Meb Faber Ivy Portfolio

Meb Faber Ivy Portfolio (ETF, Video, Rules, Backtest, Investment Strategy)

Mebane T. Faber, along with Eric W. Richardson, is a co-founder of Cambria Investment Management and serves as the company’s Chief Investment Officer. In 2009, they released a book called “Ivy Portfolio,” which outlines their investment strategy. Let’s take a look at Meb Faber Ivy Portfolio.

The Ivy Portfolio is a globally diversified investment strategy that seeks to replicate the performance of a basket of endowments, such as those of Ivy League universities. The portfolio consists of a mix of stocks (60%), intermediate bonds (20%), and commodities (20%), with a focus on low-cost, passively managed index funds. The strategy uses a tactical asset allocation technique to adjust the portfolio’s allocations based on market conditions.

In this post, we answer some questions about the Meb Faber Ivy portfolio. We finish the article by doing a backtest of it.

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If you are looking for similar articles like the above from Meb Faber, we remind you that we have written many more investment strategies.

Meb Faber Ivy Portfolio

The Meb Faber Ivy Portfolio is an investment strategy developed by Mebane T. Faber and Eric W. Richardson, co-founders of Cambria Investment Management. The strategy is outlined in the book “Ivy Portfolio,” which was published in 2009.

The Ivy Portfolio is a globally diversified investment strategy that seeks to replicate the performance of a basket of endowments, such as those of Ivy League universities. The portfolio consists of a mix of stocks, bonds, and other investments, with a focus on low-cost, passively managed index funds.

Generally, the portfolio allocation is as follows with relevant ETFs in parentheses:

  • 20% Total Stock Market (VTI)
  • 20% International Stocks (VXUS, alternatively 10% EEM and 10% VEA)
  • 20% REITs (VNQ)
  • 20% Intermediate Bonds (IEI)
  • 20% Commodities (DBC)

The strategy also includes a tactical asset allocation component, which adjusts the portfolio’s allocations based on market conditions. The Meb Faber Ivy Portfolio strategy is designed to provide long-term growth while also limiting risk through diversification and tactical asset allocation. It’s created because endowments, such as those of Ivy League universities, have consistently outperformed the market over time due to their diversified portfolios and long-term investment horizon.

The Ivy Portfolio is a popular strategy among investors looking for a simple, low-cost, and diversified investment approach. However, it’s worth noting that past performance is no guarantee of future results, and investors should always conduct their own research and consult with a financial advisor before making any investment decisions.

Investment Strategies of Meb Faber’s Ivy Portfolio

The Meb Faber’s Ivy Portfolio aims to replicate the approach of endowments such as those of Ivy League universities. It’s composed of a mix of stocks, bonds, real estate, and commodities. The idea behind the strategy is to have a diverse mix of investments that will provide a balance of growth and income.

The strategy is also designed to have a low correlation with traditional stock and bond portfolios, which can help to reduce overall portfolio risk. The strategy is named after the Ivy League universities because these institutions are known for their long-term investment approach and for their ability to generate returns even in difficult market conditions.

Based on low turnover and global diversification, the strategy aims to reduce the risk of the portfolio and increase the chances of long-term positive returns.

Benefits of Investing in Meb Faber’s Ivy Portfolio

The benefits of investing in Meb Faber’s Ivy Portfolio include:

  • Diversification: The Ivy Portfolio strategy is designed to provide a balance of growth and income through a diverse mix of investments, including stocks, bonds, real estate, and commodities.
  • Low correlation: The portfolio has an estimated low correlation with traditional stock and bond portfolios, which can help to reduce overall portfolio risk.
  • Long-term investment approach: The strategy is named after the Ivy League universities because these institutions are known for their long-term investment approach and ability to generate returns even in difficult market conditions.
  • Global diversification: The strategy is based on low turnover and global diversification, to reduce the risk of the portfolio and increase the chances of long-term positive returns.
  • Low turnover: The strategy is based on low turnover, which means that it doesn’t frequently change the investments, reducing transaction costs and tax implications.
  • Potential for higher returns: By following the endowment-style investment approach, the Ivy Portfolio has the potential to generate higher returns over the long term.

Please note that past performance doesn’t guarantee future results. As with any investment, it’s essential to do your own research, and consult a financial advisor if necessary.

