The Fortress Portfolio is Alhambra’s original asset allocation strategy, a good foundation for a well-diversified investment program.

  • 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.

Just like the 60/40 stock/bond portfolio we separate assets into two categories: Growth assets (stocks) and diversifying assets (bonds in the traditional model).

Diversifying assets will, ideally, produce a return that has a low correlation to the growth assets’ return; they should zig when stocks zag. The problem of choosing which diversifying assets to include is complicated by the fact that correlations between asset returns are not stable. Bonds, for instance, were negatively correlated with US stocks (bonds rose when stocks fell) from the 1990s to around 2010. But for much of their history they were positively correlated (stocks and bonds rose and fell together) and have returned to that state today. They still reduce the volatility and return of a stock portfolio but not as well as they once did.

Our solution is to include other assets in the diversifying portion of the portfolio. We include real estate, commodities, and gold, along with bonds, in the diversifying portion of our Fortress portfolio. In all, this is how the Fortress Portfolio looks like across 5 distinct asset classes:

  • Large Cap Stocks 
  • Small Cap Stocks 
  • Real Estate 
  • Commodities/Gold 
  • Bonds 

Adding these other elements to the portfolio can increase the return for a given volatility (risk) relative to a stock/bond portfolio:

Or it can reduce volatility (risk) for a given return:

This Fortress strategy is the basis for all the asset allocation portfolios we build at Alhambra.

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Fortress Portfolio

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    Portfolio Construction

    The Fortress Portfolio is a simple, flexible approach to asset allocation. The original portfolio consists of 6 distinct domestic (US) assets (ETF symbols):

    • Large Company Stocks – S&P 500 Index (SPY, IVV)
    • Small Company Stocks – CRSP Small Cap Value Index (VBR) or S&P 600 Index (IJR)
    • Real Estate – MSCI US Investable Market Real Estate Index (VNQ)
    • Commodities – S&P GSCI Commodity Index (GSG, COMT, PDBC)
    • Gold – Spot Gold Price (IAU, GLD)
    • Bonds – Bloomberg 3-10 Year US Treasury Index (VGIT)

    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.

    We could construct a global version that incorporates non-US assets into the mix:

    • Large & Small Company Stocks – MSCI All Country World Index (ACWI)
    • Real Estate – FTSE EPRA/NAREIT Global REITs Index (REET)
    • Commodities – S&P GSCI Commodity Index (GSG, COMT, PDBC)
    • Gold – Spot Gold Price (IAU, GLD)
    • Bonds – Bloomberg Global Aggregate Composite Bond Index (BNDW)

    Other versions that can be used at this level would include:

    • International
    • Value
    • Growth
    • Emerging Market
    • Europe
    • Asia
    • Latin America
    • Country-Specific

    Different versions of the Fortress can be combined in a core/satellite construction to express different market outlooks. One might choose a global version as the core portfolio and add an emerging market version and a value version as satellites. Or you can choose a more active, tactically managed version of the Fortress Strategy…

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    Before we invest the first penny for you, we need to know about you. We need to find out what’s important to you, what your dreams and goals are and the type of investing that will give you peace of mind.

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