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:

'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:
  • Looking at the total return, or performance of 169.9% in the last 5 years of Moderate Risk Portfolio, we see it is relatively greater, thus better in comparison to the benchmark SPY (71.4%)
  • Compared with SPY (47.3%) in the period of the last 3 years, the total return, or increase in value of 84.1% is larger, thus better.

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (11.4%) in the period of the last 5 years, the compounded annual growth rate (CAGR) of 22% of Moderate Risk Portfolio is larger, thus better.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 22.6%, which is greater, thus better than the value of 13.8% 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 historical 30 days volatility over 5 years of Moderate Risk Portfolio is 9.6%, which is smaller, thus better compared to the benchmark SPY (13.2%) in the same period.
  • During the last 3 years, the volatility is 9.3%, which is lower, thus better than the value of 12.4% 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 (14.5%) in the period of the last 5 years, the downside deviation of 10.9% of Moderate Risk Portfolio is smaller, thus better.
  • During the last 3 years, the downside risk is 10.7%, which is lower, thus better than the value of 14.1% from the benchmark.

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Which means for our asset as example:
  • The ratio of return and volatility (Sharpe) over 5 years of Moderate Risk Portfolio is 2.03, which is higher, thus better compared to the benchmark SPY (0.67) in the same period.
  • Compared with SPY (0.91) in the period of the last 3 years, the ratio of return and volatility (Sharpe) of 2.16 is larger, thus better.

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 (0.61) in the period of the last 5 years, the ratio of annual return and downside deviation of 1.79 of Moderate Risk Portfolio is larger, thus better.
  • Compared with SPY (0.8) in the period of the last 3 years, the downside risk / excess return profile of 1.88 is higher, thus better.

Ulcer:

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Applying this definition to our asset in some examples:
  • Looking at the Ulcer Index of 1.89 in the last 5 years of Moderate Risk Portfolio, we see it is relatively lower, thus worse in comparison to the benchmark SPY (3.95 )
  • During the last 3 years, the Downside risk index is 1.86 , which is lower, thus worse than the value of 4.01 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (-19.3 days) in the period of the last 5 years, the maximum drop from peak to valley of -9.1 days of Moderate Risk Portfolio is larger, thus better.
  • Compared with SPY (-19.3 days) in the period of the last 3 years, the maximum DrawDown of -7.6 days is larger, 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'

Using this definition on our asset we see for example:
  • The maximum days below previous high over 5 years of Moderate Risk Portfolio is 106 days, which is smaller, thus better compared to the benchmark SPY (187 days) in the same period.
  • Looking at maximum days under water in of 106 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (139 days).

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 Moderate Risk Portfolio is 19 days, which is lower, thus better compared to the benchmark SPY (41 days) in the same period.
  • During the last 3 years, the average time in days below previous high water mark is 21 days, which is lower, thus better than the value of 36 days from the benchmark.

Performance of Moderate Risk Portfolio (YTD)

Historical returns have been extended using synthetic data.

Allocations of Moderate Risk Portfolio
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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.