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This article will be the final article in my series of articles about simple portfolio allocations for different levels of risk tolerance. In this article I will be constructing an Ultra Aggressive growth portfolio of ETFs.

There are two goals I had for constructing the following portfolio:

  1. Make sure the portfolio is diversified as measured by correlations.
  2. Increase the volatility of the portfolio by weighting the most volatile funds higher than more volatile funds. I used the 3 month average volatility over the last 12 months. [Volatility data is from ETFreplay.com]

Portfolio Funds

Ultra Aggressive Growth

Symbol

Weight

Volatility

Vanguard Small Cap Growth ETF

(VBK)

45%

15.20%

Vanguard MSCI Emerging Markets ETF

(VWO)

40%

19.40%

SPDR Gold Shares

(GLD)

15%

19.00%

Fund Selection Method

I selected the above funds by selecting the almost the opposite asset allocation that I used in constructing the ultra conservative portfolio. In the ultra conservative portfolio, the allocation was 100% to bonds, and those funds I chose were all short term bond ETFs. This portfolio being for someone with ultra aggressive risk taking, I decided to make the portfolio 85% equities. Because there is no allocation to ETFs that match the risk level like the previous portfolios I have done, I am comparing this portfolio to the SPDR S&P 500 (SPY).

To find the best equity funds I used to following guidelines using the TD Ameritrade ETF screener, the only difference from these criteria and the ones from my previous portfolio is that I excluded the dividend criteria, because the portfolio is Ultra aggressive growth, so it favors capital growth over dividend growth.

  1. Morningstar Category: Small Cap Blend, Small Cap Growth, Small Cap Value.
  2. Total net assets: Greater than $1 Billion.
  3. 3 yr Market Return is greater than 0.
  4. ETF Type is Equities.
  5. Chose the fund with the Highest Standard Deviation.

Based on the above criteria there were 9 ETFs that met this criteria for Small Cap U.S. equities, so I used the one with the highest standard deviation because this portfolio has an Ultra aggressive risk target. So the fund that had the highest standard deviation was VBK, so I included it as the Small Cap U.S. equity fund for the portfolio.

Based on the above criteria there were 5 ETFs that met this criteria for International/Emerging Markets equities, so I used the one with the highest standard deviation because this portfolio has an Ultra aggressive risk target. The fund that had the highest standard deviation was VWO, so I included it as the International equity fund for the portfolio.

For the ultra aggressive growth portfolio I decided to keep the 15% GLD allocation as I did in the aggressive growth portfolio. Also, I included GLD for the purpose of diversifying since the correlations in this portfolio were higher than my previous portfolio's.

Below is a table showing the correlation of each fund to each other as well as each fund the Vanguard Total World Stock Index ETF (VT) and the SPY.

Correlations

[Data from ETFscreen.com]

GLD

SPY

VBK

VT

VWO

GLD

1

SPY

0.4

1

VBK

0.37

0.95

1

VT

0.47

0.98

0.93

1

VWO

0.5

0.92

0.88

0.96

1

Returns and Data

[Data from ETFreplay.com]

The following charts and data show the portfolio compared to the SPY.

(click to enlarge)

(click to enlarge)

Portfolio Challenges

The biggest challenge of this portfolio is being able to handle the volatility. Because 85% of the portfolio is Small Cap and Emerging markets equities, the volatility will be much greater than the previous aggressive growth portfolio's. Another challenge is when the market turns bad like it did in 2008, the above portfolio will tend to underperform the SPY because Small Cap stocks and Emerging markets stocks tend to underperform on the way down, but then they outperform by a good margin on the way up.

Closing thoughts

The returns of the portfolio have outperformed SPY by a wide margin over almost the last 7 years. The portfolio accomplished the outperformance with a higher volatility than SPY. Overall I am very happy with all six of the portfolios that I constructed; I got lots of feedback both positive and negative on the portfolios. One theme that kept reoccurring in the comments was about rising interest rates and the duration of the bonds in the portfolios I have constructed. Rising rates are definitely a challenge for investors, and possibly I will begin work on a "rising rates" portfolio.

Disclaimer

Source: Simple Portfolio Building: Ultra Aggressive Growth