The Trinity Portfolio:: A Long-Term Investing Framework Engineered For Simplicity, Safety, and Outperformance

CQR ISSUE 9 | June 2016
The Trinity Portfolio:

A Long-Term Investing Framework Engineered for
Simplicity, Safety, and Outperformance
I am a quant.
In other words, data, numbers, and verifiable results dictate my investment
decisions. This makes it difficult for me to place my faith in any one investment
strategy much less advocate it to others. Yet thats what Im doing in this paper, as
I find myself strongly believing in the investing framework Ill detail in the following
pages.
There are a few reasons why Im willing to stand behind this strategy. First, based
on my personal research, it produces returns that historically outperform those of
common benchmark portfolios. Second, the same research suggests it does this
with reduced volatility and drawdowns.
Meb Faber
However, there are abundant investing strategies claiming great returns and/or
lower volatility, many of which Ive written about. In fact, over the last ten years,
Ive written five books, ten white papers, and over fifteen-hundred investing
articles. Why is this portfolio different?
The answer leads us to the third reason why I believe in this framework: It addresses
a major question facing many investors today how do I put it all together?
Investors today have access to more market data and strategic information than
at any other time in history. Yet from the perspective of the average investor, this
huge volume of fragmented information presents a challenge how should one
actually implement everything?
So the third reason Im advocating this framework is because its holistic. On one
hand, the approach is broad and sturdy, rooted in respected, wealth-building
investment principles. On the other hand, its strategic and intuitive, able to
adapt to all sorts of market conditions. The result is a unified, complementary
framework that can relieve investors of the handwringing and anxiety of whats
the right strategy right now?
If youre an investor whos struggled with generating long-term returns that make
a real difference in your wealth, I believe this portfolio can help. If you want less
anxiety during periods of heightened market volatility and drawdowns, I believe
this portfolio can help. And if youre unsure how to balance the simplicity of buyand-hold with the various benefits of an active portfolio, I think the investing
framework in this paper can help.
If that sounds like your type of investing, I hope youll read on.
Global Asset Allocation
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THE FOUNDATION OF THE TRINITY PORTFOLIO

Ive named the portfolio youre reading about today The Trinity Portfolio. Actually, a creative reader of my
blog suggested the name, but as its appropriate, it stuck.
Trinity is a reference to the three core elements of the portfolio: 1) assets diversified across a global
investment set, 2) tilts toward investments exhibiting value and momentum traits, and 3) exposure to trend
following.
If you find any of these terms unfamiliar, dont worry. Well detail each in the pages to come. At this point, I
present them more as a set of guideposts.
You see, in addition to being the foundational elements of the Trinity Portfolio, these three pieces also provide
us the sequence to follow when constructing the portfolio. Three chronological steps, if you will.
So as I introduce Trinity, well follow this three-step roadmap. Well analyze the effect of each step on our
portfolio, considering its impact on returns, volatility, as well as a few other metrics. This will enable you to
see the exact engineering behind our final result.
Lets dive in.
STEP 1-A
Assets Diversified Across a Global Investment Set
Lets say you set out to design a portfolio, knowing everything we know today about investing. How would a
logical, evidence-based investor construct such a portfolio?
First, you would start out with the basics: U.S. stocks and U.S. bonds. How has that performed historically?
Below is a data table followed by a chart depicting their returns back to 1926. It demonstrates the true
dominance of stocks over the last century.
(If youre unfamiliar with any of the included metrics, please refer to the appendix for their definitions.)
Figure 1 - U.S. Stocks and Bonds Returns, 1926 - 2015
1926 - 2015
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
% Positive Months
$100 becomes
Inflation CAGR
U.S. Stocks
9.95%
18.88%
0.34
-83.46%
62.41%
$514,135
2.91%
U.S. Bonds
5.26%
6.43%
0.27
-15.79%
63.98%
$10,146
2.91%
Source: Meb Faber, GFD

Figure 2 - U.S. Stocks and Bonds Returns, Nominal Returns, 1926 - 2015
But while stocks experienced nearly double the annual returns of bonds, they were not without risk. As youll
see in the chart below, stocks suffered numerous declines of only 40-50%, on top of the massive drawdown
of over 80% during the Great Depression. The unfortunate mathematics of an 80% decline requires an investor
to realize a 400% gain just to get back to even!
While stocks for the long run would have resulted in much higher ending wealth, very few investors could
have sat through that bumpy ride to arrive unscathed at the finish. Picture your portfolio right now, and
subtract 80% could you sit through that?
Figure 3 - U.S. Stocks and Bonds Maximum Drawdowns, 1926 - 2015
However, comparing stock and bond returns is not totally fair. In order to accurately compare returns over
time we need to include the impact of inflation on a portfolio.
Below are real returns of stocks and bonds (real returns are the returns of an asset after subtracting the
wealth-eroding effect of inflation). We often describe real returns as returns you can eat.
3