Pros and Cons of Meb Faber’s Ivy Portfolio

The pros of Meb Faber’s Ivy Portfolio:

  • It provides a balance of growth and income through a diverse mix of investments, including stocks, bonds, real estate, and commodities.
  • It has a low correlation with traditional stock and bond portfolios, which can help to reduce overall portfolio risk.
  • It uses the long-term investment approach and can generate returns even in difficult market conditions.
  • The strategy is based on low turnover and global diversification, to reduce the risk of the portfolio and increase the chances of long-term positive returns.
  • It has a low turnover, so it doesn’t frequently change the investments, reducing transaction costs and tax implications.
  • It has the potential to generate higher returns over the long term.

The cons of Meb Faber’s Ivy Portfolio:

  • Complexity: The Ivy Portfolio strategy can be somewhat complex to implement, and it may require a significant amount of research and monitoring to maintain the portfolio’s balance.
  • Lack of flexibility: The strategy is based on a fixed allocation of assets, which can limit the ability to adjust the portfolio in response to changing market conditions.
  • Risk: Despite its diversification, the portfolio still carries risk, as with any investment.
  • Cost: The portfolio may incur additional costs such as transaction costs, management fees, and taxes.

How to Use Meb Faber’s Ivy Portfolio

To use Meb Faber’s Ivy Portfolio strategy, you will need to allocate a portion of your investment portfolio to stocks, bonds, real estate, and commodities. The specific allocation of assets will vary depending on your risk tolerance, investment horizon, and personal financial goals. But generally, you allocate 20% to domestic stocks, 20% to international stocks, 20% to REITs, 20% to intermediate bonds, and 20% to commodities.

To reduce risk, the portfolio should be diversified across different sectors, countries, and asset classes. The Ivy Portfolio strategy is based on a long-term investment approach, meaning that you should be prepared to hold onto your investments for an extended period. It’s important to monitor and rebalance the portfolio regularly to ensure that it remains in line with your investment goals and risk tolerance.

It’s recommended to consult a financial advisor to make sure that this strategy is appropriate for your investment needs.

What is Meb Faber’s Ivy Portfolio?

Created by Meb Faber and his colleague, the Ivy Portfolio is a portfolio strategy that aims to replicate the investment approach of endowments such as those of Ivy League universities. The portfolio is composed of a mix of stocks, bonds, real estate, and commodities.

The specific allocation of assets can vary, but the idea is to have a diverse mix of investments that will provide a balance of growth and income. The strategy is also designed to have minimal correlation with traditional stock and bond portfolios, which can help to reduce overall portfolio risk.

The strategy is named after the Ivy League universities because these institutions are known for their long-term investment approach and for their ability to generate returns even in difficult market conditions.

Types of Investments in Meb Faber’s Ivy Portfolio

Meb Faber’s Ivy Portfolio strategy is composed of a diverse mix of investments, including stocks, bonds, real estate, and commodities.

  • Stocks: The portfolio would typically include a mix of domestic and international stocks across different sectors and market capitalizations, with a focus on value stocks.
  • Real estate: The portfolio would include investments in real estate in the form of REIT stocks, which can provide a combination of income and potential for capital appreciation.
  • Bonds: The portfolio includes a mix of high-quality bonds such as U.S. Treasury bonds, corporate bonds, and municipal bonds to provide a steady stream of income.
  • Commodities: The portfolio includes investments in commodities such as gold and other precious metals, which can act as a hedge against inflation and provide a diversification benefit.

Risk Factors of Meb Faber’s Ivy Portfolio

Meb Faber’s Ivy Portfolio strategy, like any other investment strategy, carries certain risks. Some of the risk factors to consider include:

  • Market risk: The portfolio is exposed to market risk, which means that the value of the portfolio can fluctuate due to changes in the overall stock and bond markets.
  • Interest rate risk: The portfolio carries interest rate risk, so the value of bond investments may decrease as interest rates rise.
  • Currency risk: The portfolio invests in international stocks, so it is exposed to currency risk, which means that the value of investments denominated in foreign currencies may fluctuate due to changes in exchange rates.
  • Real Estate market risk: The portfolio is exposed to the real estate market, which means that the value of the investments may fluctuate due to changes in the real estate market.
  • Commodity market risk: The portfolio is exposed to the commodity market, which means that the value of commodity investments may fluctuate due to changes in the commodity market.
  • Correlation risk: The portfolio aims to diversify into assets that might help reduce return correlations. However, correlation tends to increase during a crisis, and there is always the risk of historical returns not being reliable in predicting the future.

