Variable portfolio challenge - PP like performance without any commodities

[BP]

Hello,

I have been considering a variety of options for VP portfolios.  I am thinking that the "blog mind" may come up with a better option than I can design myself.

Would anyone like to accept the challenge of posting a VP that:

1.  Does not use any commodities.

2.  Backtests to at least 9% CAGR over a minimum 20 year look back.

3.  Standard deviation equal to PP.

4.  Maximum drawdown of 15%.

5.  Low cost to implement like PP ETF (.15).

6.  Used in a taxable account.

[Pointedstick]

Easy peasy. 65% 5-year treasury bonds, 35% small-cap value stock index.


http://www.riskcog.com/portfolio-theme2.jsp#59y5ihd


You could do even better by violating #1 and adding some gold (assuming you're classifying gold as a commodity).

[BP]

Nice pointedstick.  How about a layer of difficulty? Must also provide deflation and inflation protection like PP.  Do you think that the 65 5yr/35 SCV will still cut it?

[Pointedstick]

I wouldn't trust any portfolio without gold to provide any real inflation protection, but you could easily get deflation protection with 25% SCV 75% 30-year bonds:

[BP]

I am thinking that both portfolios would not meet the criteria because the standard deviation appears to be far greater than the PP.

35/65:

1972-2008

    Average Return  10.72%
    CAGR                10.36%
    Standard Dev      9.1%
    Correlation TSM    0.67
    Correlation EAFE    0.32

http://www.assetplay.net/financial-tools/backtest/

25/75:

1972-2008

verage Return  10.68%
CAGR                10.2%
Standard Dev      10.53%
Correlation TSM    0.49
Correlation EAFE    0.22

What do you think?

[possum]

25% Wellesley
10% SCV
10% Emerging Markets
15% LT Treasury
20% 5yr Treasury
20% 2yr Treasury

1972 - 2011
CAGR 10.35%
STD 7.53%

[iwealth]

How about reconstructing the PP w/ TIPS instead of gold, using 5-yr treasuries, and SCV instead of TSM. Still have your government guaranteed inflation protection, the equivalent of a STT/LTT bond ladder, and a slightly more volatile stock proponent.

25% SCV
50% 5-year treasuries
25% TIPS

1975-2011:

10.53% Average
6.30% Std. Dev.
1.99% Down SD
4.59% Up SD
10.35% CAGR
0.82 Sharpe
2.77 Sortino
0.61 US Mkt. Corr.
0.35 Intl. Corr.

vs. a traditional PP from 1975-2011:

9.47% Average
8.11% Std. Dev.
2.43% Down SD
7.17% Up SD
9.19% CAGR
0.51 Sharpe
1.84 Sortino
0.52 US Mkt. Corr.
0.34 Intl. Corr.

I prefer starting a couple years after 1972. Give gold a chance to regulate a bit.

[BP]

Thanks Possum and Iwealth.  Both interesting ideas.

[frugal]

The most important issue is:

MAXIMUM DRAWDOWN

this is the problem to accept loses during the investment


Why don't you want comodities?

[BP]

Hi frugal.  Just to see if it was possible to get the same benefits of PP without the commodity component.  Some folks may wish to combine a PP with a conventional portfolio.  Others may have 401(k) portfolios that are limited to non-commodity conventional investments and do not want to combine a 401(k) and PP portfolio (e.g., split the stock and bond component in the 401(k) and the MMF and gold outside of the 401(k)) because of the concern that the 401(k) assets may lose a substantial amount of value before retirement.

My thinking is that the many experienced folks here might have considered this issue before and have come up with a solution that all might benefit from considering.

[melveyr]

No commodities? This is easy. 

You simply hold stocks and long duration TIPs (no gold or nominal treasuries). You weight them so that they have the same weighted volatility. The returns from this strategy look almost exactly like the PP. 50% stocks and 50% 30 year TIPs is a decent place to start.

I have been doing some research on this and I am toying around with the idea of replacing my PP with

40% stocks
20% gold
20% 30 year nominals
20% 30 year TIPs

Same economic neutrality except with a little more leverage (no cash) and more diversification within the "risk off" portion. The main turn off for me right now is that TIPs are not super liquid and they have a larger bid/ask spread than nominal Treasuries. I also really like the tax efficiency of gold.

[frugal]

melveyr melveyr melveyr

do you think TIPS and your new idea should also work in Europe?

I would like to add it to my 50-50% bogle portfolio.

Thanks

[melveyr]

melveyr melveyr melveyr

do you think TIPS and your new idea should also work in Europe?

I would like to add it to my 50-50% bogle portfolio.

Thanks

I think so, as long as you keep the credit quality extremely high. So right now I would only be looking at German bonds.

[BP]

Thanks melveyr.

I am going to post a couple of my own.  Evaluate away.  I am calling them the 3/4 PP:

1.  Large Cap Blend (TSM) - 33%
    Long Term Government Bonds - 33%
    2 Year ST Treasury - 34%

1972-2008 (2008: -2.52%)

Average Return  9.36%
CAGR                9.06%
Standard Dev      8.33%
Correlation TSM    0.83

2.  Small Cap Value - 33%
    Long Term Government Bonds - 33%
    2 Year ST Treasury - 34%

1972 - 2008 (2008: -0.875)

Average Return  10.58%
CAGR                10.22%
Standard Dev      9.04%
Correlation TSM    0.66

[clacy]

No commodities? This is easy. 

You simply hold stocks and long duration TIPs (no gold or nominal treasuries). You weight them so that they have the same weighted volatility. The returns from this strategy look almost exactly like the PP. 50% stocks and 50% 30 year TIPs is a decent place to start.

I have been doing some research on this and I am toying around with the idea of replacing my PP with

40% stocks
20% gold
20% 30 year nominals
20% 30 year TIPs

Same economic neutrality except with a little more leverage (no cash) and more diversification within the "risk off" portion. The main turn off for me right now is that TIPs are not super liquid and they have a larger bid/ask spread than nominal Treasuries. I also really like the tax efficiency of gold.

The only question is how would long dated TIP's work in a tight money recession ala the early 80/81?

Here is a link to a paper that supports a PP knock off that uses TIP's instead of cash, commodities instead of gold and holds slightly lower percentages of the risk assets.  It's not too dissimilar to your portfolio melveyr.

http://www.advisorperspectives.com/news ... sified.pdf