Figure 4 - U.S. Stocks and Bonds Returns, Real Returns, 1926 - 2015
Figure 5 - U.S. Stocks and Bonds Maximum Real Drawdowns, 1926 - 2015
After adjusting to include the effect of inflation, we see an interesting difference. Notice that whereas the
stock drawdown charts appear fairly similar, the bond drawdown charts are substantially different due to the
high inflationary periods of the 1950s through the 1970s. During those decades when inflation soared, the
result was a long, painful drawdown for bonds.
This points toward an important difference between stock and bond investing: While stocks often suffer from
sharp price declines, bonds usually suffer from the slower erosion of inflation. And while stocks outperform
bonds over the long term, there have been periods of 20 (1929 1949), even 40 years (1969 2009) where
stocks underperformed bonds. (And if you include the 1800s, there was a 68-year period of zero stock
outperformance!)
Because different economic environments affect stocks and bonds in various ways, and since we cannot
predict what the future will hold, it makes sense to allocate to both types of investments rather than just one.
In other words, we diversify our portfolios.
Diversification has been called the only free lunch in investing. The free lunch, so to speak, is the benefit an
investor receives from diversifying his investing capital into two assets that are not perfectly correlated. The
idea is when one asset falls, the negative impact on the overall portfolio is softened as the second asset wont
fall to the same degree (or may even rise) since there is not perfect correlation. In essence, by investing in
uncorrelated assets, 1 + 1 = 3.
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With this in mind, lets look at the traditional 60/40 portfolio comprised of 60% U.S. stocks and 40% U.S.
bonds.
This portfolio is often seen as the starting point onto which investors layer additional asset classes and/or
strategies. Given that, we might think of the 60/40 portfolio as our Asset Allocation 101 portfolio.
Figure 6 - U.S. Stocks and Bonds and 60/40, 1926 - 2015
U.S. Stocks
U.S. Bonds
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
9.95%
18.88%
0.34
-83.46%
5.26%
6.43%
0.27
-15.79%
60% U.S. Stocks

40% U.S. Bonds
8.54%
11.78%
0.43
-62.39%
% Positive Months
$100 becomes
Inflation CAGR
62.41%
$514,135
2.91%
63.98%
$10,146
2.91%
62.96%
$161,319
2.91%
1926 - 2015
Figure 7 - U.S. Stocks and Bonds and 60/40, 1926 - 2015
Notice the benefits of combining U.S. stocks and bonds. The Sharpe ratio increases substantially. And while
volatility tamps down significantly from just stock levels, an investor doesnt lose much in terms of returns.
But the U.S. 60/40 portfolio is not without its drawbacks.
A portfolio consisting of just U.S. stocks and U.S. bonds leaves investors exposed to an obvious problem: What
if one of those two assets underperforms? What if both assets do poorly? Despite lower volatility than just
stocks alone, the 60/40 portfolio still had a whopping 60% drawdown.
Plus, with just two assets in the 60/40 portfolio, your portfolios future returns are especially sensitive to
each assets starting valuation. In other words, the price you pay influences your rate of return. Pay a below
average price and you can reasonably expect an above average return, and vice versa. (For those unfamiliar
with valuation methods for stocks, I discuss this in detail in my book Global Value.)
5

What are valuations today telling us about U.S. 60/40 returns going forward for the next decade?
As I have demonstrated in my Global Value book, U.S. stocks are priced at a premium Shiller CAPE ratio of
around 25. This means I expect returns to remain low, around 4% a year. Bond yields are easy to forecast, and
if held to maturity should return their 1.6% current yield.
Many institutions agree with our analysis, and a recent report by AQR Capital Management pegged the
forward-looking real return of the U.S. 60/40 portfolio at the lowest level in over 100 years! Note that these
anemic returns fall woefully shy of the 8% returns most pension funds and investors expect.
Given this, its clear that while the U.S. 60/40 portfolio is a fine starting point, its hardly where we want to
end up. So whats our next step?
Simple go global.
STEP 1-B
Add Foreign Stocks and Bonds
U.S. 60/40 is the classic portfolio benchmark, offering investors basic diversification. But as we just saw, it
leaves investors exposed to the underperformance and huge drawdowns that can gut a portfolio when its
entirely allocated to just the United States.
Of course, this isnt just a U.S. problem. Any global market is susceptible to underperformance. The problem
is you dont always know which market it will be, or when. If you happen to be born in the wrong country at
the wrong time, and limit your portfolio to domestic investments, the odds are stacked against you.
Now, if your response is that youd simply avoid this by investing in some bullish market on the other side of
the globe, the statistics suggest otherwise.
Thats because investors commonly fall victim to a pitfall called home country bias. Its exactly what it
sounds like we tend to put most of our money into investments from our own country.
For instance, Vanguard has demonstrated that U.S. investors usually put around 70% of their stock allocation
at home here in the U.S. when it should only be about 50%. But this isnt unique to the United States, it
occurs everywhere. Most investors around the world invest the majority of their assets in domestic markets.
Vanguard details the home country bias effect in the U.S., but also in the U.K., Australia, and Canada. This
shouldnt be that surprising to most after all Im a Denver Broncos fan and my co-workers are Seahawks and
Patriots fans.
While you might believe professional money managers wouldnt make this mistake, theyre just as prone to
home country bias as retail investors. The chart below shows where institutional investors are allocating their
money. Unsurprisingly, North American institutional investors sink 75% of their funds into North American
markets and we find similar results for Europe and Asia.

