Description of Moderate Risk Portfolio for 401

Recommended for: Capital accumulation, savers and investors 10-20 years from retirement. 

The Moderate Risk Portfolio is appropriate for an investor with a medium risk tolerance and a time horizon longer than five years. Moderate investors are willing to accept periods of moderate market volatility in exchange for the possibility of receiving returns that outpace inflation by a significant margin.

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 plans which do allow single stocks. See details here.

Methodology & Assets
This portfolio is constructed by our proprietary optimization algorithm 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 12%.

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%)
  • US Sector Rotation Strategy (USSECT) (0% to 40%)
  • Universal Investment Strategy (UIS) (0% to 40%)
  • US Market Strategy (USMarket) (0% to 40%)
  • Short Term Bond Strategy (STBS) (0% to 50%)

Statistics of Moderate Risk Portfolio for 401 (YTD)

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

TotalReturn:

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Which means for our asset as example:
  • The total return, or increase in value over 5 years of Moderate Risk Portfolio for 401 is 84.2%, which is greater, thus better compared to the benchmark SPY (80.9%) in the same period.
  • Compared with SPY (54.7%) in the period of the last 3 years, the total return, or performance of 52.4% is lower, thus worse.

CAGR:

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Using this definition on our asset we see for example:
  • The annual return (CAGR) over 5 years of Moderate Risk Portfolio for 401 is 13%, which is larger, thus better compared to the benchmark SPY (12.6%) in the same period.
  • Compared with SPY (15.7%) in the period of the last 3 years, the annual return (CAGR) of 15.1% is lower, thus worse.

Volatility:

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (13.3%) in the period of the last 5 years, the historical 30 days volatility of 6.1% of Moderate Risk Portfolio for 401 is lower, thus better.
  • Compared with SPY (12.8%) in the period of the last 3 years, the 30 days standard deviation of 5.6% is lower, thus better.

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:
  • Compared with the benchmark SPY (14.8%) in the period of the last 5 years, the downside risk of 6.9% of Moderate Risk Portfolio for 401 is smaller, thus better.
  • Looking at downside deviation in of 6.6% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (14.8%).

Sharpe:

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (0.76) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 1.72 of Moderate Risk Portfolio for 401 is higher, thus better.
  • Looking at ratio of return and volatility (Sharpe) in of 2.26 in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (1.03).

Sortino:

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Applying this definition to our asset in some examples:
  • Looking at the excess return divided by the downside deviation of 1.53 in the last 5 years of Moderate Risk Portfolio for 401, we see it is relatively higher, thus better in comparison to the benchmark SPY (0.68)
  • Compared with SPY (0.89) in the period of the last 3 years, the excess return divided by the downside deviation of 1.92 is greater, thus better.

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (3.97 ) in the period of the last 5 years, the Downside risk index of 1.53 of Moderate Risk Portfolio for 401 is lower, thus better.
  • Compared with SPY (4.1 ) in the period of the last 3 years, the Ulcer Index of 0.96 is lower, thus better.

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Applying this definition to our asset in some examples:
  • The maximum drop from peak to valley over 5 years of Moderate Risk Portfolio for 401 is -5.5 days, which is higher, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Looking at maximum drop from peak to valley in of -5.5 days in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (-19.3 days).

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'

Applying this definition to our asset in some examples:
  • The maximum time in days below previous high water mark over 5 years of Moderate Risk Portfolio for 401 is 190 days, which is greater, thus worse compared to the benchmark SPY (187 days) in the same period.
  • Compared with SPY (139 days) in the period of the last 3 years, the maximum days below previous high of 71 days is smaller, thus better.

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 31 days in the last 5 years of Moderate Risk Portfolio for 401, we see it is relatively smaller, thus better in comparison to the benchmark SPY (42 days)
  • During the last 3 years, the average days below previous high is 14 days, which is smaller, thus better than the value of 37 days from the benchmark.

Performance of Moderate Risk Portfolio for 401 (YTD)

Historical returns have been extended using synthetic data.

Allocations of Moderate Risk Portfolio for 401
()

Allocations

Returns of Moderate Risk Portfolio for 401 (%)

  • Note that yearly returns do not equal the sum of monthly returns due to compounding.
  • Performance results of Moderate Risk Portfolio for 401 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.