What Funds are Included in Meb Faber’s Ivy Portfolio?

The specific funds included in Meb Faber’s Ivy Portfolio strategy can vary depending on an individual’s investment goals, risk tolerance, and personal preference. Generally, it would include a mix of low-cost index funds or ETFs (Exchange-Traded Funds) to achieve the diversification, low turnover, and low-cost aspects of the strategy.

The portfolio would typically include the following:

  • A domestic stock index fund or ETF, such as the Vanguard Total Stock Market (VTI)
  • An international stock index fund or ETF, such as the Vanguard FTSE All-World ex-US (VEU)
  • A bond index fund or ETF, such as the Vanguard Total Bond Market (BND)
  • A real estate index fund or ETF, such as the Vanguard Real Estate (VNQ)
  • A commodity index fund or ETF, such as iShares S&P GSCI Commodity Indexed Trust (GSG)

How to Create a Meb Faber Ivy Portfolio

To create a Meb Faber Ivy Portfolio, you can follow these steps:

  • Determine your investment goals and risk tolerance.
  • Allocate a portion of your investment portfolio to stocks (both domestic and international stocks), bonds, real estate, and commodities based on your risk tolerance and investment horizon.
  • Select a mix of low-cost index funds or ETFs for each asset class.
  • Diversify the portfolio across different sectors, countries, and asset classes.
  • Monitor and rebalance the portfolio regularly to ensure that it remains in line with your investment goals and risk tolerance.

The specific allocation of assets can vary depending on your risk tolerance, investment horizon, and personal financial goals. However, it’s recommended to consult a financial advisor to make sure that this strategy is appropriate for your investment needs.

What are the Advantages of Investing in Meb Faber’s Ivy Portfolio?

The advantages of investing in Meb Faber’s Ivy Portfolio include:

  • Strategy diversification: It offers a balance of growth and income through a diverse mix of investments.
  • Global diversification: It provides global diversification, which can reduce the risk of the portfolio and increase the chances of long-term positive returns.
  • Non-correlation with the stock market: Its low correlation with traditional stock and bond portfolios can help to reduce overall portfolio risk. However, as we have seen in the past, correlations are not static, and intermarket correlations change constantly.
  • Long-term benefits: It is based on a long-term investment approach, which can generate returns even in challenging market conditions.
  • Low-cost approach: The strategy is based on low turnover, which reduces transaction costs and tax implications.

How Does Meb Faber’s Ivy Portfolio Work?

Meb Faber’s Ivy Portfolio works by allocating a portion of the investment portfolio to stocks, bonds, real estate, and commodities. The specific allocation of assets will vary depending on the investor’s risk tolerance, investment horizon, and personal financial goals.

However, the portfolio must be diversified across different sectors, countries, and asset classes, to reduce risk. It’s based on a long-term investment approach, meaning that the investments should be held for an extended period.

The portfolio is regularly monitored and rebalanced to ensure that it remains in line with the investor’s goals and risk tolerance. The easiest way to implement the strategy is by using low-cost index funds or ETFs, which can reduce costs.

Performance of Meb Faber’s Ivy Portfolio

Meb Faber’s Ivy Portfolio is based on the endowment-style investment approach, which has historically generated higher returns over the long term. The portfolio’s performance can vary depending on the specific asset allocation, funds, and market conditions. However, below is a table showing the simulated returns assuming no fees and rebalancing is done every January 1st:

Meb Faber Ivy Portfolio performance
Results above per December 2022.

Meb Faber Ivy Portfolio Backtest – Does It Work?

Let’s backtest the strategy to find its statistics and performance metrics. We make the following trading rules and settings:

Trading Rules

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The equity with daily rebalancing looks like this:

Meb Faber Ivy Portfolio backtest

The CAGR (annual returns) is 4.6%, and max drawdown was 45% (2008/09). Additionally, there are some switching/rebalancing costs (taxes?), but our results show the results don’t differ much whenever you do the rebalancing.

The returns each respective year in the backtest read like this:

Meb Faber Ivy Portfolio does it work

The performance is below the S&P 500, but that might not be the best benchmark. For example, the 60/40 strategy might be a better comparison.

The portfolio is dragged down by the abysmal performance of commodities (DBC). DBC had negative returns until a commodity bonanza happened in 2021/22. Also, IEI was not a safe haven in 2022.

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