Description of Minimum Volatility Portfolio

This portfolio has been optimized for achieving the lowest possible historical volatility over the analyzed period with the involved assets. As such, it exhibits the least risk of all our portfolios, and is therefore suited especially for very risk adverse investors with conservative growth expectations.

Please note that this portfolio might use leveraged ETF and single stocks. Should these not be allowed in your retirement account please see our 401k and IRS compatible Conservative, Moderate, and Aggressive Risk Portfolios. Contact us for special requirements.

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 lowest volatility.

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 Minimum Volatility 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, or increase in value over 5 years of Minimum Volatility Portfolio is 75.7%, which is larger, thus better compared to the benchmark SPY (68%) in the same period.
  • During the last 3 years, the total return, or increase in value is 36.6%, which is smaller, thus worse than the value of 53.9% 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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (10.9%) in the period of the last 5 years, the annual return (CAGR) of 11.9% of Minimum Volatility Portfolio is higher, thus better.
  • During the last 3 years, the annual return (CAGR) is 11%, which is smaller, thus worse than the value of 15.5% from the benchmark.

Volatility:

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Using this definition on our asset we see for example:
  • The 30 days standard deviation over 5 years of Minimum Volatility Portfolio is 5.4%, which is lower, thus better compared to the benchmark SPY (13.2%) in the same period.
  • During the last 3 years, the 30 days standard deviation is 5.1%, 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:
  • Looking at the downside deviation of 6% in the last 5 years of Minimum Volatility Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (14.6%)
  • Looking at downside deviation in of 5.8% 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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (0.64) in the period of the last 5 years, the risk / return profile (Sharpe) of 1.74 of Minimum Volatility Portfolio is higher, thus better.
  • Looking at risk / return profile (Sharpe) in of 1.66 in the period of the last 3 years, we see it is relatively larger, 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:
  • Compared with the benchmark SPY (0.58) in the period of the last 5 years, the ratio of annual return and downside deviation of 1.57 of Minimum Volatility Portfolio is greater, thus better.
  • During the last 3 years, the downside risk / excess return profile is 1.45, which is larger, thus better than the value of 0.91 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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (3.93 ) in the period of the last 5 years, the Ulcer Ratio of 2 of Minimum Volatility Portfolio is lower, thus worse.
  • Compared with SPY (3.95 ) in the period of the last 3 years, the Ulcer Ratio of 2.13 is lower, thus worse.

MaxDD:

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Which means for our asset as example:
  • Compared with the benchmark SPY (-19.3 days) in the period of the last 5 years, the maximum DrawDown of -5.6 days of Minimum Volatility Portfolio is higher, thus better.
  • During the last 3 years, the maximum reduction from previous high is -5.6 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). 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 days under water of 256 days in the last 5 years of Minimum Volatility Portfolio, we see it is relatively higher, thus worse in comparison to the benchmark SPY (187 days)
  • Compared with SPY (131 days) in the period of the last 3 years, the maximum time in days below previous high water mark of 256 days is greater, thus worse.

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.'

Using this definition on our asset we see for example:
  • The average days below previous high over 5 years of Minimum Volatility Portfolio is 54 days, which is higher, thus worse compared to the benchmark SPY (37 days) in the same period.
  • Looking at average days below previous high in of 61 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (30 days).

Performance of Minimum Volatility Portfolio (YTD)

Allocations of Minimum Volatility Portfolio
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Allocations

Returns of Minimum Volatility Portfolio (%)

Annual returns of Minimum Volatility Portfolio do not equal the sum of monthly returns due to compounding.
Performance results of Minimum Volatility 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.