Meb Faber’s Global Asset Allocation Portfolio

Meb Faber’s Global Asset Allocation Portfolio (ETFs, Backtest, Returns, Performance, Drawdowns and Analysis)

Today we will look at Meb Faber’s Global Asset Allocation portfolio from his book of the same name. The Global Asset Allocation portfolio is a passive investment strategy that aims to provide investors with a diversified exposure to global asset classes. In this article, we will explore the portfolio’s key features, performance, and assess whether it’s an effective investment strategy.

In the second half of the article, we present a similar portfolio by Faber called Global Market Portfolio. Both are pretty similar, thus we cover both in the same article.

Prior to 2000, the portfolio did a decent job of closely following stock returns while experiencing fewer drawdowns. Nonetheless, the portfolio’s performance has decreased somewhat since the turn of the century. Meb Faber’s book was published in 2013, and in this article, we backtest the performance since then.

What is Meb Faber’s Global Asset Allocation portfolio?

Meb Faber is a well-known author, podcaster, and co-founder of Cambria Investment Management, who wrote a book called “Global Asset Allocation” where he reviews over 10 famous portfolios and makes the claim that as long as you have a diversified portfolio, it doesn’t really matter what the mix or weighting is… they all end up returning about the same.

He also believes many investors suffer from “home country bias” and don’t invest outside their home country enough. He also reviews his own portfolio, called the “Global Asset Allocation portfolio,” a globally diverse mix of stocks, bonds, and real assets.

The Global Asset Allocation (GAA) portfolio is a simple yet effective investment strategy that aims to provide investors with a diversified exposure to global asset classes. The portfolio consists of a mix of stocks, bonds, real estate, and commodities. The strategy’s key idea is that by investing in a diversified set of asset classes, investors can capture the returns of the global market while minimizing the impact of individual asset class risk.

What investments are included in Meb Faber’s Global Asset Allocation portfolio?

The Global Asset Allocation portfolio comprises a mix of different asset classes, including stocks, government bonds, corporate bonds, commodities, and real estate. The specific allocation of these asset classes is based on the global market capitalization of each asset class. In other words, the portfolio invests more heavily in asset classes with larger market capitalization. Since it is hard to calculate the market capitalization of gold and commodities, Meb Faber ballparked a 5% allocation for each.

To implement this strategy, Faber recommends using a combination of low-cost index funds that provide exposure to the various asset classes. Specifically, he recommends investing in the following funds and allocations:

Asset classFund nameSymbolAllocation
US large cap stocksVanguard Large-CapVV18%
Foreign developed stocksVanguard FTSE Developed MarketsVEA13.5%
Foreign emerging market stocksiShares MSCI Emerging MarketsEEM4.5%
US corporate bondsiShares Investment Grade Corporate BondLQD19.8%
US long term bondsiShares 20+ Year Treasury BondTLT13.5%
Foreign bondsVanguard Total International BondBNDX14.4%
TIPSiShares TIPS BondTIP1.8%
REITsVanguard Real EstateVNQ4.5%
GoldSPDR Gold TrustGLD5%
CommoditiesiShares S&P GSCI Commodity Indexed TrustGSG5%

How does Meb Faber’s Global Asset Allocation portfolio work?

The Global Asset Allocation portfolio’s key idea is to provide investors with a diversified exposure to global asset classes, allowing them to capture the returns of the market while minimizing individual asset class risk.  The portfolio is then rebalanced monthly, quarterly, or annually to maintain the weightings. In this way,  investors get exposure to global financial markets without making individual security or market timing decisions.

What are the risks associated with Meb Faber’s Global Asset Allocation portfolio?

All investments come with risks and Meb Faber’s Global Asset Allocation portfolio is no exception. What’s interesting is that the investment choices are intended to provide performance even when one asset class is in crisis similar to risk parity portfolios like the permanent portfolio and the all-weather portfolio. Nevertheless, each investment in the portfolio is subject to some risk and the biggest risks to this portfolio are:

