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Portfolios

This is a deep dive into the 4 Portfolios I offer: Conservative, Moderate, Aggressive, and Pratik's Portfolio.

Moderate

The Moderate Portfolio is what I recommend to most people: investors who are comfortable with the risk of investing in a passive S&P 500 Index, but are looking for higher returns based on cutting-edge research. This model is perfect for those 30 - 60 years old, investors with a long time horizon to let their investments compound. The Moderate Model has greater exposure to the growth and small-cap sectors of the economy, which limits our backtesting data to the year 2007. This still includes 2 market crashes: the Great Financial Crisis and Covid-19 Pandemic. Thankfully, the Moderate Model's Maximum Drawdown of 17.82% outshines the SPY's massive 50.80% drawdown in 2008.

The Moderate Portfolio is constructed to have a comparable standard deviation, or what we often think of as volatility, to the SPDR S&P 500 Index, while integrating highly-researched market anomalies (sector rotation, dual momentum, growth-value tilt etc.) to maximize topline returns. Thus, the Moderate Model's Compounded Annual Growth Rate is more than double the SPY's over the same time period -- 20.42% vs. 9.64% -- while having an extremely similar standard deviation.  The graph below is provided by PortfolioVisualizer.com and is plotted month-to-month from April 2007 to January 2024, almost 17 years of data (data limited by ETF availability). 

Latest Moderate.png

ETF Exposure

The Moderate Portfolio invests in the same 8 sector ETF's as the Conservative Model, and new ETF's that can be grouped into 2 categories: US Market Indexes, and Assets Uncorrelated to the S&P 500. In effect, the ETF universe can be understood as comprising 3 parts:

1. US Stock Market Indexes

2. US Sector ETF's

3. Hedges Against the US Stock Market

The new assets below are considered staples in many well-diversified portfolios; the broad diversification is in part what improves the moderate model's performance. Information is provided by Investopedia and the issuers of each ETF.

The Nasdaq Composite Index is a market capitalization-weighted index of more than 2,500 stocks listed on the Nasdaq stock exchange. It is a broad index that is heavily weighted toward the important technology sector. The index is composed of both domestic and international companies. The Nasdaq Composite Index is a highly-watched index and is a staple of financial markets reports.

The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smallest companies included in the Russell 3000 Index, an index that covers 96% of the total US Market. The Russell 2000 is widely regarded as a bellwether of the U.S. economy because of its focus on small capitalization stocks - small businesses tend to thrive when the economy is doing well and vice versa.

The VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index, which measures the performance of publicly traded equity REITs and other real estate-related investments. Each stock is held each stock in approximately the same proportion as its weighting in the index. 

 

REITs generate income from the rents and leases of the properties they own. The majority (90%) of a REIT’s taxable income must be returned to shareholders in the form of dividends. As a result, investors often rely on REITs as providers of a steady cash flow, though the shares can also appreciate in value if the real estate holdings do.

The iShares 20+ Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years. The Treasury’s long bond is considered one of the safest securities and is among the most actively traded bonds in the world.

The Invesco DB Base Metals Fund (DBB) is an exchange-traded fund that mostly invests in broad market commodities. The fund tracks an index of three base metal futures contracts. It selects contracts based on the shape of the futures curve to minimize contango. DBB was launched on Jan 5, 2007 and is issued by Invesco.

Stats Since Inception

The goal of the Moderate Portfolio is to closely mirror the volatility of the S&P 500 Market Index, but provide much higher returns for each unit of risk. This can be observed in the statistics below, from April 2007 to Jan 2024:

Moderate Stats.png

Compounded Annual Growth Rate (CAGR)

Higher is Better

The compounded annual growth rate (CAGR) is one of the most accurate ways to calculate and determine returns for any investment that can rise or fall in value over time. A higher CAGR means higher annual returns on average, which is preferable to most investors assuming all else is equal. Investors can compare the CAGR of two or more alternatives to evaluate how well one investment performed relative to another.

 

The Moderate Portfolio has a much higher CAGR (20.42%) than the S&P 500 Index (9.64%), showing that over the last 17 years, the Moderate Portfolio vastly outperformed the SPY Market Index.

Average Monthly Returns

Higher is Better

Average Monthly Returns is the percent change that an investor should reasonably expect to see their portfolio rise or fall each month. A higher number is preferable to a lower number because it implies higher compounded earnings over time. 

 

The Moderate Portfolio increased 1.65% per month on average, compared to the SPY's 0.88% monthly average over the last 17 years.

Lower is Better

A Maximum Drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum drawdown is an indicator of downside risk over a specified time period.

A low maximum drawdown is preferred as this indicates that losses from investment were small. If an investment never lost a penny, the maximum drawdown would be zero. The worst possible maximum drawdown would be -100%, meaning the investment is completely worthless.

The Moderate Portfolio's Maximum Drawdown of -17.82% is significantly better than the S&P 500's Maximum Drawdown of -50.80%. 

Worst Year

Lower is Better

Worst Year is the calendar-aligned year between 2007 and 2004 with the absolute worst performance. Most investors would prefer a lower (in absolute terms) Worst Year to a higher one, since a 'lower trough' implies a portfolio that declined less over a 12-month period than another portfolio would have.

The Moderate Portfolio's Worst Year is much better than the S&P 500's: only -4.94% compared to -36.81%.

Higher is Better

The Sharpe ratio is a mathematical expression that helps investors compare the return of an investment with its risk. To calculate the Sharpe ratio, investors can subtract the risk-free rate of return from the expected rate of return, and then divide that result by the standard deviation (the asset's volatility). The greater a portfolio's Sharpe ratio, the better its risk-adjusted performance.

The Moderate Portfolio's Sharpe ratio of 1.25 trounces the SPY's Sharpe Ratio of 0.59 over the same time period.

 

The Sharpe ratio can also help explain whether a portfolio's excess returns are attributable to smart investment decisions or simply luck and risk. For example, low-quality, highly speculative stocks can outperform blue chip shares for considerable lengths of time, as during the Dot-Com Bubble or the recent meme stocks rally. If a YouTuber happens to beat Warren Buffett in the market for a while, the Sharpe ratio quickly provides a reality check by adjusting both of their performances by their portfolio's volatilities.

Higher is Better

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns.  Because the Sortino ratio focuses only on the negative deviation of a portfolio's returns from the mean, it is thought to give a better view of a portfolio's risk-adjusted performance, since positive volatility is a benefit.

Just like the Sharpe ratio, a higher Sortino ratio result is better. When looking at two similar investments, a rational investor would prefer the one with the higher Sortino ratio because it means that the investment is earning more return per unit of the bad risk that it takes on.

The Moderate Portfolio's Sortino Ratio of 2.60 destroys the SPY's Sortino Ratio of 0.87 over the same time period.

Up-to-Date Backtest

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