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Individual investor. On double secret probation for commenting on SA articles, especially for pointing out that a portfolio that an RIA was using as an example of the kind of great advice he would provide had a drawdown of over 60%.
  • A Portfolio Of Mutual Funds 7 comments
    Apr 30, 2013 4:41 PM

    A Mutual Fund Portfolio

    This is an extension of the basic portfolio described elsewhere ( ).

    The main purpose here is to show the results for a longer period - in this case 1991-2013, and, consequently, instead of ETFs, some mutual funds have been used.

    For the equity portion of the portfolio we use FDVLX and VFINX, which are approximate proxies for mid-cap value and SP500, respectively. For the fixed income assets in the basket, the following funds, mostly from Fidelity, have been used:


    Components of the basket are selected for investment at the beginning of every quarter according to the method described in detail in the earlier post. Note that since the update period is three months, the transaction costs are essentially zero if, for practical implementation, IEF and TLT are used instead of the corresponding treasury funds VFITX and VUSTX, and SPY or IVV is used instead of VFINX. (Fidelity also has an SP500 fund inexplicably named as FUSEX, but its date of inception is much later than 1991.)

    As described in the post referenced above, once the basket of assets is chosen, the only parameter that needs to be specified in this strategy is the number of assets selected on the basis of the prior performance in each tranch. Since there are only two equity like assets in the basket, as the number of selected assets increases from two, the number of fixed-income assets in the portfolio also increases, thus resulting in lower returns, accompanied, one hopes, by lower volatility as well. This expectation is borne out in the equity growth curves for the various cases as shown in the following figure:

    (click to enlarge)

    Note that the cumulative return for the worst case is better than the returns for either FDVLX or VFINX. Further, the cumulative returns at any time during the period 1991-2013 for the best case (with two assets selected in each tranch, thus leading to the possibility of a 100% equity portfolio during some periods), are for the most part better than the cumulative returns of either FDVLX or VFINX.

    The table below summarizes all the results. Clearly, just with a handful of mutual funds, it is possible to achieve relatively greater returns without too much volatility with the approach used here.















    Number of Yearly Losses (Max. Loss)



























    The following figures show the asset allocation diagram for the case when three assets are selected in each tranch and the history of the number of funds in which the strategy is invested. As noted in the earlier post, the strategy is quite responsive to the market conditions inasmuch as it changes the allocation to equity and fixed income assets quite rapidly with the evolution of the market.

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (7)
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  • MrBobDobalina
    , contributor
    Comments (71) | Send Message
    Nice follow up, Varan.


    I have used your etf portfolio from before, but found the commission free equivalents at TD Ameritrade. IEF and CEF are the only ones I kept as is since there's no real commission free alternative. It essentially makes the portfolio cost next to zero to implement. I also added IWB for a large blend option.


    My preference is also to choose 2 etf's for the year and 3 for the 6-month and quarterly time periods.


    I think it's like you said in the earlier post - use whatever mutual funds or etf's you want as long as there are basically the same number of fixed income choices as equity choices, if you apply some reasonable variation of this concept, your results should be outperform the S&P500 alone.
    1 May 2013, 11:16 AM Reply Like
  • varan
    , contributor
    Comments (5897) | Send Message
    Author’s reply » great.


    1 May 2013, 11:32 AM Reply Like
  • nvtrader
    , contributor
    Comments (3) | Send Message
    Nice work Varan. You post great ideas on your blog.


    Are each of the tranches equally weighted? In other words do you allocate 1/3rd of the portfolio for the quarterly, half yearly and yearly picks?
    19 May 2013, 08:43 PM Reply Like
  • varan
    , contributor
    Comments (5897) | Send Message
    Author’s reply » Yes, I use the same weights.


    That's not optimal for the historical data, obviously, but I want to avoid optimization in order to eliminate any possibility of overfitting/data mining.
    19 May 2013, 08:53 PM Reply Like
  • nvtrader
    , contributor
    Comments (3) | Send Message
    Thanks for your response. I agree with your comment on overfitting/ data mining. Have you tried penalizing the 1 month and 3 month returns by volatility similar to the methodology on ? Or you are already accounting for volatility by having an equal number or greater number of bond/fixed income etfs in the basket?
    21 May 2013, 09:16 AM Reply Like
  • varan
    , contributor
    Comments (5897) | Send Message
    Author’s reply » There are quite a few possibilities if you want to introduce volatility. I have tried risk parity for each of the tranches separately, but the added complexity is not justified by the minimal difference in the performance.


    I have not attempted the introduction of weights for volatility.
    21 May 2013, 11:16 AM Reply Like
  • varan
    , contributor
    Comments (5897) | Send Message
    Author’s reply » YTD 7/22/2013


    2 Funds selected in each: 10.4%
    21 Jul 2013, 09:50 PM Reply Like
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