Bernstein No Brainer Portfolio: Strategy and Backtest Analysis

William Bernstein is a former neurologist turned financial expert and writer. He believes, like many other successful investors, that index investing is better than selecting individual stocks and that how you allocate your assets is more crucial than choosing specific assets or timing your trades. He explains these concepts in depth in his debut book, “The Intelligent Asset Allocator.” Let’s take a look at Bernstein’s No Brainer Portfolio.

The “Bernstein No Brainer Portfolio” is an investment strategy created by William Bernstein that recommends allocating assets into a mix of low-cost index funds in specific ratios. It comprises 75% stocks split into equal parts of large-cap, small-cap, and international stocks, and 25% bonds. The portfolio is designed for individual investors who want a straightforward investment approach that can achieve long-term growth with a minimum of effort and stress.

In this post, we take a look at the Bernstein No-Brainer Portfolio. At the end of the article, we make a backtest to see how it has performed.

Bernstein No Brainer Portfolio: Overview

The “Bernstein No Brainer Portfolio” is an investment strategy created by William Bernstein, a retired neurologist, financial theorist, and prolific author. William Bernstein has written several books on finance and investing, including “The Intelligent Asset Allocator” and “The Four Pillars of Investing.” He is known for his advocacy of low-cost, evidence-based investing strategies for individual investors. He is also a founding partner of Efficient Frontier Advisors, an investment management firm.

He designed the Bernstein No Brainer Portfolio to provide a simple, low-maintenance approach to investing for individual investors who want to achieve long-term growth with minimal effort and stress. The portfolio is comprised of 75% stocks and 25% bonds. The stocks are split equally into three categories: large-cap, small-cap, and international stocks.

This diversified allocation of assets is designed to reduce the overall risk of the portfolio and increase the potential for growth. The bond portion of the portfolio is also diversified, with investment-grade bonds from both the U.S. Treasury and U.S. corporations. The bond allocation provides a stable source of income and helps to balance the ups and downs of the stock market.

The key to the “Bernstein No Brainer Portfolio” is simplicity and low cost. Instead of trying to pick individual stocks or time the market, the portfolio relies on low-cost index funds to achieve diversification and minimize expenses. This makes it a suitable strategy for individuals who don’t have the time or expertise to actively manage their investments.

Bernstein Portfolio Strategies

As a financial theorist and author, William Bernstein has developed several investment strategies over the course of his career. These strategies are based on his beliefs in the importance of evidence-based investing and the use of low-cost index funds to achieve diversification and minimize expenses.

One of his most well-known strategies is the “Bernstein No Brainer Portfolio,” which is a simplified approach to investing that relies on a mix of low-cost index funds. The portfolio is comprised of 75% stocks and 25% bonds, with the stocks split equally into three categories: large-cap, small-cap, and international stocks.

Another Bernstein method is “strategic asset allocation,” which is the process of determining the mix of assets in a portfolio to achieve the investor’s goals and risk tolerance. He emphasizes the importance of considering a portfolio’s overall asset allocation, rather than focusing on individual investments or trying to time the market.

In addition to these strategies, Bernstein has written extensively about the importance of diversification, low costs, and a long-term investment horizon. He has also discussed the risks and limitations of actively managed funds, as well as the benefits of passive investing through index funds.

Overall, William Bernstein’s portfolio strategies are based on his beliefs in the importance of evidence-based investing and the use of low-cost index funds to achieve diversification and minimize expenses.

Easy Investment Strategies with Bernstein

William Bernstein advocates for simple and evidence-based investment strategies that prioritize low costs and long-term investing. Some of his most popular and easy-to-follow investment strategies include:

• The Bernstein No Brainer Portfolio: This is a simple approach to investing that relies on a mix of low-cost index funds. The portfolio is comprised of 75% stocks and 25% bonds, with the stocks split equally into three categories: large-cap, small-cap, and international stocks.
• Strategic asset allocation: Bernstein emphasizes the importance of considering a portfolio’s overall asset allocation, rather than focusing on individual investments or trying to time the market. He advocates for a long-term investment horizon and a focus on low-cost index funds to achieve diversification and reduce overall risk.
• Diversification: Bernstein stresses the importance of diversification as a means of reducing risk in a portfolio. He suggests investing in a mix of stocks, bonds, and alternative investments to achieve diversification and reduce the impact of any one investment on the portfolio.
• Low costs investing: Bernstein is a strong proponent of low-cost index funds, as he believes that high fees can have a significant impact on an investor’s long-term returns. He suggests that investors focus on low-cost index funds rather than actively managed funds to keep costs down and maximize returns.

