Description of Conservative Risk Portfolio

Recommended for: Capital preservation, liquidity and for investors close to or in retirement.

The Conservative Portfolio is appropriate for an investor with a low risk tolerance or a need to make withdrawals over the next 1 to 3 years. Conservative investors are willing to accept lower returns in exchange for lower account drawdowns in periods of market volatility.

To be compatible with most retirement plans, this Portfolio does not include our Maximum Yield Strategy and leveraged Universal Investment Strategy. If you are using a more flexible account you can choose from our unconstrained portfolios in the Portfolio Library.

We also offer a version for 401k plans which do not allow individual stocks. See details here.

Methodology & Assets
This portfolio is constructed by our proprietary optimization alogrithm based on Modern Portfolio Theory pioneered by Nobel Laureate Harry Markowitz. Using historical returns, the algorithm finds the asset allocation that produced the highest return with volatility less than 8%.

While this portfolio provides an optimized asset allocation based on historical returns, your investment objectives, risk profile and personal experience are important factors when deciding on the best investment vehicle for yourself. You can also use the Portfolio Builder or Portfolio Optimizer to construct your own personalized portfolio.

Assets and weight constraints used in the optimizer process:
  • Bond ETF Rotation Strategy (BRS) (0% to 40%)
  • BUG Permanent Portfolio Strategy (BUG) (0% to 40%)
  • World Top 4 Strategy (WTOP4) (0% to 40%)
  • Global Sector Rotation Strategy (GSRS) (0% to 40%)
  • Global Market Rotation Strategy (GMRS) (0% to 40%)
  • NASDAQ 100 Strategy (NAS100) (0% to 40%)
  • US Sector Rotation Strategy (USSECT) (0% to 40%)
  • Universal Investment Strategy (UIS) (0% to 40%)
  • US Market Strategy (USMarket) (0% to 40%)
  • Dow 30 Strategy (DOW30) (0% to 40%)
  • Short Term Bond Strategy (STBS) (0% to 50%)

Statistics of Conservative Risk Portfolio (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Using this definition on our asset we see for example:
  • The total return, or increase in value over 5 years of Conservative Risk Portfolio is 84.6%, which is greater, thus better compared to the benchmark SPY (66.7%) in the same period.
  • Compared with SPY (46%) in the period of the last 3 years, the total return of 41.6% is lower, thus worse.

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (10.8%) in the period of the last 5 years, the annual return (CAGR) of 13.1% of Conservative Risk Portfolio is larger, thus better.
  • Compared with SPY (13.5%) in the period of the last 3 years, the annual return (CAGR) of 12.3% is smaller, thus worse.

Volatility:

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Using this definition on our asset we see for example:
  • The historical 30 days volatility over 5 years of Conservative Risk Portfolio is 6.3%, which is lower, thus better compared to the benchmark SPY (13.4%) in the same period.
  • During the last 3 years, the historical 30 days volatility is 6.2%, which is smaller, thus better than the value of 12.3% from the benchmark.

DownVol:

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Which means for our asset as example:
  • The downside volatility over 5 years of Conservative Risk Portfolio is 7.2%, which is smaller, thus better compared to the benchmark SPY (14.6%) in the same period.
  • During the last 3 years, the downside volatility is 7.1%, which is lower, thus better than the value of 13.9% from the benchmark.

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Applying this definition to our asset in some examples:
  • Looking at the Sharpe Ratio of 1.67 in the last 5 years of Conservative Risk Portfolio, we see it is relatively larger, thus better in comparison to the benchmark SPY (0.62)
  • Looking at ratio of return and volatility (Sharpe) in of 1.59 in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (0.89).

Sortino:

'The Sortino ratio improves upon the Sharpe ratio by isolating downside volatility from total volatility by dividing excess return by the downside deviation. The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation. The ratio was named after Frank A. Sortino.'

Which means for our asset as example:
  • Looking at the ratio of annual return and downside deviation of 1.47 in the last 5 years of Conservative Risk Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.57)
  • Looking at excess return divided by the downside deviation in of 1.39 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (0.79).

Ulcer:

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Using this definition on our asset we see for example:
  • Looking at the Ulcer Ratio of 1.32 in the last 5 years of Conservative Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (3.99 )
  • Looking at Ulcer Ratio in of 1.37 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (4.04 ).

MaxDD:

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Applying this definition to our asset in some examples:
  • Looking at the maximum drop from peak to valley of -6.2 days in the last 5 years of Conservative Risk Portfolio, we see it is relatively higher, thus better in comparison to the benchmark SPY (-19.3 days)
  • During the last 3 years, the maximum DrawDown is -4.9 days, which is greater, thus better than the value of -19.3 days from the benchmark.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Using this definition on our asset we see for example:
  • The maximum days below previous high over 5 years of Conservative Risk Portfolio is 100 days, which is smaller, thus better compared to the benchmark SPY (187 days) in the same period.
  • Looking at maximum time in days below previous high water mark in of 100 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (139 days).

AveDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Applying this definition to our asset in some examples:
  • Looking at the average days below previous high of 20 days in the last 5 years of Conservative Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (41 days)
  • Looking at average days below previous high in of 21 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (36 days).

Performance of Conservative Risk Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Conservative Risk Portfolio
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Allocations

Returns of Conservative Risk Portfolio (%)

  • "Year" returns in the table above are not equal to the sum of monthly returns due to compounding.
  • Performance results of Conservative Risk Portfolio are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.