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:

'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.'

Applying this definition to our asset in some examples:
  • Looking at the total return, or increase in value of 82.6% in the last 5 years of Conservative Risk Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (74.4%)
  • During the last 3 years, the total return is 38%, which is lower, thus worse than the value of 47.2% from the benchmark.

CAGR:

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (11.8%) in the period of the last 5 years, the compounded annual growth rate (CAGR) of 12.8% of Conservative Risk Portfolio is greater, thus better.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 11.4%, which is smaller, thus worse than the value of 13.8% from the benchmark.

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.'

Which means for our asset as example:
  • The 30 days standard deviation over 5 years of Conservative Risk Portfolio is 6.4%, which is lower, thus better compared to the benchmark SPY (13.6%) in the same period.
  • Looking at volatility in of 6.2% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (12.9%).

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.'

Applying this definition to our asset in some examples:
  • Looking at the downside deviation of 7.3% in the last 5 years of Conservative Risk Portfolio, we see it is relatively smaller, thus better in comparison to the benchmark SPY (14.9%)
  • During the last 3 years, the downside deviation is 7.3%, which is lower, thus better than the value of 14.6% from the benchmark.

Sharpe:

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Which means for our asset as example:
  • Looking at the risk / return profile (Sharpe) of 1.61 in the last 5 years of Conservative Risk Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.68)
  • During the last 3 years, the risk / return profile (Sharpe) is 1.42, which is higher, thus better than the value of 0.88 from the benchmark.

Sortino:

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Applying this definition to our asset in some examples:
  • The downside risk / excess return profile over 5 years of Conservative Risk Portfolio is 1.41, which is larger, thus better compared to the benchmark SPY (0.62) in the same period.
  • During the last 3 years, the downside risk / excess return profile is 1.22, which is greater, thus better than the value of 0.77 from the benchmark.

Ulcer:

'The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period. Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement, it's the downside that causes stress and stomach ulcers that the index's name suggests.'

Which means for our asset as example:
  • Looking at the Ulcer Ratio of 1.51 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 )
  • Compared with SPY (4.1 ) in the period of the last 3 years, the Ulcer Ratio of 1.67 is smaller, thus better.

MaxDD:

'Maximum drawdown measures the loss in any losing period during a fund’s investment record. It is defined as the percent retrenchment from a fund’s peak value to the fund’s valley value. The drawdown is in effect from the time the fund’s retrenchment begins until a new fund high is reached. The maximum drawdown encompasses both the period from the fund’s peak to the fund’s valley (length), and the time from the fund’s valley to a new fund high (recovery). It measures the largest percentage drawdown that has occurred in any fund’s data record.'

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 greater, 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 higher, 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) in days.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (187 days) in the period of the last 5 years, the maximum days under water of 113 days of Conservative Risk Portfolio is lower, thus better.
  • During the last 3 years, the maximum days under water is 113 days, which is lower, thus better than the value of 139 days from the benchmark.

AveDuration:

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. 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:
  • Compared with the benchmark SPY (41 days) in the period of the last 5 years, the average time in days below previous high water mark of 25 days of Conservative Risk Portfolio is lower, thus better.
  • During the last 3 years, the average time in days below previous high water mark is 28 days, which is lower, thus better than the value of 36 days from the benchmark.

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.