  • Commodity Investing Risk: Investing in commodity-related companies may subject the portfolio to greater volatility than investments in traditional securities. The commodities markets have experienced periods of extreme volatility. 
  • Currency Risk: Currency exchange rates may fluctuate significantly over short periods of time and can be unpredictably affected by political developments or government intervention. Changes in currency exchange rates may affect the U.S. Dollar value of the portfolio’s investments.
  • Foreign Investment Risk. Returns on investments in foreign securities could be more volatile than returns on investments in U.S. securities. Exposures to foreign securities entail other risks, mostly around different rules in different countries. 
  • Emerging Markets Risk: Emerging market investments are subject to the same risks as foreign investments and to additional risks due to greater political and economic uncertainties.
  • Equity Investing Risk. An investment in the portfolio involves risks similar to those of investing in any fund holding equity securities, such as market fluctuations, changes in interest rates and perceived trends in stock prices. 
  • Fixed Income Risk. A decline in an issuer’s credit rating and/or financial condition may cause such issuer’s fixed income securities to decrease in value while experiencing increased volatility and investment risk. The market value of a fixed income security generally changes in response to changes in interest rates and may change quickly and without warning in response to issuer defaults and changes in issuer credit ratings.
  • Interest Rate Risk. The market value of fixed income securities generally changes in response to changes in interest rates. As interest rates rise, the value of certain fixed income securities is likely to decrease. Risks associated with rising interest rates are heightened given the Federal Reserve’s recent increases in interest rates. The portfolio may be subject to significant losses to the extent that rates increase substantially and/or rapidly.
  • Real Estate Investments Risk. The portfolio is subject to the risks related to investments in real estate, including declines in the real estate market, decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems and natural disasters.

Performance of Meb Faber’s Global Asset Allocation portfolio – backtest

According to Faber’s research in his book “Global Asset Allocation”, the Global Asset Allocation portfolio has generated an average annual return of 9.90% from 1973 to 2013 with a max drawdown of -26.72%.

The returns are comparable to the returns of stock index returns but with half the drawdown. (Stock indexes had an average annual return of 10.21% with a max drawdown of -50.95% from 1973 to 2013).

We backtested this portfolio from 2000 to 2023 and observed somewhat different results. The annual returns were 5.92% and the max drawdown was -30.63%. We believe the difference is attributable to the huge bull run in bonds in the 80s and 90s, which are periods not covered by this backtest. 

The equity curve looks like this from the year 2000 until today:

Meb Faber's Global Asset Allocation portfolio
Meb Faber’s Global Asset Allocation portfolio

And the drawdowns from 2000 until today are like this:

Meb Faber drawdowns
Meb Faber drawdowns

Meb Faber’s Global Asset Allocation portfolio – Does it work?

The performance history of the Global Asset Allocation portfolio indicates that it is a successful investment strategy. When compared to a standard stock-bond portfolio, its worldwide diversification across asset classes has traditionally offered investors comparable returns with lower risk.

Also, many investors find it to be an appealing alternative because of its low cost and simplicity of implementation.

However, it’s important to note that past performance does not guarantee future performance. 

FAQ:

What is Meb Faber’s Global Asset Allocation portfolio?

Meb Faber’s Global Asset Allocation portfolio is a passive investment strategy designed to provide diversified exposure to global asset classes, including stocks, bonds, real estate, and commodities. Unlike traditional strategies, it aims to capture global market returns while minimizing individual asset class risk through worldwide diversification.

What are the key features of Meb Faber’s Global Asset Allocation portfolio?

The key features of MebFaber’s Global Asset Allocation Portfolio are a mix of stocks, bonds, real estate, and commodities, with allocations based on the global market capitalization of each asset class. This approach ensures that the portfolio is more heavily invested in asset classes with larger market capitalization, achieving diversification and reducing exposure to individual asset class risks.

How does Meb Faber’s Global Asset Allocation portfolio work, and what is the rebalancing strategy?

Meb Faber’s Global Asset Allocation portfolio aims to provide investors with a diversified exposure to global markets without requiring individual security or market timing decisions. It is rebalanced monthly, quarterly, or annually to maintain desired weightings. This ensures that investors capture global market returns while managing the impact of changing market conditions.

Meb Faber’s Global Market Portfolio: ETFs, Backtest, Performance, Returns, Drawdowns Analysis

Today we will look at a portfolio published by Meb Faber in his book Global Asset Allocation. The Global Market Portfolio is a passive investment strategy that aims to capture the returns of the global financial markets by investing in a diversified mix of asset classes. 

Before 2000, the portfolio did a good job matching the returns of stocks but with less drawdown. However, after the turn of the century, the portfolio has lost some of its velocity. 

Meb Faber’s Global Market Portfolio – Does it Work?

Meb Faber is a well-known author, podcaster, and co-founder of Cambria Investment Management, who has created an investment strategy that he calls the “Global Market Portfolio.”

This portfolio is designed to be a simple, low-cost, and globally diversified investment solution for individual investors. In this article, we will explore what Meb Faber’s Global Market Portfolio is, how it works, and whether it actually works.

