Beginning with a portfolio of 16 ETFs (later expanded to 18) covering 10 different asset classes, the "Feynman" portfolio performance was examined over a 6-year period from mid-2007 to mid-2013 (present). This time frame was selected to include the bear market of 2008 through early 2009 and the subsequent bull market from March 2009 to the present.
The assets included in the portfolio, hereafter known as the Feynman, include Exchange Traded Funds (ETFs) that have a sufficient historical record to cover both a major bear and bull market. Many of the ETFs are iShares securities as Vanguard ETFs frequently used to populate portfolios did not have sufficient historical records for this study. The ETFs selected for the portfolio are well known and reflect the overall structure of a global portfolio. For example, the portfolio includes three value ETFs (IVE, IJJ and IJS), three growth ETFs (IVW, IJK and IJT) as well as EFA to cover the developed international market. Vanguard's VWO is used as the emerging market ETF. The reason for going with as many as 18 ETFs was to provide flexibility for the optimizer to do its work of recommending an asset allocation plan beginning on June 29, 2007. A complete list of ETFs can be found through one of the links.
The performance study of the Feynman runs from 06/29/2007 through 06/30/2013. For a benchmark, the Vanguard Total Stock Market Index Fund (VTSMX) was selected as it provides a broad coverage of the equities market.
To determine the asset allocation plan for the passive Feynman portfolio, an optimizer initially operated on 16 ETFs that had sufficient historical records. RWX and BWX were added a little later when adequate historical data became available. This is all detailed in a file that can be downloaded from this site. Using the suggested or optimized number of shares for each ETF, the portfolio was set in motion.
The method of share allocation to the portfolio is described in further detail at this site. The method described is chosen to limit the impact of discretionary bias - i.e. rather than dictate that we should have a 60%/40% Equity/Bond portfolio we allocate a range to each asset group and allow the Optimizer to determine the "optimal" holdings within these constraints.
Key features of the VTSMX performance (based on daily closing prices) are:
· 6-year return (start of analysis period 6/29/2007 to end of analysis period 6/28/2013): +10.81% or a Compound Annual Growth Rate (OTCPK:CAGR) of 1.73%
· Maximum Drawdown (37.80 on 10/09/2007 to 16.43 on 3/09/2009): -56.53%
· Maximum Trough to Peak (16.43 on 3/09/2009 to 41.93 on 5/21/2013): +155.20%
· Maximum (10-day) volatility: 98.65% on 10/22/2008
· Minimum (10-day) volatility: 2.58% on 12/31/2010
· 8 "legs" with bullish or bearish moves of greater than 15%
Key features of the "Passive" Feynman portfolio are:
· 6-year return (start of analysis period 6/29/2007 to end of analysis period 6/28/2013): +24.32% or Compound Annual Growth Rate (OTCPK:CAGR) = 3.69%
· Maximum Drawdown ($102,962 on 9/28/2007 to $71,182 on 3/31/2009): -30.87%
· Maximum Trough to Peak ($71,182 on 3/31/2009 to $124,319 on 6/28/2013): +74.65%
While the passive Feynman portfolio outperformed the VTSMX index fund by nearly 200 basis points per year, the question remains - what if rebalancing took place every quarter or every year using the same optimizer? Is it possible to further reduce risk and at the same time improve return? Such a study is forthcoming.
To track the development of the Feynman study, go to this site. Total credit for the passive portfolio study goes to David Faulkner, a contributor to the ITA blog.
Additional disclosure: The Feynman study was conducted by an author on the ITA Wealth Management blog, David Faulkner.