Figure 8 - Home Country Bias
Source: JP Morgan
Given our tendency to invest in our home countries, and accounting for the reality that many times our home
countries wont produce adequate returns, how can we add a layer of safety to the U.S. 60/40 portfolio (or
any single-country-weighted portfolio) that hedges us from the wrong country and the wrong time?
We expand to include a broader set of global investments.
By diversifying away from holding just one country, we greatly increase the odds of sliding toward the average.
While this may not sound wonderful if were looking for outsized returns, its far more welcome when it
protects us from outsized losses.
Remember, concentration is a double edged sword, and investing a large part of your wealth in one country or
asset class can often be a terrible idea just ask an investor in Brazil, Greece, Russia, or many other countries
over the past few years!
In the chart below, I show that expanding our portfolio to include global investments slightly reduces our
returns, but in exchange, we receive lower volatility and drawdowns. This results in a near identical Sharpe
ratio.
Figure 9 - U.S. and Global Stocks and Bonds, 1926 - 2015
1926 - 2015
U.S. Stocks
U.S. Bonds
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
9.95%
18.88%
0.34
-83.46%
5.26%
6.43%
0.27
-15.79%
60% U.S. Stocks

40% U.S. Bonds
8.54%
11.78%
0.43
-62.39%
% Positive Months
$100 becomes
Inflation CAGR
62.41%
$514,135
2.91%
63.98%
$10,146
2.91%
62.96%
$161,319
2.91%
8.73%
14.44%
0.36
-71.33%
60% Global Stocks

40% Global Bonds
7.41%
9.67%
0.40
-51.92%
62.78%
$188,107
2.91%
64.44%
$62,353
2.91%
Global Stocks
Now, since the rest of the paper is going to use the common dates of 1973 2015, below I present the stock
and bond returns again for just this period. (Historical data on the asset classes well add going forward isnt
as readily available dating back to 1926.)
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Many will look at the results below and conclude that adding foreign assets is a step backward. Indeed, it was
during this period. However, that is why it is important to study market history to ensure youre seeing the
whole picture.
Consider the abysmal equity returns in the U.S. during the Great Depression. Lets say we looked at U.S.
equity returns only during that one decade. Would we have been correct to assume they would predict U.S.
returns for the next five decades? Of course not. Thats why investors should never assume that the returns
of short investment periods will be repeated in longer periods.
Back to foreign asset returns.
Though it surprises some investors, U.S. stock performance versus international stock performance has
historically been a coin flip with both out/underperforming the other about 50% of the time. That doesnt
mean that both cannot go through stretches of outperformance. Indeed, there have been two periods since
1973 when foreign stocks have outperformed U.S. stocks for six years in a row. And this property of oscillating
returns is timely right now, as U.S. stocks have outperformed foreign stocks five out of the last six years.
Perhaps it is time for a foreign stock market rebound?
Figure 10 - U.S. and Foreign Stock 12-Month Rolling Performance
So even though foreign asset returns are lower in the results below, remember that they represent only a
select, narrower time period. (All returns are in U.S. dollars and are from the perspective of a U.S. based
investor.)
Figure 11 - U.S. Stocks and Bonds, 1973 - 2015
U.S. Stocks
U.S. Bonds
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
10.07%
15.38%
0.33
-50.95%
7.65%
8.32%
0.32
-15.79%
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
% Positive Months
$100 becomes
Inflation CAGR
61.43%
$6,246
4.06%
60.66%
$2,394
4.06%
63.18%
$4,941
4.06%
1973 - 2015

Figure 12 - Global Stocks and Bonds, 1973 - 2015

Global Stocks
Global Bonds
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
9.20%
15.00%
0.28
-53.65%
7.47%
6.63%
0.37
-15.52%
60% Global Stocks

40% Global Bonds
8.77%
10.18%
0.37
-38.56%
% Positive Months
$100 becomes
Inflation CAGR
60.66%
$4,429
4.06%
65.89%
$2,226
4.06%
63.57%
$3,743
4.06%
1973 - 2015
Figure 13 - U.S. Global Stocks and Bonds, 1973 - 2015
Expanding to global investments is even more important as I write this here in summer 2016, as the U.S.
stock market is one of the most expensive in the world. Foreign equity markets are much cheaper than U.S.
markets, and emerging markets are cheaper still. (Here is an article I wrote at the beginning of 2016 on global
stock market valuations.)
Pulling back to look at the larger picture now, the important takeaway is that by going global, weve protected
ourselves from overconcentration in just one country (home country bias). Weve also reduced our portfolios
volatility and drawdown numbers. This has cost us a small bit of return, but thats fine. At this point, weve
been playing defense. Offense will come later.
STEP 1-C
Add Real Assets
A global 60/40 portfolio protects us from single country concentration exposure and drawdowns, but theres
a new problem with just two principal asset classes (stocks/bonds), were limiting our global investment
opportunity set.

