a native diversification strategy for those who do not know what the future holds (which means all of us). A 50% bonds/50% equities split would have worked well over the last 20 years, but would have been disastrous in the stagflationary 1970s. So he suggests a four way split – 25% equities, 25% government bonds, 25% cash and 25% gold.
The annual return from this strategy would have been highly respectable – 5% real since 1971, compared with 5.5% in equities and 4% in government bonds. But the volatility is much lower – the maximum drawdown was 20% in the early equities, compared with 50% (twice) for equities and 40% for government bonds. Investors would have found it easier to sleep at night.
similar naive strategy, involving just equities, bonds and cash; one took the expected return from the three asset classes and dividend the portfolio accordingly. The expected return on bonds and cash is the current yield; the expected return on equities was the dividend yield plus nominal GDP growth. So if cash yielded 4%, bonds 5%, equities 3% (with nominal GDP growing at 4%), expected returns were 4/5/7. The three returns added up to 16, so one put 4/16 in cash, 5/16 in bonds and 7/16 in equities. The beauty of this system is that it made you rebalance when asset classes looked expensive; at the time (back in 2005), it also had a record of low volatility.