Strategic asset allocation – How you can beat the stock market

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I have said before that I am a huge fan of index funds as a method for simple investing for beginners and the advanced. But now I want to introduce you to simple strategic asset allocation. It’s a special technique where you get to have your burrito and eat it too. In finance terms, it’s great because it uses indexes to beat the market so it’s very easy.

Can you beat the market? In most cases no but I have a trick. As you might have realized I love index funds because they give great returns with almost no time investment (awesome!). Certainly better returns than most hedge funds and mutual funds because most mutual funds are bad. However, I discovered a loophole. You can actually beat the market while being lazy with index funds.

Sounds too good to be true? It should be. All you need is common sense and some basic knowledge of bond investing and how stocks vs bonds work. It won’t even hurt your liquid net worth (the real metric of financial stability) and a needed piece of your asset allocation in early retirement if you own real estate.

Today we will cover:

  • The general concept of simple strategic asset allocation
  • The basics of asset allocation
  • How it can help us
  • The small twist on normal advice
  • How useful simple strategic asset allocation is for retirement

Can you really beat the average?

Beating the stock market average with indexes sounds stupid if you think about it. Like something a strangely educated hobo might yell at you. It’s actually not stupid and it’s about risk management…not the sexiest topic but I’ll help you power through the dry bits to get to the benefits.

First, Index investing is great!

Once you understand it, you can implement simple strategic asset allocation and not only can you beat the market, you can do it with little effort. Actually, you can even take the easiness up a notch and do it with robo advisors.

Read about robo advisor performance here

That’s our goal here. Maximum financial gains with minimum time input.

Basing this technique on index finds means it takes very little time! And since indexes beat out other investments almost 100% of the time, you will be able to effortlessly beat almost every investment that is out there with minimal effort.

You just need to learn to not lose all the money you make. 

Building wealth is like raising kids. Just don’t lose them or let them get hurt. It will be fine!

TADA! Easy! 

If you managed to skip all the downturns in the stock market you make way more money! Let’s do a rough version of this.

Don’t lose your money

Obviously, you make more money by skipping out on market crashes. Maybe that sounds easy to you, maybe it sounds hard, but a lot of people try to do it. Unfortunately, they try too hard and screw everything up. The secret technique they don’t know is that minimal effort gives maximum benefit. 

OMG and when I discovered that it was music to my ears! *Angels singing*

You see, predicting whether the market will go up or down is basically impossible.

Many people have fancy methods to attempt it and they never really work out. If anyone could actually predict what was going to happen, the banks with their teams of economists wouldn’t lose money in a market crash. 

The banks do lose money. Therefore no one can predict downturns well.

saving money with friends - bank

So what are we going to do? More importantly, what are we going to do that is easy and won’t take up a lot of our precious time?

Basic Asset Allocation

The first step in learning our secret technique is to understand ‘asset allocation’, and the magic of asset allocation is that it can be very easy. 

How does it work you ask? You choose a certain mix to keep over the course of your lifetime, then as your investments go up and down in value you try to ensure that you always have that predetermined mix. The most normal mix is a 70%-30% split of stocks and bond index funds. 

You could mix whatever you want but the normal thing is stocks and bonds since they are both easy to buy in index form and act somewhat differently from one another.

This bond acts very differently than the rest of my portfolio

To many of you, mixing stocks and bonds might sound stupid. Just look at the chart below! Stocks are shown to give you way more payback than bonds even though they bounce around a lot, thus mixing in bonds decreases your returns. Booo?

Mixing in bonds actually results in you making less money and seems silly when you just look at averages (Market average = S&P500 100 year inflation-adjusted average of 7.4% growth, and US 10 yr treasury bond 100-year inflation-adjusted average of 1.8% growth)

So why would you purposefully mix in something that will hold you back? Is our simple strategic asset allocation off to a bad start?

Hell no, we are just getting warmed up.

Getting the mix right – art of making chunky peanut butter

The answer isn’t so obvious when you just look at the historical averages above but when you look at something bumpy like the real stock market we start to see a different kind of story.

Holding on to some bonds will smooth out the roller coaster that is the stock market. The big reason is that while bonds move around with stocks due to economics funny business, bonds don’t move around much.

Now if we have a more realistic market model that bounces around more you see what bonds do. The average growth is still the same as before but I tossed in a -30% year for stocks every 6 years.

So if you have a split of stocks and bonds you end up with a mix of bumpy and smooth stock market things. Like chunky peanut-butter…which is obviously better than smooth peanut butter.

So what does that actually get you? Bonds prices stay stable compared to stocks so when you own them your money won’t fluctuate as wildly as if you owned 100% stocks. When stocks go up you won’t gain quite so much, but you won’t get hurt quite so much when they go down either.

You will still make less money but your portfolio is less of a roller coaster along the way. While that may not seem particularly helpful, it should assist you in not freaking out at a bad time.

This is the first concept for our simple strategic asset allocation technique. We aren’t breaking into secret technique territory yet but oh boy is it coming. 

Just. You. Wait.

We are allowed to be a little bit smart

Here we go. Secret technique release!

Blamo! Ninja secret technique reveal

As a whole, I don’t think that anyone has the ability to predict anything in the market reliably but there is one thing that is possible to know. 

It is easy to know when values have dropped a lot and when things seem expensive.

When people try to be smarter than that is when they get into trouble.

After some big recession or stock market calamity like in 2009, stocks are low. Maybe you can’t tell when they are at their lowest but you can tell that they went down a bunch. 

Then on the flipside, we can tell when something seems ‘not low’. Lots of records being broken, people talking about crashes, whatever. Again, trying to judge how high stock prices seem, or when they will drop or how much that they will drop is basically impossible but judging that they are ‘not low’ is something we can handle. 