We want to squeeze every bit of return out of the degree of risk were willing to accept. Historical data
suggests we can help do this by adding other, non-correlated assets.
Investors can allocate to many other assets including the one well add next a category described as real
assets.
For our purposes in this paper, real assets has a broad definition. Were adding commodities, real estate
(REITs), and gold. Investing in real assets isnt a new idea, in fact the Talmud spoke to it over 2000 years ago!
(Some also prefer the label hard assets but we will stick with real assets here.)
The exact allocation were using is below, and comes from our book Global Asset Allocation. This allocation
resembles something called the global market portfolio (or Global Asset Allocation portfolio). In essence,
thats simply the portfolio you would own were you to wrap all global investments into one, composite
portfolio.
Figure 14 - Global Market Portfolio Asset Allocation
U.S. Stocks
Foreign Developed Stocks
Foreign Emerging Stocks
Corporate Bonds
30 Year Bonds
18.0%
13.5%
4.5%
19.8%
13.5%
10 Year Foreign Bonds

TIPS
Commodities
Gold
REITs
14.4%
1.8%
5.0%
5.0%
4.5%
Source: Meb Faber Research
Below, we see the positive impact of adding real assets.

In particular, note how the Sharpe ratio shoots higher. This reflects how our returns have improved from the
global 60/40 portfolio and our volatility and drawdowns have decreased. Weve had our cake and eaten it too.
Figure 15 - Various Asset Allocations, 1973 - 2015
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
60% Global Stocks

40% Global Bonds
8.77%
10.18%
0.37
-38.56%
Global Asset
Allocation
9.48%
7.93%
0.56
-26.72%
% Positive Months
$100 becomes
Inflation CAGR
63.18%
$4,941
4.06%
63.57%
$3,743
4.06%
66.86%
$4,943
4.06%
1973 - 2015
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When we look at the Global Asset Allocation portfolio on a real basis after inflation, we see that adding real
assets was a substantial help during the tough investment periods of the 1970s and 2000 bear market. Real
assets usually perform well during times of inflation, as well as unexpected inflation.
Figure 17 - Various Asset Allocations, Real Returns, 1973 - 2015
Many investors could stop here. That would be fine, as this is a perfectly suitable portfolio (better than what
many investors hold).
But I think we can do better. After all, up to this point the adjustments to the base U.S. 60/40 portfolio have
been focused on reducing risk and optimization. What about improving our returns?
That takes us to Step 2.
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STEP 2
Add Value and Momentum
We have a respectable portfolio at this point but we can borrow from academic research to improve the basic
indexes that have led us here.
We have our portfolios building blocks in place specifically, an assortment of asset classes, spread over the
entire global investment set. Now its time to begin refining those building blocks.
In this case, we will use strategies that have been known for decades, namely value and momentum tilts
within stock indexes.
For any readers less familiar with these terms, a tilt is simply a weighting toward a specific asset or investing
style. A value tilt means were investing more heavily in global stocks exhibiting traditional traits of being
priced at low valuations. This could be something as simple as ranking stocks on common measures of value
like price-to-book or price-to-earnings ratios.
A momentum tilt means were investing more heavily in global stocks that are enjoying more upward
momentum in market pricing than other, similar stocks. For example, a traditional momentum strategy would
be buying the stocks that have increased the most in price over the past 12 months. You might think of this as
racecars speeding around a track suddenly, one of them hits the gas and begins passing the other racecars
as it pushes toward the front of the pack. This car would have the best momentum.
There are, of course, many flavors of both strategies. Yet, regardless of which specific variety you choose, the
performance attained by combining value and momentum comes not just from investing in what is cheap and
going up, but also by avoiding what is expensive and going down.
So what are the specific steps taken to tilt the portfolio toward value and momentum?
For our value tilt, Ill substitute our U.S. equity exposure with the unhedged strategy from our paper Value
and Momentum. I encourage you to read it for all the details, but in general, the strategy ranks stocks by
value and momentum, then takes the average reading across both variables. One can then use the ratings to
identify the stocks with the best aggregate scores. In doing this, our goal is to own only cheap stocks with
rising market prices.
For foreign equity exposure, I use the strategy from our book Global Value. This strategy invests in the
cheapest global markets around the world. (We dont have sufficient history to include momentum as a
variable here, but research shows it works in foreign markets too.)
A quick aside for any cynics who might believe Im guilty of data mining. Ben Graham and Charles Dow were
writing about similar investing strategies nearly 100 years ago, they have worked since and they remain viable
strategies today. I dont think that the exact factors or approaches matter greatly, and intrepid readers can
download all of the French-Fama data and view similar results. Plus, any detractors should agree that any
weighting that moves a portfolio away from a market cap weighting has benefitted the portfolio over time.
A detailed explanation of this point isnt the focus of our paper. However, in order that I not leave anything
dangling, market cap weightings often allocate to more heavily to over-priced assets. Therefore, if youre an
investor looking to buy at a discount, a market cap weighted portfolio may be working against you. This is why
any weighting other than market cap often carries added benefits.
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We can also tilt toward value in the global bond space with the methodology from Finding Yield in a 2%
World. This strategy also moves away from the market cap weighted index, where 70% of the global debt
comes from only five countries. Instead, it invests in the highest yielding sovereign bonds around the world.
For perspective, as I write, the top five global bond issuers yield around 0.5%, whereas a value strategy
applied to bonds would yield closer to 7% today.
Below you can see the impact of adding all of the value and momentum tilts, what some might call smart beta
(referenced as Global Asset Allocation Plus). Notice the substantial increase in returns that we enjoy without
giving up much in volatility and drawdowns. We see this positive effect manifested in the higher Sharpe ratio.
Summary of Step 2:
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
60% Global Stocks

