I am discontinuing the Basic Portfolio and replacing it with an All-Weather ETF Portfolio. First, the Basic Portfolio is being discontinued because there is too much cross-over with the moving average and momentum strategies already used in the Ivy Portfolios and ETFReplay.com Portfolio. I will continue to track the Ivy and ETFReplay.com Portfolios on Scott's Investments.
The Basic ETF Portfolio will be replaced with an “All-Weather ETF Portfolio”. The portfolio draws inspiration from several sources, the first being Ray Dalio, founder of Bridgewater Associates. Dalio created an “All-Weather” investment strategy (Bridgewater pdf available here) which is intended to perform well over all market environments. The strategy as explained by Bridgewater boils down to having exposure to asset classes that perform well in four different market environments, summarized in the simple diagram below:
The Fiscal Pop-N-Drop for Equities – Look Out
The All-Weather portfolio can be easily replicated using ETFs. Below is a proposed portfolio allocation and weighting:
| Asset Classes | Targeted Allocation | Potential Investment Vehicles |
| Equities | 18.75% | VTI |
| Commodities | 14.50% | DBC, GLD, GSCI Index |
| Corporate Credit | 6.50% | VWEHX, HYG |
| Emerging Market Credit | 14.50% | PREMX, EMB |
| Inflation-Linked Bonds | 20.75% | TIP |
| Nominal Bonds | 25% | TLT, IEF |
The objective is not to create a one-sized fits all portfolio, but to duplicate, as best possible and in a simple portfolio, the spirit of the All-Weather Portfolio as laid out by Bridgewater. Liberties could be taken with my choice of TLT and IEF to represent nominal bonds. A more broad-based bond ETF like AGG, BND or BOND could serve as a viable substitute. Corporate credit could also be divided among high-yield (HYG) and investment-grade corporate bonds, using an ETF like LQD. Commodities are a broad sector, Gold may be the most popular among the investment masses but several other ETF options exist for broader commodity exposure. Equity exposure could be further allocated among market-capitalization, sectors, global exposure, value vs. growth, etc. Inflation-linked bonds could be further divided among duration as well as global exposure through an ETF like WIP. The possibilities are nearly infinite, but the objective was to keep it simple.
I took the portfolio above and tested it using ETFReplay.com. The nominal bonds were equally split between TLT and IEF (12.5% each) and the commodity exposure was split equally between DBC and GLD. In cases where the ETFs listed above had trading histories beginning later than 2005, I substituted the listed ETF or Index for testing purposes.
The tests ran three variations of the All-Weather strategy. The first was a buy-and-hold with an annual rebalance. The second used a 10 month simple moving average rule to sell any of the funds or ETFs in the All-Weather Portfolio when they crossed below their 10 month moving average and purchased them when they crossed back above it (re-balanced monthly). The third used the same 10 month SMA rule but used an equal weighted version of the All-Weather Portfolio. Comparisons to SPY, AGG, VBINX, and a variation of the Ivy 5 Portfolio, which uses the same 10 month SMA crossover system, are presented:
| 2005-2012 | ||||||
| Strategy | CAGR | Total Return | Volatility | Sharpe | Max Drawdown | Trades |
| All-Weather Buy and Hold, Annual Rebalance | 8.10% | 85.80% | 6.10% | 0.83 | -19.67% | annual |
| All-Weather (Mutual Funds/ETFs) w/ 10 Mo SMA | 7.40% | 76.30% | 4.90% | 0.96 | -4.60% | 128 |
| All-Weather (Mutual Funds/ETFs) Equal Weighted w/10 Mo SMA | 7.70% | 80.80% | 5.40% | 0.91 | -6.50% | 132 |
| VBINX (Vanguard 60/40 Balanced Fund) | 5.30% | 51.10% | 13.00% | 0.23 | -36% | N/A |
| SPY | 4.20% | 38.60% | 22.10% | 0.16 | -55.20% | N/A |
| AGG | 5.20% | 49.60% | 5.60% | 0.45 | -12.83% | N/A |
| Ivy 5 w/ 10 month SMA (AGG, EFA, SPY, VNQ, GSCI Index) | 6.10% | 61.10% | 9.90% | 0.35 | -14.70% | 81 |
For the 2010-2012 test only ETFs were used:
| 2010-2012 | ||||||
| Strategy | CAGR | Total Return | Volatility | Sharpe | Max Drawdown | Trades |
| All-Weather Buy and Hold, Annual Rebalance | 10.80% | 35.80% | 5% | 1.84 | -3.28% | annual |
| All-Weather (ETFs only) w/ 10 Mo SMA | 6.70% | 21.40% | 5% | 1.06 | -3.70% | 56 |
| All-Weather (ETFs only) Equal Weighted w/10 Mo SMA | 6.20% | 19.60% | 5.40% | 0.89 | -4.20% | 56 |
| VBINX | 9.20% | 30.20% | 10.80% | 0.73 | -10.87% | |
| SPY | 10.80% | 36.00% | 18.40% | 0.57 | -18.61% | |
| Ivy 5 w/ 10 month SMA (AGG, EFA, SPY, VNQ, GSCI Index) | 2.10% | 6.30% | 11.70% | 0.12 | -14.70% | 45 |
The portfolio has been a low volatility alternative to both a balanced mutual fund (VBINX), the Ivy 5 Portfolio, and equities (SPY). The SMA variation has under-performed relative to equities since 2010, although volatility and drawdowns remained low relative to the other benchmarks. Since 2005 the portfolio has shown significantly lower drawdowns and volatility then any of the benchmarks. Not shown in the tables above is the buy-and-hold All-Weather Portfolio has a correlation of .39 to AGG from 2005-2012 and .57 to VBINX.
Past performance is no guarantee of future results. Factors that would impact the test results above are commissions and taxes. The more transactions, the higher the potential commissions and taxes. These factors, among others, should be considered when evaluating the buy-and-hold approach to the 10 month SMA approach.
Readers may be concerned about exposure to long-term government bonds. It is a fair concern in the present monetary and fiscal environment; however, the objective of the portfolio is to provide exposure to a variety of assets that perform differently in different market environments. Its purpose is not to predict when these changes in market conditions will occur. In this aspect, it is not dissimilar from the Permanent Portfolio, which I have profiled on several occasions. AGG, BND, or PIMCO's BOND offer some additional diversification within the bond sector.
In the next few days I will post the portfolio as a spreadsheet so that readers can follow the performance at Scott's Investments. The spreadsheet will track portfolio allocations and 10 month SMA signals. As a bonus, I will list some potential commission-free ETFs (depending on your broker and a variety of other factors) to substitute for the ETFs listed above.
For some further research on the All-Weather portfolio CSS Analytics posted a worthwhile piece in November.
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