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A Three Fund Portfolio

Jul. 17, 2020 1:43 PM ET8 Comments
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Varan's Blog
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Seeking Alpha Analyst Since 2010


  • Past performance of bimonthly rebalanced portfolio of VTI/QQQ/ZROZ is summarized.

The following plots summarize the performance of bimonthly rebalanced portfolio of VTI, QQQ, and ZROZ on the basis of risk parity. On the first trading day of every other month the weights of the assets are computed on the basis of the daily returns of the immediately prior three months using risk parity and the investment is made at the close of the market. The plots represent the equity curve as well as the weights of the assest during the two month periods. In order to extend the back test for a longer time period the following proxies were used: VFINX (1987-1993) and VTSMX (1994-2003) for VTI, the NASDAQ index ^NDX (1987-2000) for QQQ and WHOSX (1987-2010) for ZROZ.

The comparison of the rolling ten year returns of the portfolio with VFINX (SP500 Fund) and PRWCX (one of the best balanced funds, but unfortunately, closed to new investors at most brokerages) suggests that this portfolio has been a better investment than both for any ten year holding period since around 2002.

This comparison of rolling buy and hold returns suggests that for long term holding the portfolio has been better than both VFINX and PRWCX starting at any time since 1988. Of course this conclusion is based on the time periods ending on 7/16/2020, and is subject to change in the future.

Here are the various metrics.

Volatility Max DD Sharpe Sortino CAGR
Portfolio 9.3% 14.5% .91 1.74 11.5%
VFINX 14.4% 51% .5 0.93 10.5%
PRWCX 9.7% 37% .86 1.44 11.3%

According to the Morning Star Mutual Fund Screener there are no mutual funds in the category of Allocation funds (that includes balanced funds with various equity/fixed-income allocations, target date funds, and tactical allocation funds, among many others) whose ten-year, five-year, three-year, one-year, and YTD returns are all better than those of this portfolio.

Finally, for any distribution phases beginning in any year since 1988, this portfolio would have sustained 7% initial withdrawal subsequently indexed for inflation every year, with the current portfolio value larger than the starting value. Note that the safe withdrawal rate is expected to be lower than 7%.

Analyst's Disclosure: I am/we are long VTI, QQQ, ZROZ.

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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