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varan
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  • Safe 35 For 1991-2012 7 comments
    Feb 22, 2013 9:00 PM

    Two recent articles on SA

    http://seekingalpha.com/article/1152161-protected-principal-retirement-strategy-the-quest-for-perfection

    http://seekingalpha.com/article/1108071-dividend-growth-safety-superstars-2012-update-part-two

    prompted an interesting question: can one construct a reasonably sized portfolio in hindsight (with a reallocation strategy no more sophisticated than yearly rebalancing of an equally weighted portfolio) that would have had not a single year of loss during the last 20 years or more, and would have yet yielded more than decent annual returns? Clearly the answer has little bearing for what is the best investment for the future, but it is definitely worthwhile from a certain perspective.

    Obviously there are multiple portfolios that satisfy this criterion. Here is one.

    I started with twenty of the current dividend champions whose mean annual loss during the period 2000-2012 was the lowest.

    AWR BF-B BMS CBSH

    CLC CTWS GRC HCP

    JNJ MCY MGEE MSEX

    NWN PNY RLI SCL

    SHW UGI UHT VVC

    I added some income generating CEFs whose performance during the last twenty years has been quite impressive.

    AWF MIN MMT NXQ

    I also added some leading names in health, energy (MLPs), and technology sectors

    CSCO BWP KMP LLY ORCL

    I finally rounded off the list with some ETFs encompassing treasuries, municipal bonds, gold, and inverse indices.

    DOG GLD IEF MUB SH TLT

    That does it. An annually rebalanced equally weighted portfolio of these 35 stocks would have had not a single year of loss during the period 1991-2012.

    CAGR 16.7%

    Current Yield 3.5%

    Minimum Annual Return 0.3% (2008)

    Maximum Monthly Drawdown 15.5%

    Kelly Fraction .52

    Sharpe Ratio 0.98

    Mean Annual Return 17.4%

    95% Lower Bound on Mean Annual Return 12.4%

    Two Factor Alpha 10%

    Two Factor Beta .4

    Safe Withdrawal Rate 8%

    Sufficient Saving Rate 0.35%

    Year to date (as of 2/22/2013) this portfolio has returned 4.5%.

    The equity curve for the portfolio is shown in the following figure.

    (click to enlarge)

    Disclosure: I am long CSCO.

    Themes: Dividend Growth stocks, zero annual drawdown portfolio
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  •  
    Good stuff, Varan.
    23 Feb, 11:41 PM Reply Like
  •  
    Thanks. I think that this exercise, although backward looking, does point to the type of equities that belong in a portfolio whose main purpose is robust returns with low drawdowns.
    24 Feb, 03:40 PM Reply Like
  •  
    If essentially a static portfolio, yes.
    24 Feb, 10:27 PM Reply Like
  •  
    Hi Varan,

    You're right that the exercise is backward looking. Using current dividend champions as an initial filter means that the stocks you end up with suffer from strong survivorship bias (eg. it eliminates many financials which paid great dividends until the crisis).

    If you had to construct a portfolio now for the next ten years, what would it look like?

    Best,
    David
    25 Feb, 06:56 AM Reply Like
  •  
    Thanks David. That's a million dollar question whose answer is obviously impossible to give.
    25 Feb, 10:05 AM Reply Like
  •  
    Oh well - it was worth asking :-)
    25 Feb, 11:17 AM Reply Like
  •  
    David

    Now that you have been such a good sport, let me venture to say that if you update a portfolio containing three of SPY, CEF, FGMNX, FGOVX, FNMIX, PTTDX and FTHRX (or the ETF equivalents of the funds if you can find them) every six months by buying the three that did the best during the prior month (December for the Jan update and June for the July update), you will beat SPY in the long term by a percent or so, and will have very low drawdown, with about 90% certainty. We will see if this works in five years. During 1994-2013 this has returned over 11% with the only loss of about 2% in 1994.
    25 Feb, 11:39 AM Reply Like
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