This is the secret technique! This twist sounds useless but it unlocks our simple strategic asset allocation.

The birth of simple strategic asset allocation

Now with this very minimal, very basic knowledge all we do is adjust our asset allocation. When things seem low, you go all-in on stocks. When things aren’t low anymore you split up your stocks to keep some of the magical smoothing agents that are bonds. 

It’s simple, that’s for sure. It’s strategic because we are planning it. We are messing with asset allocation. This creates a simple strategic asset allocation.

How to Save on Daycare Expenses - booyah
He’s excited! You should be too! This **** is great!

The beauty of this is that we don’t have to think very much or do much research to determine if things are ‘low’ or not. People will be squawking all over the news when markets are breaking new records or getting close to them, then conversely everyone will be talking about how bad things have gotten.

When you start hearing about that on the news – bing – change your ratios.

How is this different than all the other dummies trying to time the market?

When people try to time the market they go too far. When some guy decides the market is too high, he’ll move everything into bonds and wait for the crash.

If the crash doesn’t come they get screwed and miss out on years of growth. It sucks! Trust me I’ve done it!

We won’t do anything so extreme. We just hop back and forth between a super aggressive portfolio of 100% stocks to a more normal stock-bond split (70%-30% is normal if you need a reminder).

Sure it would be nice if we could time everything perfectly and go all out but we can’t, so don’t bother. Instead, we alternate from aggressive to normal. 

An aside for finance nerds
Strategic asset allocation is a special word referring to pre-planned asset allocations. Even though I’m messing with my allocations over time I say this wording counts because it is planned. If you don’t like it, too bad, I made it up so I get to make up the name 😛

The magic that this creates is that you don’t need to be accurate at all! Yay, no stressing about timing things right. That means: 

  • You don’t need to think about market economics which saves your brain space. 
  • Nor do you need to read about anything to try to get your spot on timing just right which saves time.
  • You’ll basically always be right which means you will make lots of money!

Even if you are off by a bunch of years it’s not a big deal since we aren’t going crazy and hiding our money under the mattress. This is an important nuance. We just want enough money in bonds to stop us from freaking out and to let us buy some super cheap stocks later on.

With this 70/30 split part of the time, we basically don’t need to time anything…not that we could… it’s impossible 😛

It’s easy to time our simple strategic asset allocation

The timing for this really is easy. If you consider that the stock market will blow up once every 6 years or so and you would have normally a 70/30 split then any time at 100% stocks while they are growing is better than not doing it. Just don’t get greedy. 

You were off by a few years? Who cares it’s all good as long as you went 100% for a while.

Above I just had 70/30 mix half the time and it did great. I’ll go through how I came to that mix in another ‘advanced asset allocation post’ but for now just trust it. 

This is the secret technique that is our simple strategic asset allocation. It’s easy and it works well but I haven’t shown why this is so important for us early retirees. 

Just how big of a deal is simple strategic asset allocation?

This probably sounds nice so far but this strategy is very key for my comrades on the FIRE escape. Our simple strategic asset allocation is very important for one big reason. 

Everyone who ever retires will go through downturns during retirement but since we are going to be retired for 60 years or so we will end up living off our retirement income through a whole whack of market crashes.

That means how we deal with money during those times is important and simple strategic asset allocation can come to the rescue.

Damn this gets good after a few recessions!

Look at that plot! We are going to be retired for a long time so getting this figured out will be very beneficial. It’s so easy it’s almost magic and so powerful it should be illegal. In the scenario I made above a 100% stock portfolio manages to not grow while pulling 4% out every year for living expenses

But with simple strategic asset allocation, our investment managed to grow almost 100% over those 30 years while we live off the income! 

That’s freaking amazing and this is how you easily beat the market average with indexes. 

One of those things where you quote yourself in your own article:
Everyone who ever retires will go through downturns during retirement but since we are going to be retired for 60 years or so we will end up living off our retirement income through a whole whack of market crashes. -Mr FireEscape

How do you implement this?

Easy! It’s a simple 5 step plan to implement this with your own investments.

  1. Assess whether the market is ‘low’ or not.
  2. If the market seems low put 100% of your money into a stock index. Otherwise, put 30% of your money into a bond index. 
  3. If you need to take out money, sell your bonds if your stocks aren’t worth much. 
  4. Once a year, assess whether the market is ‘low’ then buy and sell accordingly. 
  5. Bask in the simple glory of simple strategic asset allocation.

It’s easy so it takes no time. It’s effective so it helps you retire early. And it’s simple so you need to think hard or do any research. What’s not to love? 

Can you implement strategic asset allocation with SRI investing?

Of course you can! Participating in Socially Responsible Investing is actually very easy when you invest with index funds. Since you will be owning so few individual line items in your portfolio you can just invest in SRI ETFs instead.

TL;DR – Simple strategic asset allocation

  • A mix of stocks and bonds is usually recommended for your sanity
  • The most common mix is 70% stocks and 30% bonds – all in index funds
  • If the market is “low”, sell off your bonds and only own stocks. If the market is “high”, have a stock-bond mix. 
  • Rinse and repeat your checks once a year
  • Beat the market on every recession cycle
  • Celebrate (but frugally 😛 )

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2 thoughts on “Strategic asset allocation – How you can beat the stock market”

    • Oh that’s easy! There is a plot that covers it in the article!
      It has the caption: “With this 70/30 split part of the time, we basically don’t need to time anything…”
      Maybe I should go plug in a companion plot with real stock and bond market. Now where is that data *scrooge McDucks into reems of excel sheets*


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