Safety First: NASCAR driver Johanna Long and her helmet (Credit: Gearheads)
Bulletproof Investing: Week Six Performance
Each week since the beginning of June, I have presented at least two hedged portfolios created by Portfolio Armor to my Bulletproof Investing subscribers. This is an "investing with a helmet on" approach, and these portfolios are designed to last six months. I have promised to publicly share the final performance of each of these portfolios. Here, I update the final performance of the three portfolios and the top 10 names I presented in the sixth week I offered my service.
Bulletproof Investing Background
For most of the time I've offered my service, I've presented the $1 million portfolio with the highest ratio of possible upside to possible downside over the next 6 months, and the $100,000 portfolio with the highest ratio of possible upside to downside. In many cases, as in week 6, the portfolios that scored best according to that ratio were hedged against smaller than 9% declines. Those tightly hedged portfolios have often underperformed their expected returns, so recently I've shifted to presenting portfolios hedged against larger declines.
One thing I've kept doing since the second week is presenting my system's top names each week, and also a portfolio comprised of them hedged against a >9% decline over 6 months. Let's look at what I presented in week 6 and how it did.
This was the $100,000 portfolio initially presented here. The data below was as of July 7th. The primary securities here were ANSYS (ANSS), HDFC Bank (HDB), TE Connectivity (TEL), and Whole Foods, which was acquired by Amazon (AMZN). They were selected because they had the highest potential return estimates, net of hedging costs at the time when hedging against a >7% decline, and they had share prices low enough that you could buy a round lot of one of them for less than $25,000. Agnico Eagle Mines (AEM) was added in a fine-tuning step to absorb leftover cash from rounding down to round lots of the first four names.
The worst case scenario for this portfolio was a decline of 6.5% (the "Max Drawdown"), and the best case scenario was a gain of 20.12% (the "Net Potential Return", or aggregate potential return net of hedging cost). The "Expected Return" of 7.04% was a ballpark estimate taking into account that actual returns, historically, have averaged 0.3x Portfolio Armor's potential return estimates.
Portfolio 1 Performance
Here's how the portfolio performed, net of hedging and trading costs, and assuming the hedges were opened at the worst ends of their respective spreads.
This portfolio returned 7.97%, net of hedging and trading costs, which exceeded but was in the ballpark of its expected return of 7.04%.
This was the $1,000,000 portfolio presented here initially. There wasn't a lot of overlap in names with the previous portfolio, because this one was hedged against a >5% decline, and so had to select further down the overall top names list to find securities hedgeable against such a small decline. The ones it included were American Financial Group (AFG), Aon (AON), Medtronic (MDT), 3M (MMM), NextEra Energy (NEE), Rockwell Automation (ROK), and Whole Foods. United Continental (UAL) was added in a fine-tuning step to absorb leftover cash from rounding down to round lots of the primary securities.
The worst case scenario for this one was a decline of 4.81%; the best case scenario was a gain of 12.86%; and the ballpark estimate of an expected return was 4.14%.
Portfolio 2 Performance
Here's how the portfolio performed net of hedging and trading costs, and assuming the hedges were opened at the worst ends of their respective spreads.
This was the top names portfolio, hedged against a >9% decline, originally presented here, along with the list of top names.
The worst case scenario here was a Max Drawdown of 8.48%, the best case scenario, a gain of 19.35%, and the Expected Return was 6.29%.
Portfolio 3 Performance
This one returned 8.53%, which was better than its expected return of 6.29%.
These were Portfolio Armor's top 10 names as of July 7th: Align Technology (ALGN), Activision Blizzard (ATVI), ServiceNow (NOW), Brinks (BCO), IPG Photonics (IPGP), HDFC Bank (HDB), CSX (CSX), ILG (ILG), Regeneron Pharmaceuticals (REGN), and Bob Evans (BOBE).
Top Names Performance
On average, the top names were up 19.47% over the six-month period, versus 14.07% for the SPDR S&P 500 ETF (SPY).
Takeaways From Week Six
It's hard to beat the market in every weekly cohort, particularly when you're taking on as little risk as these portfolios did. The top ten names did beat the market by more than 5% over the time frame, but the constraints and costs of the top names portfolio kept it from keeping pace with SPY this time. That said, a return of 8.53% over six months -- while strictly limiting your risk to a decline of no more than 9%, even if another Lehman Brothers-level meltdown had occurred -- isn't too shabby.
Bulletproof Investing's top ten names on July 7th were up 19.47% over the next 6 months, outpacing the market by more than 5%. To see what this week's top names will be, sign up for a free 2-week trial here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.