These investment strategies are designed to be easy to follow and implement while still providing investors with the diversification and low costs they need to achieve their long-term financial goals. However, it’s important to keep in mind that these strategies may not be suitable for all investors, so you should consider your investment goals and risk tolerance. Also, consider consulting a financial advisor before making any investment decisions.

Bernstein Portfolio Management

William Bernstein has developed several portfolio management strategies throughout his career. His strategies are based on his beliefs in the importance of evidence-based investing, the use of low-cost index funds, and a long-term investment horizon. Some of the key principles of Bernstein’s portfolio management approach include:

1. Strategic Asset Allocation — This refers to how capital is shared across different asset categories. Bernstein focuses on the portfolio’s overall asset allocation, rather than individual investments or trying to time the market. He emphasizes the importance of a long-term investment horizon and a focus on low-cost index funds to achieve diversification and reduce overall risk.
2. Diversification — Bernstein uses this as a means of reducing risk in a portfolio. He recommends investing in a mix of stocks, bonds, and alternative investments. He even suggests diversifying across regions to reduce the impact of any one investment on the portfolio.
3. Low Costs — Bernstein uses low-cost index funds rather than picking individual stocks to reduce costs. He believes that high fees can have a significant impact on an investor’s long-term returns. Thus, he advises investors to focus on low-cost index funds rather than actively managed funds to keep costs down and maximize returns.
4. Long-term Investment Horizon — Bernstein advocates for a long-term investment horizon, as he believes that short-term market fluctuations are not a reliable indicator of long-term performance. He suggests that investors maintain a long-term focus and resist the temptation to react to short-term market movements.

Bernstein Portfolio Investment Advice

As an investment expert, William Bernstein has provided a few pieces of investment advice to individual investors in his many books and papers on investing and portfolio management. His advice is based on evidence-based investing principles and a long-term investment horizon. Here are some of Bernstein’s investment advice:

• Use evidence-based investing approach: Bernstein believes in using empirical evidence and academic research to guide investment decisions. He suggests that investors rely on historical market data and academic research to make informed investment decisions, rather than relying on market predictions or subjective opinions.
• Diversify your portfolio: To reduce risk, he advocates for diversifying a portfolio by investing in a mix of stocks, bonds, and alternative investments, as well as
• Use index funds to reduce cost: Bernstein supports low-cost index funds over actively managed funds, as high fees can negatively impact long-term returns.
• Ensure strategic asset allocation: Bernstein emphasizes the importance of considering a portfolio’s overall asset allocation, rather than focusing on individual investments or trying to time the market. He suggests that investors develop a strategic asset allocation based on their goals, risk tolerance, and time horizon.
• Have a long-term perspective: He advises against reacting to short-term market movements and encourages a long-term focus on investments.

Low Risk Portfolio Strategies with Bernstein

William Bernstein’s low-risk portfolio strategies emphasize diversification, low costs, and a long-term investment horizon. He suggests investing in a mix of stocks, bonds, and alternative investments to reduce the impact of any one investment on the portfolio.

Bernstein recommends low-cost index funds instead of actively managed funds to minimize costs and maximize returns. He also advocates for a long-term investment focus, as short-term market fluctuations are not a reliable indicator of long-term performance.

His low-risk portfolio strategies are based on empirical evidence and academic research, which he believes should guide investment decisions. However, it’s important to keep in mind that these strategies may not be suitable for all investors, so you may have to consult a financial advisor before making any investment decisions.

