Description of Volatility less than 7%

This portfolio has been optimized for achieving the highest possible return while limiting the historical volatility to 7% or less over the analyzed period with the involved assets. The volatility limit of 7% equals about half the volatility, or risk, of the iShares 20+ Year Treasury Bond ETF - TLT.

As such it is a very conservative Portfolio suited 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 highest return with volatility less than 7%.

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 Volatility less than 7% (YTD)

What do these metrics mean? Show Details

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:
  • The total return, or performance over 5 years of Volatility less than 7% is 102.9%, which is higher, 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 50.3%, which is lower, thus worse than the value of 53.9% from the benchmark.

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.'

Which means for our asset as example:
  • Looking at the annual performance (CAGR) of 15.2% in the last 5 years of Volatility less than 7%, we see it is relatively higher, thus better in comparison to the benchmark SPY (10.9%)
  • During the last 3 years, the compounded annual growth rate (CAGR) is 14.6%, which is lower, thus worse than the value of 15.5% 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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (13.2%) in the period of the last 5 years, the 30 days standard deviation of 6% of Volatility less than 7% is lower, thus better.
  • Compared with SPY (12.6%) in the period of the last 3 years, the 30 days standard deviation of 6% is lower, thus better.

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.'

Using this definition on our asset we see for example:
  • The downside deviation over 5 years of Volatility less than 7% is 6.9%, which is lower, thus better compared to the benchmark SPY (14.6%) in the same period.
  • Looking at downside deviation in of 7.2% 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.'

Using this definition on our asset we see for example:
  • The risk / return profile (Sharpe) over 5 years of Volatility less than 7% is 2.13, which is larger, thus better compared to the benchmark SPY (0.64) in the same period.
  • Looking at risk / return profile (Sharpe) in of 2.01 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.'

Which means for our asset as example:
  • Looking at the downside risk / excess return profile of 1.85 in the last 5 years of Volatility less than 7%, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.58)
  • Looking at excess return divided by the downside deviation in of 1.69 in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (0.91).

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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (3.93 ) in the period of the last 5 years, the Ulcer Ratio of 1.41 of Volatility less than 7% is lower, thus worse.
  • Compared with SPY (3.95 ) in the period of the last 3 years, the Ulcer Index of 1.55 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:
  • The maximum drop from peak to valley over 5 years of Volatility less than 7% is -6.2 days, which is higher, thus better compared to the benchmark SPY (-19.3 days) in the same period.
  • Looking at maximum reduction from previous high in of -6.2 days in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (-19.3 days).

MaxDuration:

'The Maximum Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Using this definition on our asset we see for example:
  • The maximum days below previous high over 5 years of Volatility less than 7% is 151 days, which is lower, thus better compared to the benchmark SPY (187 days) in the same period.
  • Compared with SPY (131 days) in the period of the last 3 years, the maximum time in days below previous high water mark of 151 days is larger, 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:
  • Looking at the average time in days below previous high water mark of 24 days in the last 5 years of Volatility less than 7%, we see it is relatively lower, thus better in comparison to the benchmark SPY (37 days)
  • Looking at average days under water in of 28 days in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to SPY (30 days).

Performance of Volatility less than 7% (YTD)

Allocations of Volatility less than 7%
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Allocations

Returns of Volatility less than 7% (%)

Annual returns of Volatility less than 7% do not equal the sum of monthly returns due to compounding.
Performance results of Volatility less than 7% 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.