Read Mebane Faber‘s The Ivy Portfolio yesterday and found it to be very well written. For a book dealing with asset allocation and some statistics, it is a very easy read and avoids ever droning on like a college textbook. The premise of the book is twofold . First is that the majority of the incredible outperformance of the “super-endowments” (Harvard and Yale are the two examples in the book) over the past 23 years (over 15% / year compounded) is due more to their asset allocation than outperformance in any specific asset (though they have achieved this as well). The second is that individual investors would be well served to follow a similar asset allocation model and can enhance their performance using a simple market timing method outlined in Faber’s 2007 paper.
I found the approach to be well thought out and refreshing. Faber makes a very strong case for the significant inclusion of foreign equities (already common on most allocation models but in smaller percentages) as well as REITs (less common) and commodities (rare). The most illustrative chart on including all 5 of the suggested asset classes (US equities, foreign equities, bonds, commodities and reits) is on page 137 which along with the accompanying table shows how surprisingly close the total returns for each of those classes have been over the previous 25 years.
The second premise and the one that has gotten more attention on the web via Faber’s blog is the timing portion where an investor moves to cash when the price of the asset class crosses below its 10 month moving average and buys back in when it crosses above. Based on the data provided in the book and updated on the accompanying website, this method provides a safeguard against scenarios like 2008 where the correlation of the major asset classes went to 1 as the entire global financial markets melted down. This meltdown resulted in losses to the Harvard and Yale endowments of 25-40% while Faber’s timing model had a positive return of ~1%. Impressive performance for model that was public as of 2007 and can be duplicated for a fraction of the cost of the average mutual fund.
This book should be read by anyone who still believes the common axiom that the key to asset allocation is adjusting the % of stocks versus bonds based on your age.