Nearly two years ago I ran an analysis on a Medium Risk portfolio recommended in Daniel Solin's book, The Smartest Portfolio You'll Ever Own. How has that portfolio performed since the September 2011 posting and what are the projections for this nine security portfolio going forward? Two ETFs, VTI and SHY were added the this portfolio for reference.
Picking up where the last analysis ended, the Solin Medium Risk portfolio returned an annualized 13.3% with a standard deviation of 8.7%. That return looks respectable, but one needs to realize that the S&P 500, during the same time frame, returned an annualized 22.3% with a standard deviation of 11.2%.
Efficient Frontier: Using a different analytical method than used in the September 2011 analysis, the Medium Risk portfolio is projected to return around 6.0% going forward. Six percentage points may be high over the next year as the U.S. market continues to push to new highs.
In the following screen shot the current portfolio (diamond dot) has a higher Return/Risk ratio than the optimized portfolio (small red dot) based on the shares assigned to each ETF and the constraints placed on both the asset classes and individual securities.
Rankings: In addition to the nine funds recommended for the Medium Risk portfolio, I added VTI and SHY as reference ETFs. The following ranking system is composed of three factors. A 50% weight is assigned to the performance over the past three months. A 30% weight is allocated to the performance over the past six months and volatility captures the remaining 20% weight. VVIAX is the top performing fund followed by VBR and VTI. Remember that VTI is not part of the original portfolio but is included in this study as a broad market reference.
Buy-Hold-Sell Recommendations: The following data table is critical to the portfolio manager as it provides guidance based on momentum and optimization indicators. To learn more about the importance of momentum and risk reduction I highly recommend reading all parts of The Feynman Study beginning at the provided link. There are now six parts to the study with more to come.
The following portfolio was set up to emulate a $100,000 portfolio. VTI shows up as a potential buy even though it is not an official part of the Medium Risk Portfolio.
Momentum Recommendations: The following table is designed for the momentum investor. 1) Enter the size of the portfolio. In this example it is $100,000. 2) In the % column, enter the percentage to invest in the top performing securities held in the portfolio. In Part 5 of The Feynman Study, 25% was invested in each of the top four ETFs and the portfolio was rebalanced every quarter. The six-year study includes performance data, and it is quite impressive.
Part six of the study shows how ITA Risk Reduction (Modification of the Faber-Richardson model) does exactly what it is designed to do. Using a 195-Day Exponential Moving Average as a down-draft collar, capital is preserved, particularly in major bear markets such as we experienced in 2008 and early 2009.
While the Medium Risk Portfolio is well diversified, there are missing asset classes such as commodities, domestic and international REITs that serve a portfolio well during different market periods.