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Adaptive Asset Allocation For Lazy Portfolios

|Includes:DBC, EFA, IWB, SPDR S&P 500 Trust ETF (SPY), TLT, VNQ

Selection of a few of the ETFs from a basket on the basis of prior performance, together with allocation on the basis of risk parity, may improve the performance of some of the so-called lazy portfolios (see, e,g., ).

We consider the following portfolios (we note that we have used TLT for the bond components of the portfolios, and this may not conform exactly to the original recommendations).

Portfolio Components Weights
Ivy SPY, EFA, DBC, VNQ, TLT Equally weighted
Swensen SPY, EFA, VNQ, TLT 30%, 20%, 20%, 30%
Bernstein SPY, IWB, EFA, TLT Equally weighted

The performance of each of these portfolios starting in the year when all the component ETFs were first available is shown in the following table (the last column lists the minimum of the annual returns during the period).

Portfolio Period CAGR


Ivy 2007-2012 4.3% -22%
Swensen 2005-2012 7.4% -16%
Bernstein 2003-2012 8.6% -20%

For adaptive asset allocation we update the portfolio every two months as follows:

1. Find the two top ETFs whose performance was the best during the prior three months.

2. If any of the two top ETFs performed worse than TLT, replace it by TLT.

3. Find the weights of the two top ETFs using risk parity and the daily return history of the ETFs during the prior quarter.

Note that for only two assets the risk parity problem is quite easy to solve: the weights of the assets are inversely proportional to the standard deviation of the daily returns during the prior quarter.

The performance of this strategy applied to the lazy portfolios is shown in the table below.

Portfolio Period CAGR


Ivy 2007-2012 17.6% -0.77%
Swensen 2005-2012 14.1% 1.3%
Bernstein 2003-2012 13.1% -3.3%

The annual returns of these portfolios during the recent years are shown in the following table.

Portfolio YTD 1 Year 3 Years 5 Years
Ivy 14.4% 31.9% 18.5% 18.9%
Swensen 14.4% 31.9% 20.4% 14.3%
Bernstein 11.6% 37.1% 18.8% 13.5%

It is quite noteworthy that the Morningstar Fund Selector ( does not yield a single mutual fund that beats all of these four recent returns of any of these lazy portfolios. Surprisingly, none of the portfolios at Foliovesting ( ) can beat all of the metrics of any of these lazy portfolios with adaptive asset allocation.

Clearly, there is a slight improvement in the performance at the cost of twelve round-trip trades per year. Of course for taxable accounts there will be additional considerations.

Disclosure: I am long VNQ.