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A Five Fund Basket For The Long Haul

Jan. 18, 2015 3:18 PM ETTLT30 Comments
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Varan's Blog
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The yearly balanced equally weighted portfolio of four Fidelity funds and the long term treasury bond fund (FDFAX, FSCSX, FBIOX, FRESX and VUSTX/TLT) has yielded very good returns for the last twenty five years. The following figure compares its performance with that of VFINX/SPY and BRK-A as well as with an annually rebalanced portfolio of the same five fund basket wherein the weights are determined on the basis of a modified version of risk parity. The figure displays the annualized CAGRs of the portfolios that were initially funded at the beginning any month during the period 1991-todate, and held up to today. Clearly the fund based portfolios would have outperformed SPY independent of what month they were initially funded in. (By the way, this way of comparing past performance seems to be the best one, as it removes all doubt about the dependence of the returns on the starting date. Looking at the returns on the basis of just a handful of starting dates has led to a lot of unnecessary arguments on SA.)

Obviously the future performance of the portfolio relative to SPY may be entirely different, but the results suggest that this basket may prove to be a good long term investment, a conclusion that is also supported by the various performance metrics shown below.

CAGR (%) MaxDD (%) Sharpe Sortino Volatility (%)
Eq. Wt. 14.3 33.2 0.91 1.69 12.6
Risk Parity 16.2 34.8 1.04 1.85 12.7
VFINX 9.9 50.9 0.54 0.88 14.5
BRK-A 15.7 44.5 0.68 1.36 20.6

This is the allocation for the annually rebalanced portfolio according to a modified risk parity method for the current year 2015 (YTD return : 4.4%, 2014 return : 27.7%)

FBIOX 13.3%

FRESX 24.4%

TLT 43.8%

FDFAX 16.9%

FSCSX 1.6%

Analyst's Disclosure: The author is long TLT.

I hold positions in all of the Fidelity funds mentioned in this post, which is not investment advice in any shape or form but just a description of some results that may be of interest to the readers.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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