40% Global Bonds
8.77%
10.18%
0.37
-38.56%
Global Asset
Allocation
9.48%
7.93%
0.56
-26.72%
Global Asset
Allocation Plus
11.77%
8.41%
0.80
-30.79%
% Positive Months
$100 becomes
Inflation CAGR
63.18%
$4,941
4.06%
63.57%
$3,743
4.06%
66.86%
$4,943
4.06%
68.02%
$12,079
4.06%
1973 - 2015
As before, many investors could stop here, as this too is a perfectly fine portfolio. It would hold over 10,000
global securities in a handful of basic indexes. You could rebalance this portfolio once a year in tax-exempt
accounts. Or in taxable accounts, an investor could employ tax-harvesting strategies using various inflows and
outflows. Both should take about one hour per year.
The simplicity and returns of this portfolio make it very attractive. In fact, my company believes in it so much
that we launched the first, and still only, ETF with a permanent 0% management fee based on a similar
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strategy (as of the time of publishing). (For more information visit www.cambriafunds.com.) Many automated
investment solutions would be a good choice as well.
However, despite the benefits of this portfolio, I believe we can do better once again, which leads us to our
final step.
STEP 3
Add Trend Following
At this point, we have a buy-and-hold portfolio (minus occasional rebalancing). Thats a great starting point,
but many investors struggle with buy-and-hold. Its difficult to do nothing while watching your portfolio drop
10%, 30%, 50% or more.
This leads to all sorts of bad behavior including the most damaging selling assets during bear markets and
never re-entering again. Think back to any I cant take it any more moments you may have had in 2008 or
the tech bubble after 2000.
The alternative to buy-and-hold is any sort of active management, with one of our favorite strategies being a
trend-following approach.
Many investors are confused as to the distinction between trend and momentum (from Step 2). Momentum
refers to how a security is performing versus other securities. Remember our earlier example of the racecar
speeding around the track, passing competing cars? In the case of stocks, it might be Apple outperforming,
say, Google or IBM over the preceding 12 months.
Trend following, on the other hand, tries to answer the question: Looking at just Apple, is it going up or
down? Though not a perfect analogy, you might think of this as Will the racecar continue speeding around
the track, or is it about to get sidetracked for a lengthy pit stop?
We dont want to be invested in securities that wont be rising (stuck in a pit stop). So using this trend filter
helps us weed them out of our portfolio.
The most famous trend following indicator is likely the 200-day simple moving average (this is simply an
average of an investments closing price over the last 200 days). If the assets current market price is above
that 200-day average trend-line, it would indicate a bullish trend, so you would be long the asset. But if the
market price fell below the 200-day average it would indicate a bearish trend, so you would sell the asset to
avoid taking additional losses.
The chart on the next page shows the market price of SPY, an ETF which tracks the S&P 500 index, along with
its 200-day moving average. Notice how the 200-day trend indicator would have gotten you out of SPY prior
to several significant drawdowns, therein protecting your wealth.
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Figure 20 - SPY ETF and the 200-Day Simple Moving Average
Source: Stockcharts.com
A quick clarification: Many investors expect basic trend strategies to magically time the market. However,
a basic trend strategy is not meant to be an outperformance strategy rather, it is designed to produce
similar returns as buy-and-hold, yet with lower volatility and drawdowns.
How then will we apply trend to the Trinity Portfolio?
Well borrow from the strategies from our first white paper in 2007, A Quantitative Approach to Tactical Asset
Allocation. In it, I propose numerous models of varying degrees of risk and granularity, which I encourage you
to read about in the whitepaper.
Well call the specific model we are going to use here Global Trend, and it is meant to be an aggressive
and concentrated strategy that combines both momentum and trend. (It is similar to the GTAA Aggressive
system as published in the paper.)
The general summary is we invest in the top half of the Global Asset Allocation Plus portfolio assets as sorted
by momentum, but only if they are above their long-term trend. (The paper used the 10-month simple
moving average, which is the monthly equivalent of the 200-day moving average.)
The portfolio would be updated just once each month. If the assets market price is above its long-term trend
line (in this case, the 10-month SMA), the asset would remain in your portfolio. However, if its market price is
below the trend line, you would sell the security and move to the safety of cash and T-Bills.
(Note: One could place the cash investment in 10-year U.S. bonds instead of T-Bills, and historically this
would increase the returns of both strategies by another percentage point. However, the likelihood of a bull
market in bonds similar to the one over the past 30 years is small, so I use the more conservative T-Bill figures.)
Applying trend to our portfolio has the benefit of increasing returns and lowering volatility, a double bonus.
The effect is the Sharpe ratio jumps to over 1.0. Thats more than double where we started with our base U.S.
60/40 portfolio.
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Returns
Volatility
Sharpe Ratio 3.5%
Max DD
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
60% Global Stocks

