Description of Moderate Risk Portfolio

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 401k plans which do not allow individual 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 50%)
  • BUG Permanent Portfolio Strategy (BUG) (0% to 50%)
  • World Top 4 Strategy (WTOP4) (0% to 50%)
  • Global Sector Rotation Strategy (GSRS) (0% to 50%)
  • Global Market Rotation Strategy (GMRS) (0% to 50%)
  • NASDAQ 100 Strategy (NAS100) (0% to 50%)
  • US Sector Rotation Strategy (USSECT) (0% to 50%)
  • Universal Investment Strategy (UIS) (0% to 50%)
  • US Market Strategy (USMarket) (0% to 50%)
  • Dow 30 Strategy (DOW30) (0% to 50%)
  • Short Term Bond Strategy (STBS) (0% to 50%)

Statistics of Moderate Risk Portfolio (YTD)

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

TotalReturn:

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Applying this definition to our asset in some examples:
  • The total return, or performance over 5 years of Moderate Risk Portfolio is 136.1%, which is greater, thus better compared to the benchmark SPY (81.7%) in the same period.
  • Compared with SPY (54.7%) in the period of the last 3 years, the total return, or performance of 95.4% is higher, thus better.

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.'

Which means for our asset as example:
  • The annual performance (CAGR) over 5 years of Moderate Risk Portfolio is 18.8%, which is greater, thus better compared to the benchmark SPY (12.7%) in the same period.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 25%, which is higher, thus better than the value of 15.6% from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • Looking at the volatility of 7.4% in the last 5 years of Moderate Risk Portfolio, we see it is relatively smaller, thus better in comparison to the benchmark SPY (13.3%)
  • Looking at 30 days standard deviation in of 7.8% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (12.8%).

DownVol:

'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 7.6% in the last 5 years of Moderate Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (14.8%)
  • Looking at downside deviation in of 7.7% 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:
  • Looking at the ratio of return and volatility (Sharpe) of 2.19 in the last 5 years of Moderate Risk Portfolio, we see it is relatively larger, thus better in comparison to the benchmark SPY (0.76)
  • Looking at Sharpe Ratio in of 2.89 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (1.03).

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.'

Applying this definition to our asset in some examples:
  • Looking at the downside risk / excess return profile of 2.14 in the last 5 years of Moderate Risk Portfolio, we see it is relatively larger, thus better in comparison to the benchmark SPY (0.69)
  • Looking at excess return divided by the downside deviation in of 2.9 in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (0.89).

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:
  • The Ulcer Index over 5 years of Moderate Risk Portfolio is 1.65 , which is lower, thus better compared to the benchmark SPY (3.97 ) in the same period.
  • During the last 3 years, the Downside risk index is 1.04 , which is smaller, thus better than the value of 4.09 from the benchmark.

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.'

Using this definition on our asset we see for example:
  • The maximum DrawDown over 5 years of Moderate Risk Portfolio is -5.9 days, which is greater, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Looking at maximum reduction from previous high in of -5.9 days in the period of the last 3 years, we see it is relatively higher, 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:
  • Looking at the maximum time in days below previous high water mark of 218 days in the last 5 years of Moderate Risk Portfolio, we see it is relatively larger, thus worse in comparison to the benchmark SPY (187 days)
  • Compared with SPY (139 days) in the period of the last 3 years, the maximum days under water of 53 days is smaller, thus better.

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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (42 days) in the period of the last 5 years, the average days under water of 34 days of Moderate Risk Portfolio is smaller, thus better.
  • During the last 3 years, the average days below previous high is 11 days, which is lower, thus better than the value of 37 days from the benchmark.

Performance of Moderate Risk Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Moderate Risk Portfolio
()

Allocations

Returns of Moderate Risk Portfolio (%)

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