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  • A Five Fund Basket For The Long Haul

    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.)

    (click to enlarge)

    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 (%)SharpeSortinoVolatility (%)
    Eq. Wt.14.333.20.911.6912.6
    Risk Parity16.234.81.041.8512.7
    VFINX9.950.90.540.8814.5
    BRK-A15.744.50.681.3620.6

    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%

    Jan 18 3:18 PM | Link | 19 Comments
  • Allocation Or Stock Selection - An Example

    Although there is nothing like good stock picking skills to get returns like Warren Buffett, for an investor who, for whatever reasons, is unable to acquire such abilities, it may be possible to construct portfolios based on simple allocation strategies whose returns are almost as good as those of some portfolios based on stock selection, with somewhat less efforts.

    A recent article on SA by a fundamental analyst par excellence provides a good example (http://seekingalpha.com/article/2470375-yield-on-cost-a-vitally-important-consideration-for-retired-investors ). The case study described in this article considers a portfolio that was initiated with $3M at the beginning of 2006. Even after annual withdrawals that increased every year as the dividends accrued from the twenty stocks of the portfolio, it ends up with $5.6M at the end of 2013, thus weathering the intervening shocks in the market with admirable and rarely matched success.

    I have compared the the performance of this all stock portfolio with that of various portfolios based the Naïve Graham allocation strategy (http://seekingalpha.com/instablog/709762-varan/2990923-naive-graham-passive-investing-according-to-the-master ) . The following are the relevant details for each portfolio:

    1. The starting capital was $3M.
    2. The portfolio was rebalanced at the beginning of every quarter according to the Naïve Graham method.
    3. At the beginning of every year, an amount equal to the annual accrued dividends as specified the article referenced above was withdrawn from portfolio. The specific withdrawal amounts are given below:

    Year

    Amount withdrawn

    2006

    $88,845

    2007

    $105,108

    2008

    $116,076

    2009

    $124,513

    2010

    $134,035

    2011

    $147,111

    2012

    $161,281

    2013

    $174,271

    It might be noted that the timing of the withdrawals may affect the results, but the withdrawal at the beginning of the year probably biases the results against the allocation portfolios.

    The amount left in the portfolios at the end of 2013 is given in the following table:

    Portfolio

    Value at EOY 2013

    VTI/TLT

    $6.5M

    IJJ/TLT

    $5.8M

    IJS/TLT

    $5.9M

    iShares Value

    $5.7M

    iShares Gowth

    $6.5M

    Fidelity Value

    $6.3M

    Fidelity Growth

    $6.7M

    All Stock

    $5.5M

    For the iShares Growth portfolio, the following ETFs were used in addition to TLT: IVW, IJK and IJT. For the Fidelity Growth portfolio, I used the following funds: FBGRX, FMCSX and FCPGX. For the other portfolios the same funds were used as in the original post on Naïve Graham referenced above.

    Sep 07 4:29 PM | Link | 24 Comments
  • Simple GMR

    Starting in August 2014, I will be tracking the results of the simplified Global Market Rotation strategy applied to baskets of ETFs. On the first trading day of every month, the strategy invests in the asset that performed the best during the immediately preceding three months on the basis of total return (i.e. including dividends and any other distributions). The back test results for three baskets (the mutual fund basket has been added mainly to get an estimate for the returns for a longer time period) for the periods ending on 7/31/2014 follow:

    RS-GMR-ETF: IJJ, IEV, ILF, EPP, EEM, TLT

    RS-GMR-LETF: MVV, IEV, ILF, EPP, EEM, TLT

    RS-GMR-MF: FDVLX, FIEUX, FEMKX, FLATX, FPBFX, VUSTX

     

    Period

    CAGR

    Sharpe (Sortino)

    Max. Drawdown

    Min. Annual Return

    RS-GMR-ETF

    2003-2014

    28.6%

    1.3 (2.8)

    17.2%

    6.5%

    RS-GMR-LETF

    2007-2014

    31.5%

    1.12 (2.11)

    22.4%

    4.1%

    RS-GMR-MF

    1991-2014

    20.7%

    0.97 (1.93)

    24.6%

    -24.6%

    YTD Returns

    RS-GMR-ETF 13.1%

    RS-GMR-LETF 4.1%

    RS-GMR-MF 14.1%

    For August 2014, both of the ETF strategies are going to be invested in EEM.

    The following figures display some results for the RS-GMR-ETF and the RS-GMR-MF baskets.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Disclosure: The author is long EEM.

    Additional disclosure: This is not investment advice in any form.

    Jul 31 10:31 PM | Link | 106 Comments
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