What is Meb Faber’s Global Market Portfolio?

The Global Market Portfolio is a passive investment strategy that aims to capture the returns of the global financial markets by investing in a diversified mix of asset classes.

The idea behind this approach is that by investing in a broad range of assets, investors can reduce their exposure to an individual company and country risks and capture the returns of the global markets as a whole.

What types of investments are in Meb Faber’s Global Market Portfolio?

The Global Market Portfolio comprises a mix of asset classes, including stocks, government bonds, corporate bonds, and real estate.

The specific allocation of these asset classes is based on the global market capitalization of each asset class. In other words, the portfolio invests more heavily in asset classes that have a larger market capitalization.

What funds are included in Meb Faber’s Global Market Portfolio?

To implement this strategy, Faber recommends using a combination of low-cost index funds that provide exposure to the various asset classes.

Specifically, he recommends investing in the following funds and allocations (with examples of relevant/potential ETFs):

Asset classFund nameSymbolAllocation
US large-cap stocksVanguard Large-CapVV20%
Foreign developed stocksVanguard FTSE Developed MarketsVEA15%
Foreign emerging market stocksiShares MSCI Emerging MarketsEEM5%
US corporate bondsiShares Investment Grade Corporate BondLQD22%
US long-term bondsiShares 20+ Year Treasury BondTLT15%
Foreign bondsVanguard Total International BondBNDX16%
TIPSiShares TIPS BondTIP2%
REITsVanguard Real EstateVNQ5%

How does Meb Faber’s Global Market Portfolio work?

The Global Market Portfolio is a passive investment strategy that is designed to be low-cost and easy to implement.

The basic idea behind the strategy is to invest in a globally diversified mix of asset classes and to rebalance the portfolio periodically to maintain the desired asset allocation.

By doing so, investors can capture the returns of the global financial markets without making individual security or market timing decisions.

Performance of Meb Faber’s Global Market Portfolio

According to Faber’s research in his book Global Asset Allocation, the Global Market Portfolio has generated an average annual return of 9.90% from 1973 to 2013 with a max drawdown of -26.87%.

The returns are comparable to the stock index returns but with half the drawdown. (Stock indexes had an average annual return of 10.21% with a max drawdown of -50.95% from 1973 to 2013).

We backtested this portfolio from 2000 to 2023 and observed somewhat different results:

The annual returns were 5.86%, and the max drawdown was -30.70%. We believe the difference is attributable to the huge bull run in bonds in the 80s and 90s, which are periods not covered by this backtest.

The performance and equity performed like this from the year 2000 until today:

Meb Faber’s Global Market Portfolio
Meb Faber’s Global Market Portfolio

Meb Faber’s Global Market Portfolio – Does it work?

The Global Market Portfolio is a simple, low-cost, and globally diversified investment strategy that has the potential to deliver strong long-term returns.

However, like any investment strategy, it is not without its risks. For example, investing in emerging market stocks and bonds can be more volatile than investing in US stocks and bonds. Additionally, the portfolio’s heavy reliance on US stocks and bonds may not be appropriate for investors seeking more diversification.

Overall, investors looking for a low-cost, globally diversified, and “easy” investment approach may find success with the Global Market Portfolio. But, before investing in this, it is crucial to analyze your investment goals and time horizon carefully – not to mention your risk tolerance to avoid knee-jerk decisions like selling into a panic.

FAQ:

What is Meb Faber’s Global Market Portfolio, and how does it aim to capture global market returns?

Meb Faber’s Global Market Portfolio is a passive investment strategy designed to capture global market returns. It achieves this by investing in a diversified mix of asset classes, including stocks, bonds, and real estate. The goal is to reduce individual company and country risks while capturing the overall performance of global financial markets.

What types of investments are included in Meb Faber’s Global Market Portfolio?

The types of investments included in Meb Faber’s Global Market Portfolio are various asset classes such as US large-cap stocks, foreign developed stocks, emerging market stocks, corporate bonds, long-term bonds, foreign bonds, TIPS (Treasury Inflation-Protected Securities), and REITs (Real Estate Investment Trusts). Allocations are based on the global market capitalization of each asset class, ensuring a diversified and balanced approach.

How does Meb Faber’s Global Market Portfolio work, and why is it considered a low-cost investment strategy?

The Global Market Portfolio is a passive strategy that involves globally diversified investments and is a low-cost investment strategy because it uses low-cost index funds to represent various asset classes. The strategy aims to capture global market returns without making individual security or market timing decisions, making it cost-effective and easy to implement.

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