Signal2Noise (S2N) News
Posts
#33 S2N: The Classic 60 / 40 Portfolio

#33 S2N: The Classic 60 / 40 Portfolio

micksonmatch
April 03, 2024

In today’s issue:

The Classic 60 / 40 Portfolio
Tesla having a tough time
How is our cocoa short doing?

Today’s Spotlight

I had a lot on today, so I will keep this brief.

You have probably heard about the 60/40 portfolio, where you invest 60% in the stock market, say the SP500, and 40% in 10-year bonds. I am going to slowly introduce a few model portfolio’s over the coming weeks so you can get a feel for what is available without the costs that financial advisors charge.

If we look at the classic 60/40, how did it do over more than 100 years of history. Not many financial advisors will show you this kind of track record. I think having a long track record is vital for assessing a portfolio allocation strategy, as it covers many cycles.

There are a lot of cool stats in the table above. I have added a pretty cool stat where I adjust the returns for inflation. For the purposes of the point I want to make, yes, the SP500 (benchmark) produces more return than the classic 60 / 40 portfolio. However, 60/40 produces a much better risk-adjusted return. You can use the Sharpe Ratio to measure the comparison. 60/40 produces a Sharpe of 0.76 versus 0.46, which is very significant. Yes, the benchmark turns $100k into $2.5 billion versus $648 million, but look at the Max Drawdown: 83% versus 63%. I would take the 60/40 returns over just the SP500 without even blinking, even knowing that the benchmark makes more money.

If there is one thing I am going to keep repeating, it is how important it is to look at risk-adjusted returns. To quote my late father, “turnover is vanity, but profit is sanity.”

S2N Insights

Tesla having a tough time

There was a time when Tesla could never deliver on Elon’s promises, but its share price didn’t care. Then Tesla started increasing its production and delivered a profit. It made Musk the richest man in the world. Tesla has always traded at a silly valuation.

Delivery, according to its results yesterday, dropped. Some analysts are expecting there to be no growth in sales for the full year. Competition has arrived with a vengeance. You can see in the above chart that Tesla no longer fetches the premium it used to in the second-hand market. Tesla is also down over 30% this year. I wonder whether Musk can ride out a bear market without blowing up, hmmmmm?

How is our cocoa short doing?

My short call was when it was trading at $9600 a ton, it got over $10,000 but is now in profit. I think there is more still in this trade.