40% Global Bonds
8.77%
10.18%
0.37
-38.56%
Global Asset
Allocation
9.48%
7.93%
0.56
-26.72%
% Positive Months
$100 becomes
Inflation CAGR
63.18%
$4,941
4.06%
63.57%
$3,743
4.06%
66.86%
$4,943
4.06%
1973 - 2015
Global Asset
Global Trend
Allocation Plus
11.77%
15.53%
8.41%
9.51%
0.80
1.10
-30.79%
-16.47%
68.02%
$12,079
4.06%
69.38%
$50,308
4.06%
There are two principal ways to approach the trend application. The first would be to update the model every
month, placing the suggested trades. Astute investors with time on their hands could do this.
Even though that approach has worked well since I originally published our paper, it comes with two challenges.
One, it forces investors to regularly update and trade the portfolio, which introduces opportunities to stray
from the model. Two, it increases taxable events and commissions which erode returns, especially for smaller
investors.
The second, easier way to apply a trend strategy is simply by investing in a fund, or ETF, that implements a
similar model (we manage a similar aggressive global momentum and trend ETF).
So, with superior returns to buy and hold, why not just put all of your money into a trend following strategy?
At the beginning of the section, I introduced trend as an alternative to buy-and-hold. Again, many investors
find buy-and-hold challenging when markets are headed south. But the irony is that those same investors also
struggle with trend following, or being too different from the world in general.
The reason is because being a lone wolf investor, significantly different than the pack, can feel risky. Being
different is great when your strategy is outperforming like 2008, but its a supreme challenge when it is
lagging a roaring bull market in the years that followed or going through periods of underperformance, which
every strategy experiences at some point (and even worse when lots of other investors are making big gains).
Because of this, many investors dont like being different. But the challenge is that any active strategy, by
definition, will be different than a buy-and-hold market strategy.
The chart on the next page illustrates the back-and-forth many investors feel when comparing an active
timing strategy with a passive buy-and-hold strategy. It shows the rolling 12-month performance of the Global
Trend strategy (timing) versus the Global Asset Allocation Plus strategy (buy-and-hold). There were multiple
periods when one strategy outperforms the other by over 30 percentage points!
16

Figure 22 - Timing Strategy vs. Buy and Hold, 1973 - 2015
Either strategy can go years underperforming the other, making you second-guess your choice. So with
both buy-and-hold and trend following presenting their own unique challenges, what should an investor
do?
The answer points us toward the final step well take that will result in our completed Trinity Portfolio.
The simplistic solution addressing buy-and-hold versus trend that actually works quite well is, and I
apologize for the technical term, to go halfsies. Specifically, use buy-and-hold (Global Asset Allocation
Plus) as your foundation with a 50% allocation, and allocate to trend as well (Global Trend) with the other
50%. This will complete our transition from U.S. 60/40 to the Trinity Portfolio.
Lets summarize Step 3 on the Trinity Portfolio:
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
60% Global Stocks

40% Global Bonds
8.77%
10.18%
0.37
-38.56%
% Positive Months
$100 becomes
Inflation CAGR
63.18%
$4,941
4.06%
63.57%
$3,743
4.06%
1973 - 2015
Global Asset Global Asset

Allocation Allocation Plus
9.48%
11.77%
7.93%
8.41%
0.56
0.80
-26.72%
-30.79%
66.86%
$4,943
4.06%
68.02%
$12,079
4.06%
Global
Trend
15.53%
9.51%
1.10
-16.47%
13.72%
8.06%
1.08
-17.61%
69.38%
$50,308
4.06%
69.96%
$25,493
4.06%
Trinity
Some investors will examine the above table and scratch their heads. If the Global Trend Portfolio has stronger
risk adjusted returns than the Trinity Portfolio, why wouldnt we allocate all of our investment to this superior
strategy?
The reason is because the best investment strategy is the one that youll be able to stick with, year-in-year
out. And remember, investing 100% in either buy-and-hold or trend will mean there could be years when one
17

style underperforms the other. And when that happens, our natural tendency is to jump ship, abandoning our
investing approach often at the wrong time, with injurious results. Thats the last thing you want.
The Trinity Portfolio, with its exposure to both buy-and-hold and trend, reduces the chances youll jump ship.
Thats because part of your portfolio will likely be benefitting from either buy-and-hold or trend, or both.
So, yes, Trinity has slightly lower returns than Global Trend, but its for a good reason: to save us from ourselves.
Weve come a long way from our initial U.S.-only, 60/40 portfolio. By going global, adding additional asset
classes, and introducing tilts and active trend strategies, weve transformed the risk/return complexion of the
entire portfolio.
Heres a final side-by-side, before-and-after to help illustrate how far weve come.
Figure 25 - U.S. 60/40 vs. the Trinity Portfolio
Returns
Volatility
Sharpe Ratio 3.5%
Max DD
60% U.S. Stocks

