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 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 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:

'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:
  • Compared with the benchmark SPY (64%) in the period of the last 5 years, the total return, or performance of 145.4% of Moderate Risk Portfolio is greater, thus better.
  • Looking at total return, or increase in value in of 74.4% in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (51.6%).

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:
  • Looking at the compounded annual growth rate (CAGR) of 19.7% in the last 5 years of Moderate Risk Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (10.4%)
  • During the last 3 years, the compounded annual growth rate (CAGR) is 20.4%, which is greater, thus better than the value of 14.9% 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 30 days standard deviation of 9.7% in the last 5 years of Moderate Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (13.4%)
  • Compared with SPY (12.5%) in the period of the last 3 years, the volatility of 9.6% 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.'

Applying this definition to our asset in some examples:
  • Looking at the downside deviation of 11% in the last 5 years of Moderate Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (14.6%)
  • Compared with SPY (14%) in the period of the last 3 years, the downside risk of 11% is lower, thus better.

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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (0.59) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 1.76 of Moderate Risk Portfolio is higher, thus better.
  • During the last 3 years, the ratio of return and volatility (Sharpe) is 1.87, which is larger, thus better than the value of 1 from the benchmark.

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.'

Using this definition on our asset we see for example:
  • Looking at the ratio of annual return and downside deviation of 1.56 in the last 5 years of Moderate Risk Portfolio, we see it is relatively larger, thus better in comparison to the benchmark SPY (0.54)
  • Looking at downside risk / excess return profile in of 1.63 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 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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (3.99 ) in the period of the last 5 years, the Ulcer Ratio of 2.03 of Moderate Risk Portfolio is lower, thus better.
  • Looking at Ulcer Index in of 2.08 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (4.04 ).

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.'

Using this definition on our asset we see for example:
  • The maximum DrawDown over 5 years of Moderate Risk Portfolio is -9.1 days, which is larger, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum reduction from previous high of -7.6 days is greater, thus better.

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:
  • The maximum days under water over 5 years of Moderate Risk Portfolio is 106 days, which is lower, thus better compared to the benchmark SPY (187 days) in the same period.
  • During the last 3 years, the maximum time in days below previous high water mark is 106 days, which is lower, thus better than the value of 139 days from the benchmark.

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:
  • Compared with the benchmark SPY (41 days) in the period of the last 5 years, the average days below previous high of 20 days of Moderate Risk Portfolio is smaller, thus better.
  • Looking at average time in days below previous high water mark in of 22 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 Moderate Risk Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Moderate Risk Portfolio
()

Allocations

Returns of Moderate Risk Portfolio (%)

  • "Year" returns in the table above are not equal to 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.