When it comes to retirement income, the kind of investment portfolio you focus on makes all the difference. Not surprisingly, financial experts disagree sharply on which kinds of portfolios are the best. Some insist on mutual funds, because of the long-term returns they bring. Others say annuities are better because they are not susceptible – for the most part – to market volatility.
What if you could find a portfolio that not only did not crash when the stock market did, but also gave a return higher than that of the S&P long-term average of twelve percent (not to mention several times higher than an annuity brings today)? Sound impossible?
I’m talking about the Ivy Timing Portfolio. During the period between 1984 to 2008 (before the crash), the average return was 15%.
Yes, you read that correctly.
And over the forty years prior to 2008, the average return was around 10%, still a little higher than the S&P 500 during the same time frame. This portfolio is so named because it consists of the same funds that all the Ivy League universities use to earn extra money. Let’s look at it a little more in depth.
What the Ivy Portfolio consists of
The Ivy Portfolio is truly diversified, unlike mutual funds. I summarize the basics in my book Hatching The Nest Egg: Achieve Super-Early Retirement Without Side-Gigs, Gambling, Or An Above-Average Income. In this post, I want to provide a little more detail.
The most basic Ivy Portfolio looks like this:
- 20% U.S. stocks,
- 20% in foreign stocks,
- 20% bonds,
- 20% Real Estate Investment Trusts,
- 20% commodities.
You can diversify even further, using ten different funds and putting 10% of your assets in each fund. That would like something like this:
- 10% domestic large cap fund,
- 10% domestic small cap fund,
- 10% foreign developed stocks,
- 10% foreign emerging stocks,
- 10% domestic bonds,
- 10% TIPS (treasury inflation-protected securities),
- 10% Real Estate,
- 10% foreign Real Estate,
- 10% commodities (fund A), and
- 10% commodities (fund B).
You can also break it down further by having five percent of your assets in each of twenty classes, or – if you want to really “geek out” – you can have one percent of your assets in each of 100 classes!
But you don’t want to get less diversified than the basic five-class-twenty-percent model. Also, experts in this portfolio recommend using index funds for two reasons. First, they tend to perform better than the stock market as a whole. Second, the fees connected to them are much lower than with other types of funds.
That said, one can use mutual funds just as well as any other kind of fund. Just be aware that you will lose more money in loads and fees should you choose to go that route.
Unlike stocks, bonds, and REITs, TIPS serve as a cushion against inflation because the principal amount is adjusted upward every six months based on changes in the consumer price index. So if you have more than five asset classes in your portfolio, the Ivy experts recommend that you include it.
Like TIPS, commodities serve as protection against inflation much better than the traditional – and more commonly known – asset classes. Because commodities are real products, they benefit from higher prices during inflationary periods.
How does it perform?
In the stock market crash of 2008, mutual fund investors lost over 30% of their asset value.
Ivy Timing investors lost…less than one percent.
Why? True diversification! However, there is more to this investment portfolio than diversification. If you want to get the maximum return, you need to balance it regularly.
Balancing the Ivy
Because most of the classes in the portfolio shift in value with some frequency, anyone wishing to use this strategy needs to be willing to balance the portfolio once a month. Besides the time it takes to do this, the big disadvantage is that every time you move assets around, you have to pay a fee. But the high returns more than make up those selling fees.
Of course, you are free to reduce the number of times that you rebalance; however, there is a chance that you will likely not get quite as high a return as mentioned earlier.
Summing it all up
When you’re working on your retirement planning, remember that this is your money, your future that we are talking about. You do not need a financial planner to start investing in the Ivy Portfolio, you just need the book by that name: The Ivy Portfolio: How To Invest Like The Top Endowments and Avoid Bear Markets by Mebane T. Faber and Eric W. Richardson. The book contains many charts and graphs, much more detailed information, and even specific fund names to start with.
Does the concept of a safe, truly diversified portfolio appeal to you…but you don’t want to have to keep such careful track of your assets? Be sure to read Part Two of this two-part series (coming up next Monday).