40% U.S. Bonds
9.47%
10.05%
0.44
-29.28%
13.72%
8.06%
1.08
-17.61%
% Positive Months
$100 becomes
Inflation CAGR
63.18%
$4,941
4.06%
69.96%
$25,493
4.06%
1973 - 2015
Trinity
Weve increased our yearly average returns almost 40% despite slashing volatility. Meanwhile, the Sharpe
ratio has more than doubled and our max drawdown has nearly been halved.
All of these improvements come together when we look at the difference in dollar growth between the two
portfolios. The money going into our pocket with Trinity is more than four times versus where we started with
U.S. 60/40.
18

Now, before we finish discussing the engineering behind Trinity, Id like to point out one final attribute of the
framework its flexibility.
Despite Trinitys balanced makeup which results in low volatility, some conservative investors may prefer even
less volatility. Fortunately, Trinity is easily customizable.
The simplest way to match Trinitys volatility level to your personal investing temperament is by adjusting the
bond allocation. You would simply increase your exposure to bonds (Treasuries or T-bills), decreasing your
other allocations on a pro rata basis.
If you do, youll generally find that volatility and drawdowns decrease in stair-step fashion as you allocate
more to bonds.
Regardless of which customized Trinity portfolio is right for you, if youre a serious investor with a long-term
perspective and self-discipline, then Im confident Trinity has the potential to provide you significant wealth
and peace of mind.
19

How to Implement the Trinity Portfolio

What we have with Trinity is a well-engineered portfolio that should outperform over time, even in varying
market conditionsif we guard it from two common mistakes that trip up investors:
1. Paying excessive fees
2. Letting your emotions lead you astray
Lets start with fees.
Investors tend to focus excessively on returns something mostly out of their control while not paying
nearly enough attention to fees, which is totally within their control and has a huge effect on long-term
wealth.
Below are some ballpark fees for perspective:
The average mutual fund charges 1.25% per year.
The average ETF charges 0.54% per year.
Source: Morgan Stanley ETF Semi-Annual Review, June 1, 2016
The average financial advisor charges 1.02% per year. (Although the most expensive quarter of advisors
charge over 2% per year.)
Source: www. investmentnews.com/article/20150405/REG/150409959/advisory-fees-show-signs-of-a-rebound
When you combine all these fees, their impact can gut your long-term returns.
Yet most people have little awareness of this. One, it isnt the fun part of investing. Talk about fees, taxes,
and other costs is not as sexy at cocktail parties as is chatter about the next hot stock, so its seldom top of
mind. Two, fees are skimmed off the investment so you never see them (a brilliant move by Wall Street of
course).
But dont let this element of stealth mislead you. The report The Real Cost of Fees by Personal Capital
demonstrates just how much people lose to fees over a lifetime.
Assuming you have a $1 million portfolio growing at 7% over 30 years, how much do you think youll pay in
total fees (including management and underlying fund fees)?
According to Personal Capital, you could pay as much as $1.4 million. Thats obviously 40% more than your
original investment!
Again, most investors dont understand this since these fees are invisible. But what if you had to go to your
bank, withdraw $19,800 in cash, then deliver it in a briefcase to your advisor? By year 30 that withdrawal is
$86,000.
Would you do that?
For another illustration of the destructive power of fees, lets rewind to Step 2. Thats where we added the
tilts of value and momentum to the Global Asset Allocation Portfolio. These tilts increased returns by about
two percentage points a year.
20

But lets tweak this now.

Lets say were going to apply the same tilts. The difference is well ask an advisor to do it for us (and pay him),
and we wont notice that the advisor fulfills our request using expensive smart beta mutual funds.
The result? The associated fees will likely erase all the gains we generated from the tilts in the first place.
Below is a chart that shows the same portfolios from earlier, but this time implemented with a 2.25% total
fee. As you can see, it makes a big difference!
Figure 26 - Various Portfolios with Different Fees Applied
We came to similar conclusions in our book, Global Asset Allocation, and you can download a free copy here.
The way to protect your portfolio from fees is by simple awareness. Be diligent about how much you pay for
investment funds (the lower the better). The good news on implementation is that there are now many low
cost index mutual funds and ETFs available to purchase from any brokerage account. My asset management
company, Cambria, launched the first and only (as of the time of publishing) permanent 0%-management-fee
ETF in the financial industry.
What about your advisor? If an advisor brings significant value to your life and/or financial situation, then
I have no problem with that. But likely their value-add is not in the asset allocation process but rather in
behavioral coaching, financial and estate planning, insurance, etc. I should add that many advisors are worth
reasonable fees of the average 1%.
Advisors can be a major defense against the second trap into which many investors fall: succumbing to
emotional investing. Specifically, letting fear and greed manipulate you into action at the wrong times.
Vanguard estimates that hiring a good advisor could add up to 3% in annual returns (and most of their value
is in the behavioral coaching, a.k.a. keeping you from doing something stupid).
The Trinity Portfolio or any portfolio utilizing buy-and-hold as a component, for that matter requires a
mastery over emotions that few investors exhibit on a long-term basis. For good reason, of course; it can be
hard.
Remaining faithful to your strategy when your portfolio is dropping 10%, 20%, or more is incredibly difficult.
Similarly, when your neighbors and coworkers are making big returns from the latest market darling and
youre missing out, its a challenge to resist joining in.
21

So how do you prevent emotional decisions from ruining your returns?

