Founders Perspctive

Explore: Wealth Planning Founder’s Perspectives Books

I find myself using this phrase often lately. Whether it is in stocks, bonds, investment real estate, money market accounts, gold, cryptos, or cash under the mattress… money must be somewhere. The concept of “money” is more of an accounting mechanism for balance sheets and income statements.

Every choice has its own characteristics which include:

• Upside potential (moonshot or steady eddy)

• Downside risk (erosion or wipeout)

• Liquidity (ease of selling at the current estimate of value)

As most clients know, I did extensive research on asset class performance in the late 1980s. I developed our proprietary Historical Risk/Reward Charts as a way of comparing the risks and rewards of each investable asset class to each other.

With this analysis in hand, I developed “ideal” asset allocations to meet the wide variety of investor objectives which were first presented in 1990.

Our Historical Risk/Reward Charts are updated annually to present up-to-date guidelines as to the risk and reward of each asset class and asset allocation since 1972. Within each Historical Risk/Reward Chart:

Risk is defined as the percentage decline during bear markets (such as the one we are in today) as well as the length of time the portfolio was “underwater” (the total months of decline plus the total months to full recovery).

Reward is defined as the average annual return the portfolio delivered above the annualized riskless rate of 30-day Treasury bills for the same period.

Table 1 shows the risks and rewards of Tanglewood’s four primary Investment Policies (IPs) as shown in their most recent Historical Risk/Reward charts (1972-2021). (A copy of these charts are provided in each client's Tanglewood/Black Diamond Portal.)

Chart 1 contains both asset class and Tanglewood IP composite performance for the period 1/1/99 through 12/31/21. This is not an arbitrary period, 1999 is the first year that Tanglewood’s performance was audited in accordance with GIPS standards. Both gross and net returns are shown for our four primary IPs -- Conservative, Moderate, Growth and All Equity. Expanded performance information is provided on page 11.

Our performance calculations were verified over 17 years before dropping the audit in 2017 due to its increasing cost. However, we continued to follow the same procedures in calculating performances. We recently made the decision to resume our outside audits which will begin with where we previously stopped.

Money has to be somewhere and the asset classes in Chart 1 are the primary portfolio choices. This provides an excellent backdrop for our performance.

A very important confirmation of Tanglewood’s performance relative to that predicted by our Historical Risk/Reward Charts can be derived from the chart. The rewards of Tanglewood’s net returns over this period are almost identical to the rewards shown in Table 2. We delivered the expected returns over this period net of all fees and costs.

For example, Tanglewood’s Conservative indexed benchmark shows an annual reward of 3.4% since 1972 (Table 2). Since 1999, Tanglewood’s actual Conservative composite has provided a reward of 3.5% (Conservative’s 5.1% net average annual return is 3.5% greater than the average 1.6% return from treasury bills over this period.) Tanglewood’s Moderate, Growth and All Equity composites are equally close to those of their expected returns.

Disclosures