Bernstein Investment Tips and Tricks

These are some of Bernstein’s investment tips and ticks

• Strategic asset allocation: The focus is on overall portfolio allocation instead of individual investments or market timing.
• Diversification: Investing in a mix of stocks, bonds, and alternative investments both locally and internationally to reduce risk.
• Cost-consciousness: Opting for low-cost index funds instead of actively managed funds to minimize costs and maximize returns.
• Long-term investment focus: Not reacting to short-term market movements and maintaining a long-term focus on investments.
• Evidence-based decisions: Making investment decisions based on historical market data and academic research instead of predictions or opinions.
• Risk tolerance: Considering personal risk tolerance when developing your investment strategy.
• Keeping emotions in check: This helps to avoid making investment decisions based on emotions and trying to react to short-term market fluctuations.

Bernstein Portfolio Strategies for Beginners

William Bernstein’s portfolio strategies for beginners emphasize simplicity, cost-effectiveness, and long-term thinking. He suggests starting with a basic portfolio that includes a mix of low-cost index funds covering large-cap stocks, small-cap stocks, international stocks, and bonds.

Over time, he recommends regularly monitoring and adjusting the portfolio to ensure that it aligns with your investment goals and risk tolerance. He also suggests avoiding market timing and focusing instead on strategic asset allocation and diversification.

Additionally, Bernstein emphasizes the importance of keeping investment costs low by making use of index funds, rather than individual stocks. Before making any investment decisions, it’s recommended to consult a financial advisor and ensure that the strategies align with your financial goals and risk tolerance.

Bernstein Portfolio Benefits

Some of the benefits of Bernstein’s portfolio include:

1. Diversifying the portfolio, which spreads out risks and helps to reduce the overall risk on the portfolio
2. Cost-saving through the use of low-cost index funds improves profitability and returns
3. Having a long-term focus, which offers greater returns
4. Using evidence-based investment decisions and only trying things that have been shown to work in the past
5. A very simple approach that any investor can implement, including beginner investors
6. Less frequent rebalancing, which helps to ensure tax efficiency and focus on long-term returns

Bernstein Portfolio Advantages

The advantages of a Bernstein portfolio include:

• Diversification: Diversification helps reduce risk by spreading investments across multiple asset classes.
• Cost-effectiveness: The use of low-cost index funds helps minimize investment costs and maximize returns.
• Long-term focus: The strategies promote a long-term investment focus, which allows investments to weather short-term market fluctuations and increases the likelihood of long-term success.
• Evidence-based decisions: The strategies are based on historical market data and academic research, providing a solid foundation for investment decisions.
• Simplicity: The strategies are designed to be straightforward, making them accessible to beginner investors.

How Can I Maximize Returns with the Bernstein No Brainer Portfolio?

To maximize returns with the Bernstein No Brainer Portfolio, follow these steps:

• Stick to the 75/25 asset allocation: The 75% stocks and 25% bonds allocation has been shown to be a successful formula over time.
• Use low-cost index funds: This helps minimize costs and maximizes returns.
• Adopt a long-term perspective: The portfolio is designed for a long-term investment horizon, so remain focused on the long term and avoid trying to time the market.
• Rebalance regularly: Regular monitoring and rebalancing help ensure that the portfolio stays aligned with investment goals.
• Avoid making impulsive decisions: Stick to the strategies and resist the urge to make impulsive decisions based on short-term market fluctuations.
• Seek professional advice: You may consult a financial advisor to help personalize the portfolio to meet your specific financial needs and risk tolerance.

What Kind of Assets Does the Bernstein Portfolio Invest In?

The Bernstein Portfolio invests in a combination of stocks and bonds. The portfolio is divided into three parts, and you will find suggested ETFs in parentheses:

• 25% in large-cap U.S. stocks (SPY)
• 25% in small-cap U.S. stocks (IJR)
• 25% in international stocks (VEU)
• 25% in U.S. bonds (SHY, IEI, or TLT)

Bernstein didn’t specifically mention the duration of the bonds. Above, we listed three tickers with all varying lengths until maturity.

The use of low-cost index funds is recommended to minimize costs and maximize returns. This asset allocation is designed to balance risk and reward and is intended to be a long-term investment strategy. By investing in various assets, the portfolio aims to reduce risk and increase diversification, which can help ensure success over time.

