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:
  • Bond ETF Rotation Strategy (BRS) (0% to 100%)
  • BUG Permanent Portfolio Strategy (BUG) (0% to 100%)
  • World Top 4 Strategy (WTOP4) (0% to 100%)
  • Global Sector Rotation Strategy (GSRS) (0% to 100%)
  • Global Market Rotation Strategy (GMRS) (0% to 100%)
  • Maximum Yield Strategy (MYRS) (0% to 100%)
  • NASDAQ 100 Strategy (NAS100) (0% to 100%)
  • Leveraged Gold-Currency Strategy (GLD-USD) (0% to 100%)
  • US Sector Rotation Strategy (USSECT) (0% to 100%)
  • Leveraged Universal Investment Strategy (UISx3) (0% to 100%)
  • US Market Strategy (USMarket) (0% to 100%)
  • Dow 30 Strategy (DOW30) (0% to 100%)
  • Universal Investment Strategy (UIS) (0% to 100%)

Statistics of Minimum Volatility Portfolio (YTD)

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

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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (61.9%) in the period of the last 5 years, the total return, or increase in value of 47.7% of Minimum Volatility Portfolio is lower, thus worse.
  • Looking at total return, or increase in value in of 23% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (41.8%).

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.'

Using this definition on our asset we see for example:
  • Looking at the compounded annual growth rate (CAGR) of 8.1% in the last 5 years of Minimum Volatility Portfolio, we see it is relatively lower, thus worse in comparison to the benchmark SPY (10.1%)
  • Looking at compounded annual growth rate (CAGR) in of 7.1% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (12.4%).

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:
  • Looking at the historical 30 days volatility of 5.3% in the last 5 years of Minimum Volatility Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (13.6%)
  • During the last 3 years, the 30 days standard deviation is 4.8%, which is lower, thus better than the value of 12.8% 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:
  • Compared with the benchmark SPY (14.8%) in the period of the last 5 years, the downside deviation of 5.9% of Minimum Volatility Portfolio is smaller, thus better.
  • During the last 3 years, the downside volatility is 5.7%, which is lower, thus better than the value of 14.4% from the benchmark.

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:
  • The risk / return profile (Sharpe) over 5 years of Minimum Volatility Portfolio is 1.07, which is greater, thus better compared to the benchmark SPY (0.56) in the same period.
  • During the last 3 years, the risk / return profile (Sharpe) is 0.96, which is greater, thus better than the value of 0.77 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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (0.51) in the period of the last 5 years, the excess return divided by the downside deviation of 0.96 of Minimum Volatility Portfolio is larger, thus better.
  • Looking at ratio of annual return and downside deviation in of 0.81 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (0.68).

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:
  • Looking at the Ulcer Index of 2.17 in the last 5 years of Minimum Volatility Portfolio, we see it is relatively lower, thus better in comparison to the benchmark SPY (4.01 )
  • During the last 3 years, the Ulcer Ratio is 2.08 , which is smaller, thus better than the value of 4.08 from the benchmark.

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:
  • Looking at the maximum reduction from previous high of -6.8 days in the last 5 years of Minimum Volatility Portfolio, we see it is relatively higher, thus better in comparison to the benchmark SPY (-19.3 days)
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum DrawDown of -5.3 days is higher, 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). 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'

Which means for our asset as example:
  • Compared with the benchmark SPY (187 days) in the period of the last 5 years, the maximum time in days below previous high water mark of 252 days of Minimum Volatility Portfolio is higher, thus worse.
  • During the last 3 years, the maximum days below previous high is 252 days, which is larger, thus worse 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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (41 days) in the period of the last 5 years, the average days under water of 60 days of Minimum Volatility Portfolio is higher, thus worse.
  • Looking at average time in days below previous high water mark in of 61 days in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (35 days).

Performance of Minimum Volatility Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Minimum Volatility Portfolio
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Allocations

Returns of Minimum Volatility Portfolio (%)

  • "Year" returns in the table above are not equal to the sum of monthly returns due to compounding.
  • Performance results of Minimum Volatility 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.