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:

Statistics of Conservative Risk Portfolio (YTD)

What do these metrics mean? Show Details

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.'

Applying this definition to our asset in some examples:
  • The total return over 5 years of Conservative Risk Portfolio is 110.4%, which is greater, thus better compared to the benchmark SPY (68%) in the same period.
  • During the last 3 years, the total return, or performance is 56.1%, which is larger, thus better than the value of 53.9% from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • The compounded annual growth rate (CAGR) over 5 years of Conservative Risk Portfolio is 16.1%, which is higher, thus better compared to the benchmark SPY (10.9%) in the same period.
  • During the last 3 years, the annual performance (CAGR) is 16%, which is larger, thus better than the value of 15.5% 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.'

Applying this definition to our asset in some examples:
  • The 30 days standard deviation over 5 years of Conservative Risk Portfolio is 6.8%, which is lower, thus better compared to the benchmark SPY (13.2%) in the same period.
  • During the last 3 years, the volatility is 7.2%, which is smaller, thus better than the value of 12.6% from the benchmark.

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:
  • The downside risk over 5 years of Conservative Risk Portfolio is 7.9%, which is lower, thus better compared to the benchmark SPY (14.6%) in the same period.
  • Looking at downside risk in of 8.6% in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (14.2%).

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.'

Applying this definition to our asset in some examples:
  • The Sharpe Ratio over 5 years of Conservative Risk Portfolio is 1.98, which is greater, thus better compared to the benchmark SPY (0.64) in the same period.
  • Looking at ratio of return and volatility (Sharpe) in of 1.89 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, 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:
  • The excess return divided by the downside deviation over 5 years of Conservative Risk Portfolio is 1.71, which is larger, thus better compared to the benchmark SPY (0.58) in the same period.
  • During the last 3 years, the ratio of annual return and downside deviation is 1.58, which is larger, thus better than the value of 0.91 from the benchmark.

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.'

Which means for our asset as example:
  • Looking at the Ulcer Ratio of 1.28 in the last 5 years of Conservative Risk Portfolio, we see it is relatively lower, thus worse in comparison to the benchmark SPY (3.93 )
  • During the last 3 years, the Ulcer Index is 1.37 , which is smaller, thus worse than the value of 3.95 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 reduction from previous high over 5 years of Conservative Risk Portfolio is -5.4 days, which is larger, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Looking at maximum drop from peak to valley in of -5.4 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) in days.'

Applying this definition to our asset in some examples:
  • Looking at the maximum time in days below previous high water mark of 114 days in the last 5 years of Conservative Risk Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (187 days)
  • During the last 3 years, the maximum time in days below previous high water mark is 114 days, which is lower, thus better than the value of 131 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:
  • The average time in days below previous high water mark over 5 years of Conservative Risk Portfolio is 19 days, which is lower, thus better compared to the benchmark SPY (37 days) in the same period.
  • During the last 3 years, the average days under water is 20 days, which is lower, thus better than the value of 30 days from the benchmark.

Performance of Conservative Risk Portfolio (YTD)

Allocations of Conservative Risk Portfolio
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Allocations

Returns of Conservative Risk Portfolio (%)

Annual returns of Conservative Risk Portfolio do not equal the sum of monthly returns due to compounding.
Performance results of Conservative Risk Portfolio are hypothetical, do not account for slippage, execution cost and taxes, and based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.