The Triad Portfolio

The Triad Portfolio Strategy (TPS) is a type of investment strategy that uses three different asset categories to lower risk while achieving the greatest return for that risk. The three different asset categories listed in the Triad Portfolio Strategy are:

1) Risk-Free Assets

2) Core Assets

3) Alternative Assets

Genesis of The Triad Portfolio Strategy

I’ve been investing for a long time. It’s been about 15 years since I purchased my first share in the stock market. With the money I saved from working at the cabinet factory, I bought 14 shares of Home Depot at $34.18 a share for a total investment of around $500. I owned one stock. That was basically the one asset I owned.

I didn’t make any money from this purchase. Sure, I sold at a couple dollars a share higher. I picked up some dividends along the way. Even though I didn’t make any real money from this purchase, I’m so glad I did it.

I didn’t earn but I learned. This one purchase set me down a path to learning about investing. I watched CNBC in college the way most kids watched Comedy Central. I read One Up on Wall Street instead of The Iliad. My siren call was investing. I knew this. It was fun for me – some may say an obsession; I wouldn’t argue.

I’ve formed a very specific framework for investing over the past 15 years. I know what it looks like to lose lots of money relative to portfolio size. I also know what it’s like to have a stock I own get bought out by a larger company and go up 40% overnight. I’ve experienced the Great Recession, a couple of bull runs, a flash crash, and everything in between.

The framework I’ve formed, The Triad Portfolio Strategy, uses different asset categories that mitigate risk while achieving the best return possible. This strategy is nothing new – I mean, I named it the Triad Portfolio but I’m sure some market participants have portfolios like this. It’s rooted in simple portfolio diversification and is similar to the barbell strategy that is popular among investors.

The Triad Portfolio Strategy Framework

The Triad Portfolio Strategy seeks to minimize risk of loss using diversification across categories of assets. I’m not just talking about diversification between stocks and bonds; go beyond that. Let’s take a look at assets and put them into the three buckets, risk-free, core, and alternative.

1) Risk-free

Just as the name implies, these investments carry no risk: no market risk, interest rate risk, liquidity risk, or credit risk. Your aim in this group is to achieve a return approximately that of the 2-year Treasury Note which is currently yielding this percentage. And this would be a nominal rate of return (pre-inflation).

Most investors use the 3-month T-bill as a benchmark for the risk-free rate. I like the 2-year T Note because there is still very little risk here. You’ll be able to hold to maturity so there’s next to no interest rate risk. The government can’t default because it owns a printing press.

risk-free rate


My risk-free holdings include cash, which gives me a negative real return, Treasuries, and Certificates of Deposit.

2) Core

Again, core holdings, as the name implies, make up the backbone of your portfolio. They should make up a substantial portion of your portfolio and be suitable to be held for the long-term. For example, you could keep Vanguard’s Total Stock Market Index Fund Admiral Shares (VTSAX) as your core holding. You could also hold a mixture of equity index funds and bond index funds. You could even hold a retirement target-date index funds.

You wouldn’t want to hold something in your core holdings that you wouldn’t want to hold for the long-term, erode due to time decay (contango), or be too risky for your retirement objective. I keep a core holdings that includes individuals stocks, ETFs, and index funds. My goal with this portion of my portfolio is to get a 9-12% CAGR while being diversified across many sectors of the market. I like stocks with growing dividend yields and lower expected capital appreciation. I also like stocks with no dividends that have good growth prospects and are currently undervalued.

3) Alternative Investments

I consider an alternative investment to be anything other than traditional stocks and bonds, and exclude risk-free investments. Alternatives could be options, crowdfunded real estate, metals, commodities, P2P lending, private equity, timber, RE flips, and any other non-traditional investment. My goal with the alternative investments portion of my portfolio is to achieve, in aggregate, at least a 25% CAGR.

I trade options as alternative investments. I stick with pretty simple strategies. No double helix super-straddles or anything like that. I like to buy volatile stocks or commodities and then sell options against them (covered calls). I believe that retirees can follow conservative options strategies like writing covered calls. Stick with real estate or peer-to-peer lending if options scare you. One of the downsides to peer-to-peer lending is that it alone will not generate a 25% CAGR.

Investments In Triad Portfolio

My Triad Portfolio Allocation

You can decide how much to allocate to each section of your Triad Portfolio depending on your age, risk tolerance, and financial goals. I generally think most are too conservative with their portfolios, especially since taxes and inflation take such a large portion of retirees’ capital. You may want a more aggressive stock/bond allocation for your age.

Here’s the allocation I use for my Triad Portfolio:

  1. Risk-free assets – 10%
  2. Core holdings – 80%
  3. Alternative investments (trading options) – 10%

The percentages change slightly with each investment but the strategy stays the same. For example, you may want to allocate 30% to risk-free, 55% to core holdings, and 15% to alternative investments.

You can see how different allocations affect your overall expected return (CAGR) by downloading the below spreadsheet and putting your specific situation in the inputs.

You can also access this spreadsheet as a Google Sheet here: Portfolio Weighting

Why Use The Triad Portfolio Strategy?

I could get all wonky and go into a dissertation about modern portfolio theory and the fundamental aspects of it. I almost fell asleep writing that last sentence. Why does finance have to be so boring?

Here’s the deal: portfolio diversification is a free lunch. You do it because you can achieve the exact same return by diversifying without taking all the risk (thanks Elton and Gruber). When someone offers me a free lunch, I partake. Thank you.

Using the Triad Portfolio allocation strategy is just further diversification away from Wall Street investments. (My goal is actually to get my core holdings percentage down and increase both risk-free and alternative investments.)

As you know, when Wall Street investments go down in value, they can really tank and you have zero control of those investments. Unless you’re on the Board or have some insider knowledge, you have zero control. You’re a passive owner.

Putting all of your money in alternative investments can be risky too. And putting all your money in cash or low yielding assets will actually result in a negative real return.

Instead, the Triad Portfolio allocation strategy is to spread your capital across different dimensions. When one dimension goes down because of forced selling by fund managers (stock market), your short stock options may increase in value, and your rental property or peer-to-peer investment will keep chugging along.

I know a lot of you get stuck on one asset class and think it’s the greatest thing ever. Fundamentalism is destructive. It can ruin your return. People who love real estate tend be skeptical of Wall Street and vice versa. The thing is they both have have their pros and cons. You should own both.

I’d like to know your current portfolio allocation. Input your email below and reply to the introductory email with your current allocation. What do you think of the Triad Portfolio? Have you experienced a deep decline in any of your asset classes?


By | 2017-05-07T15:11:10+00:00 February 15th, 2017|Investing, Retirement Planning|0 Comments

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