There is a second, subtler point to be made from this analysis.
If we compare the simple 60/40 portfolio against the more broadly diversified “asset allocation” portfolio, we see very little difference in end results. To the equity portion, we added small cap stocks, foreign developed, emerging markets, and real estate. To the bond portion, we diversified into high yield bonds and cash. We went from two asset classes to eight, and yet at the end of the day there was little change in return or risk. If anything, the results from the better-diversified portfolio are slightly worse.
Source: Zephyr StyleADVISOR. All S&P 500 data based on historical performance of the S&P Total Return Index. All historical performance of the Swan DRS Select Composite is net of fees. Prior performance is not a guarantee of future results.
This table perfectly illustrates the shortcomings of traditional asset allocation. Simply adding more asset classes does not remove systematic, market risk from the equation. The DRS was built on the premise that market risk must be hedged away since it cannot be diversified away.