The Fortress Portfolio is Alhambra’s original asset allocation strategy, a good foundation for a well-diversified investment program. You can read the story of how and why the Fortress Portfolio was developed here.
- Minimum investment of just $100,000
- A low-cost, passive, strategic portfolio of index funds
- Multiple asset class approach reduces volatility
- Effective across multiple economic environments
- Validated by 50 years of performance research analysis
Every investor knows their investment portfolio should be diversified. Don’t keep all your eggs in one basket is about as basic as investment advice gets. But what does it mean to be diversified? From a portfolio perspective, Wall Street’s standard answer is the “balanced” portfolio of stocks and bonds. The most popular version is 60% stocks and 40% bonds and it has performed quite well over a long period of time.
But there are a many different kinds of assets out there. Why restrict your portfolio to just two? Is there any benefit to adding more assets to your portfolio? We set out many years ago to find an answer to that question and the result is Alhambra’s Fortress Portfolio, an important improvement over the standard, one-size-fits-all Wall Street stock/bond portfolio. It is the foundation of all of our portfolios.
The Fortress Portfolio is a passive portfolio allocated across 5 distinct asset classes:
- Large Cap Stocks
- Small Cap Stocks
- Real Estate
- Commodities/Gold
- Bonds
We have constructed 7 versions of this portfolio, based on risk tolerance:
The Fortress Strategy was developed to be an all-weather portfolio that would produce more consistent returns across multiple economic environments:
The historical performance of the Fortress Strategy by decade demonstrates its flexibility. The 1970s were a decade of rising interest rates and a weak dollar, conditions that produced poor returns in stocks and bonds but the returns of real assets were much higher. The Fortress Portfolio’s allocation to commodities, gold, and real estate paid handsome dividends in the disco decade.
By contrast, in the 1980s, interest rates fell dramatically as supply-side reforms and tight monetary policy finally killed the inflation of the 1970s. The dollar soared in the first half of the decade and fell following the Plaza Accord of 1985. Despite the stock market crash of 1987 and the onset of the S&L crisis, the Fortress still produced great returns, if slightly less than the stock/bond combination.
More recently, the Fortress is once again outperforming the 60/40 in the post-COVID era. The outperformance is due to two factors:
- The Fortress allocation has a lower allocation to bonds for the same (or lower) volatility. The Aggregate bond index is down over 10% since 3/30/2020.
- Commodities have soared in the post-COVID era, producing 1.78 times the return of the S&P 500
Every decade has offered challenges for investors but through them all the Fortress has managed to produce acceptable returns with lower volatility than a less diversified portfolio. The Fortress portfolio offers true diversification in an era when future asset class correlations are uncertain.
The Fortress Strategy allows investors to:
– Achieve a targeted return with lower volatility
– Achieve a targeted volatility and produce a higher return
For example, since inception, the moderate Fortress Strategy with 20% bonds produced a higher return than the 60/40 stock/bond portfolio with 6% lower volatility. Over the last 20 years, the returns and volatility of the 20% bond Fortress are almost identical to the 60/40 stock/bond portfolio.
The consistency of the Fortress Strategy across multiple decades is a product of the portfolio design. Investors usually add bonds to a stock portfolio to reduce risk. Bonds have lower returns than stocks but they also have lower volatility (risk). Their returns are also not highly correlated with stocks and have in fact been negatively correlated for much of the last decade; when stocks fell, bonds rose. But that hasn’t always been true, as anyone with a stock/bond portfolio in 2022 can attest. For much of the 20th century stocks and bonds were positively correlated.
The Fortress Strategy was designed to include more assets, like bonds, whose returns are not highly correlated with stocks. The key to producing higher returns with lower risk is to introduce assets with low correlation but higher returns than the asset they are replacing, in this case, bonds.
Portfolio Construction
The Fortress Portfolio is only one part of your financial infrastructure. We build portfolios in a modular fashion starting with the foundation of a cash reserve. The Fortress Portfolio is the second stage:
As an All-Weather portfolio, the Fortress should be constructed with assets that are broad-based. The original Fortress strategy was constructed with these index ETFs for each asset class:
- Large Company Stocks – S&P 500 Index (SPY, IVV)
- Small Company Stocks – Russell 2000 Index(IWM)
- Real Estate – Dow Jones REIT Index (IYR, VNQ)
- Commodities – Bloomberg Commodity Index/S&P GSCI Index (PDBC, COMT, GCC)
- Gold – Spot Gold Price (IAU, GLD)
- Bonds – 3-7 Year Treasury Index (IEI)
These are not, obviously, the only choices one could make for each of the assets to be included in the portfolio. But the choices should be ones you are comfortable owning for years, maybe even decades. This is not the place to make a bet on a single sector or country.
You could construct a global version that incorporates non-US assets into the mix but a US-based investor probably shouldn’t build one that is all non-US assets. Here’s a global version we’ve used with existing clients:
- Large & Small Company Stocks – MSCI ACWI Index (ACWI)
- Real Estate – FTSE EPRA/NAREIT Global REITs Index (REET)
- Commodities – Bloomberg Commodity Index/S&P GSCI Index (PDBC, COMT, GCC)
- Gold – Spot Gold Price (IAU, GLD)
- Bonds – Bloomberg Global Aggregate Bond Index (BNDX)
Other versions that can be used at this level would include:
- Growth
- Value
- High Dividend (Defensive)
- Dividend Growth
Investors can choose an overall risk tolerance or invest based on goals with the risk level dependent on the urgency or importance of the goal. An investor might choose a higher risk allocation for a low-priority goal like a vacation home and a more conservative allocation for a more critical goal like retirement.
Fortress portfolios can be constructed to meet future goals or potential liabilities using historical returns as a guide:
- Self-funding of long-term care
- Charitable contributions
- College expenses
- Elder Care
- Vacation/Retirement Home
Tactical Version
While we generally use the Fortress structure as an All-Weather portfolio, it can also be utilized to construct more tactical versions. These would be shorter-term in nature but we think they should be based on long-term trends as much as possible. While the All-Weather version is intended to be nearly permanent, with only periodic, opportunistic rebalancing, a tactical version might be intended for a holding period of 5 years or less; still long-term but not permanent.
These constructions generally focus on one factor such as:
- Rising interest rates (short-duration bonds)
- Falling interest rates (long-duration bonds)
- Falling dollar (international, value)
- Rising dollar (domestic, growth)
- Wide credit spreads (corporate/high-yield bonds)
- Narrow credit spreads (Treasuries)
These tactical versions of the Fortress can fit into the next step up in our financial pyramid. We call tactical changes like this our Citadel Portfolio.
Building A Better Future
The Fortress strategy is an important improvement over the standard Wall Street stock/bond portfolio. It was designed to work in any economic environment but can also be customized to fit investor preferences and expectations. It is the building block of your financial future.
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