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Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 3:25 pm
by 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.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 3:53 pm
by 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).
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 3:58 pm
by 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?
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 4:02 pm
by 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:
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 4:39 pm
by 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?
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Fri Feb 01, 2013 6:20 pm
by 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%
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Sat Feb 02, 2013 6:30 pm
by 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.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Sun Feb 03, 2013 5:36 am
by BP
Thanks Possum and Iwealth. Both interesting ideas.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Sun Feb 03, 2013 5:46 am
by frugal
The most important issue is:
MAXIMUM DRAWDOWN
this is the problem to accept loses during the investment
Why don't you want comodities?
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Sun Feb 03, 2013 11:09 am
by 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.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Sun Feb 03, 2013 4:14 pm
by 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.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Mon Feb 04, 2013 3:00 am
by 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
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Mon Feb 04, 2013 11:22 am
by melveyr
frugal wrote:
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.
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Tue Feb 05, 2013 4:16 pm
by 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
Re: Variable portfolio challenge - PP like performance without any commodities
Posted: Tue Feb 05, 2013 5:01 pm
by clacy
melveyr wrote:
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