seasons Portfolio series of emails with a great deal of interest — I think that it is an absolutely fantastic set of timely and sage investment advice, and I would like to thank you for your efforts in bringing it to us, your humble subscribers.

“I have a question for you, and this relates really to some of your subscribers (like me) who are not U.S. citizens or U.S.-based investors.

“I currently live in the U.K., and as a result, it seems that I am unable to purchase U.S.-based stock funds — this is a relatively new phenomenon as I understand because I have been able to in the past. I believe that it is something to do with the new MIFID II [Markets in Financial Instruments Directive] rules that the European Union has brought in on this side of the Pond. Do you know of fund alternatives from your ETF list that are available to U.K.-based investors?” — Money Talks reader Andrew L.

Keith’s reply: Thanks for the kind words, Andrew. I’m thrilled to hear this series was helpful for you.

I’m certainly not an expert on the subject, but there doesn’t appear to be as many good fund and ETF options in the U.K. as there are here in the U.S.

However, Vanguard — the low-cost provider of several of the funds and ETFs we used in the All Seasons portfolio — does have a decent selection of U.K.-specific funds. This list includes low-cost domestic and international equities funds, as well as a low-cost U.S. Treasury bond fund.

You can take a look at the complete list of Vanguard’s U.K. funds on its website here.

Gold-investment firm BullionVault has also compiled a list of U.K.-specific gold ETFs (with their respective fees) you can access here.

(Note: Neither TradeSmith nor I have any affiliation with either of these companies. Please be sure to do your own research.)

Unfortunately, I’m not aware of any low-cost, broad commodity funds or ETFs for U.K. investors.

Q: Keith, the All Seasons portfolio has certainly done well in the past. But I wonder how well it will do in the future. The biggest difference I see between the past and the future is the trend of bond prices. I notice that the All Seasons portfolio is 55% bonds.

“For the past 40-plus years, interest rates have trended down. That guaranteed prices trending up. But now, interest rates are near all-time lows and can only go up from here. So, bond prices will most likely trend down.

“Thus, bonds will no longer provide the cushion they have in the past.” — Money Talks reader Bob B.

Keith’s reply: Hi Bob, you’re right. As I mentioned last week, bonds are unlikely to continue their impressive performance of the past 40 years. That is why I reduced the overall bond exposure in our “upgraded” TradeSmith version of the portfolio.

But I didn’t remove bonds entirely for a couple of reasons.

First, the goal of the All Seasons portfolio is to protect and grow your capital in any market environment. And while I believe it’s unlikely bonds will continue to do as well in the years ahead, I can’t predict the future.

For example, the Federal Reserve may implement a new policy called “yield curve control.” Yield curve control is essentially a form of quantitative easing (QE) where the central bank promises to buy as many bonds as necessary to keep long-term rates below a specific level.

(Remember, bond prices and interest rates — or “yields” — move inversely. Higher bond prices equate to lower rates, and vice versa.)

Under yield curve control, bond prices wouldn’t necessarily move significantly higher, but they wouldn’t move significantly lower either.

The Fed could also decide to try negative interest-rate policy (NIRP) at some point as well. In this case, bond prices could move significantly higher as rates fall below zero. Bond prices have soared in Europe and Japan over the past couple of years as their central banks embraced NIRP.

NIRP tends to have some nasty side effects on the banking system, so I don’t expect the Fed will use it. But they could. So, I think it still makes sense to keep bonds in this portfolio.

Second, and more importantly, because this portfolio uses our TradeSmith Health Indicator system, it will only own bonds when and if they’re in a healthy state.

Q: “Keith, in the All Seasons Portfolio, why would you hold 51.3% cash from the proceeds of [the long-term bond fund (VGLT)] and [gold (IAU)] — both currently in the Red Zone — when you could put that money to work for you in the remaining stocks by increasing each position by that 51.3%?

“Personally, I would likely hold 11.3% in cash (from the IAU proceeds) as IAU is likely to get back in the Green Zone soon. I don’t see how VGLT would get back to the Green Zone for years to come… and, therefore, would put that money to grow the portfolio.

“As you mentioned in your article, ‘there’s no question [long-term bonds have] benefited tremendously from the relentless decline in interest rates over the past 40 years,’ but I believe that long-term bonds will definitely underperform for years to come. Why have your portfolio underperform in the meantime?…

“As a matter of fact, I intend to implement your All Seasons portfolio and add that 40% to the rest of the portfolio and hold no bonds at all in the future. Thank you for your article.” — Money Talks reader Gil M.

Keith’s reply: Thank you for the note, Gil. Your question raises a few important points.

First, as I just explained, the long bull market in bonds may not be over just yet. And even if the long-term trend in bond prices has now turned down, bonds could still play an essential role as a “safe haven” asset when the next bear market in stocks inevitably arrives.

For those reasons, I believe it still makes sense to allocate a percentage of your overall portfolio to bonds. But again, with our TradeSmith Health Indicator system, you’d only own those bonds when they’re performing well. You’d simply hold cash when they’re not.

So, why not put that cash into our healthy stocks instead? Because the goal of the All Seasons portfolio is to produce market-beating returns over the long run while also avoiding the high volatility common to most traditional portfolios.

Sure, putting that extra 50% of the portfolio in stocks would likely produce better returns over the remainder of this bull market. But it would likely result in more significant drawdowns when the next bear market arrives, as well.

It’s just simple math. The average Volatility Quotient of the individual stocks in the TradeSmith All Seasons portfolio is around 20%, versus approximately 10% for long-term bonds and essentially 0% for cash.

But the beauty of our TradeSmith tools is that they allow any investor to customize any portfolio to suit their preferences. So, if you’re comfortable taking more risk, feel free to allocate more of the portfolio to stocks and less to bonds.

Q: “Keith, I became a lifetime subscriber a while back and enjoy your notes and messages that keep me grounded and aware of the market conditions. Thank you for offering the latest All Seasons portfolio.

“How will this portfolio stack up to [one of your affiliate publisher’s newsletter portfolios]? There is so much more for me to learn… I love investing and want to make it profitable with reasonable risk. Thank you for your insight and explanations.” — Money Talks reader Andy W.

Keith’s reply: Thank you, Andy. And welcome to the TradeSmith family!

I can’t speak to the specific performance of other publishers’ portfolios. However, I am familiar with the portfolio you mention. It holds primarily high-growth stocks that have traditionally done well in the final stages of a bull market.

As a result, I would expect it to produce significantly higher returns than the All Seasons portfolio over the remainder of this bull market, but with substantially higher volatility as well.

Again, as I mentioned to Gil, which one you choose will depend on your circumstances and risk tolerance. But it doesn’t have to be an “either-or” decision. For example, you could devote the bulk of your capital to a low-risk strategy like the All Seasons portfolio, while putting smaller amounts in more aggressive investments like the portfolio you mentioned.

I hope today’s Q&A was helpful. As always, I’d love to hear what you think at [email protected]. I can’t personally respond to every letter, but I read them all.