Discipline.
Whatever strategy you decide to implement, simply stick with it. Whether 60/40, a global market portfolio,
or even our Trinity Portfolio, find something that works for you and enables you to sleep well at night then
stick with it! Let the rules of your strategy dictate your actions, not your emotions. If thats too difficult for
you, then consider partnering with a cost-effective advisor who will help you stick with your plan.
In the meantime, lets not lose sight of the bigger picture. From George Mallory:
And joy is, after all, the end of life. We do not live to eat and make money. We eat and make money to be able
to live. That is what life means and what life is for.
22

APPENDIX A - Definitions of the Metrics Used in the Charts

Returns is simply the annualized returns over the stated period.
Volatility measures the variability in an assets market price. In other words, how much an assets price
bounces around. The lower the better.
Sharpe Ratio is a measure of risk adjusted return. The formula is (Asset returns Treasury Bills) / Volatility.
Most asset classes have a Sharpe ratio over long time frames of around 0.2 to 0.3. The higher the ratio, the
greater the return a portfolio is generating per unit of risk. Sharpe ratios can be misleading when looking at an
asset class or strategy at short periods of even a decade. The U.S. stock market has seen Sharpe ratios above
1, and even negative, in various decades in the past century.
MaxDD stands for maximum drawdown. This measures the greatest differential between a portfolios
highest peak value and its lowest trough value. Basically, it is the maximum amount your portfolio could have
been down at its worst poin.
% Positive Months is simply the percentage of months where the portfolio posted positive returns.
$100 becomes indicates how much an investment of $100 into the portfolio would be worth at the end of
2015.
Inflation CAGR stands for inflation compound annual growth rate. This is the annual inflation rate over
the period.
23

DISCLAIMERS
Cambria Investment Management, LP

(CIMLP) is an investment adviser registered
under the Investment Advisors Act of 1940
with the U.S. Securities and Exchange
Commission (SEC).
This publication is for informational purposes
only and reflects the current opinions of
CIMLP. Information contained herein is
believed to be accurate, but cannot be
guaranteed. This material is based on
information that is considered to be reliable,
but CIMLP and its related entities make this
information available on an as is basis and
make no warranties, express or implied
regarding the accuracy or completeness of the
information contained herein, for any
particular purpose. CIMLP will not be liable to
you or anyone else for any loss or injury
resulting directly or indirectly from the use of
the information contained in this newsletter
caused in whole or in part by its negligence in
compiling, interpreting, reporting or delivering
the content in this newsletter.
Opinions represented are not intended as an
offer or solicitation with respect to the
purchase or sale of any security or financial
instrument, nor is it advice or a
recommendation to enter into any
transaction. The material contained herein is

subject to change without notice. Statements
in this material should not be considered
investment advice. Employees and/or clients of
CIMLP may have a position in the securities
mentioned. This publication has been prepared
without taking into account your objectives,
financial situation or needs. Before acting on
this information, you should consider its
appropriateness having regard to your
objectives, financial situation or needs. CIMLP
is not responsible for any errors or omissions
or for results obtained from the use of this
information. Nothing contained in this
material is intended to constitute legal, tax,
securities, financial or investment advice, nor
an opinion regarding the appropriateness of
any investment. The general information
contained in this material should not be acted
upon without obtaining specific legal, tax or
investment advice from a licensed
professional. Past performance is not a guide
to future performance, future returns are not
guaranteed, and a loss of all of the original
capital invested in a security discussed in this
newsletter may occur. It is your responsibility
to be aware of and observe the applicable
laws and regulations of your country of
residence.
portfolio results as the securities are not

actually purchased or sold. They may not
reflect the impact, if any, that material
economic and market factors might have
had on the investment managers decision-
making if the hypothetical portfolios were
real. Indices mentioned are used for
comparison purposes, are related to the
market in a broad sense and thus may differ
from the model portfolios in their level of
volatility. Indices are unmanaged and
cannot be invested in directly. The back-
tested data relates only to a hypothetical
model of past performance of the GTAA
strategy itself, and not to any asset
management products based on this index.
No allowance has been made for trading
costs or management fees which would
reduce investment performance. Actual
results may differ. Returns represent back-
tested performance based on rules used in
the creation of the index, are not a
guarantee of future performance and are
not indicative of any specific investment.
There are inherent limitations in hypothetical

2016 by Cambria Investment Management, LP

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CQR ISSUE 9 | June 2016