What Is the Optimal Asset Allocation for the Bernstein Portfolio?

The optimal asset allocation for the Bernstein Portfolio is 75% stocks and 25% bonds using the relevant ETFs or index funds. It can be achieved as follows:

• Invest 25% in large-cap U.S. stocks using the Vanguard Large-Cap ETF (VV).
• Invest 25% in small-cap U.S. stocks using the iShares Core S&P Small-Cap ETF (IJR)
• 25% in international stocks using the Vanguard FTSE All-World ex-US ETF (VEU)
• 25% in short-term U.S. bonds using the iShares 1-3 Year Treasury Bond ETF (SHY)

This allocation has been shown to be a successful formula over time and is designed to provide a balance of risk and reward for long-term investing. The use of low-cost index funds is recommended to minimize costs and maximize returns.

What Are the Risks Associated with the Bernstein Portfolio?

Some of the risks associated with the Bernstein portfolio include:

• Market risk: The portfolio invests in stocks and bonds, both of which are subject to market fluctuations.
• Currency risk: Investing in international stocks can expose the portfolio to currency fluctuations.
• Interest rate risk: Investing in bonds can be subject to interest rate risk.
• Management risk: The portfolio’s success depends on the management of the assets within the portfolio.

Bernstein No Brainer Portfolio Backtest – Performance and investment results

Let’s backtest the portfolio. We make three different backtests with the following allocations:

• 25% in large-cap U.S. stocks (SPY)
• 25% in small-cap U.S. stocks (IJR)
• 25% in international stocks (VEU)
• 25% in U.S. bonds (SHY, IEI, or TLT)

It’s three backtests because we use three different ETFs for bonds (the equity ETFs are used in all three backtests).

The first backtest uses SHY as a proxy for bonds and gets the following equity curve compared to S&P 500 buy and hold (SPY):

The result is significantly worse than S&P 500, mostly due to lagging international stocks and the bond component. CAGR for the portfolio is 5.6%. Max drawdown is 45% compared to 55% for S&P 500.

Let’s go to our second backtest: we include IEI instead of SHY:

Compared to SHY, the annual return increases to 5.9% – as expected because of the longer duration bonds and higher returns. Max drawdown is 45% compared to 55% for S&P 500.

Our final backtest of the day is with TLT as the bond component:

TLT, which has 20 years until maturity, performed the best: 6.56% annual return. Max drawdown is 44% compared to 55% for S&P 500.

Let’s now compare all three different backtests:

Bernstein No Brainer Portfolio – conclusion

Asset allocation is mainly a task of trade-offs and diversification. Diversification is your only true Holy Grail, and you better use it. However, Bernstein No Brainer Portfolio is not genuinely diversified except for bonds, in our opinion. The bond component lowers drawdowns, but not a whole lot.

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FAQ:

What are the key features of the Bernstein No Brainer Portfolio?

The Bernstein No Brainer Portfolio is an investment strategy created by William Bernstein. It recommends allocating assets into a mix of low-cost index funds in specific ratios. The portfolio comprises 75% stocks (large-cap, small-cap, international) and 25% bonds. It aims for long-term growth with minimal effort and stress, emphasizing simplicity and low cost through the use of low-cost index funds.

How does the Bernstein No Brainer Portfolio manage risk?

William Bernstein has developed various investment strategies, including “strategic asset allocation,” which focuses on overall portfolio allocation, and he advocates for diversification, low-cost investing, and a long-term investment horizon. The portfolio manages risk through diversification, spreading investments across different asset classes (stocks and bonds), and using a mix of large-cap, small-cap, and international stocks.

How can I maximize returns with the Bernstein No Brainer Portfolio?

Bernstein believes in minimizing costs to maximize returns. He recommends low-cost index funds over actively managed funds, as high fees can significantly impact long-term returns. To maximize returns, stick to the 75/25 asset allocation, use low-cost index funds, adopt a long-term perspective, rebalance regularly, and avoid impulsive decisions based on short-term market fluctuations.