EnoughWealth commented on my recent post on our target allocation:
"Have you tried benchmarking your actual and target asset allocation
performance against something a lot simpler - like a basic Bond:Shares
allocation with similar risk level, with appropriate split of AU vs
Global within each and a basic index fund proxy for each? I just suspect
you may not be adding a lot of performance by the degree of complexity
and number of individual holdings. I did a quick comparison of your NW
monthly figures to mine (after converting my figures using the relevant
monthly avg AUD:USD exchange rate), and aside from the jump in my nW in
Feb '23 when I updated my estimated valuations for non-home real estate
values, the monthly and three year trend is visually almost identical --
if anything yours seem to have more volatility than mine. Since most of
the individual investments in your portfolio have internal
diversification, I'm not sure your role as an active fund manager of
your own investment portfolio is actually adding much 'alpha' ;) Then
again, your spare time is 'free' so at least you aren't charging
yourself a fee as fund manager (on top of whatever fees are embedded in
some of those funds you've chosen)."
My response was that I had a beta of less than one to the ASX 200 and had positive alpha... But I have now done an analysis that I think is close to what EnoughWealth is suggesting here. I picked the Vanguard managed ETF VDBA.AX, which is diversified across Australian and global stocks and bonds. So, this is a potential alternative to our current investments. It is 50/50 stocks and bonds, whereas I am targeting 60% equities. But we could lever it up a little bit if we wanted.
Vanguard nicely provide all the data needed. Most of the work is in
calculating dividend reinvestment. I assumed dividends were reinvested
on the ex-date increasing the number of shares. Then I multiplied the
daily price by number of shares to get the total value. I carried out my
analysis using month end values since inception of VDBA.
The results might surprise Bogleheads :)
First, here is how $1000 would have evolved if invested either with me or in VDBA since the end of November 2017:
Put another way, the average annual return over this period was 5.06% for VDBA and 8.65% for Moom.
Is this because VDBA is a bit more conservative? As you can see from the graph, volatility is about the same for the two investments. Formally, the monthly standard deviation of returns for VDBA is 2.32%, while it is 2.28% for Moom. So, it's not because of that.
So, I also did a CAPM style analysis using the RBA cash rate as the risk free rate and treating VDBA as the index. Moom has a 0.88 beta to VDBA and an annual alpha of 3.33%. 1% of extra return on a $5 million portfolio is $50,000...
In conclusion, the additional diversification in our portfolio really does add value.