A Three Fund Portfolio
Seeking Alpha Analyst Since 2010
Summary
- 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.
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