Review of Model Portfolios

What’s Inside:

  • 19 model portfolios potentially useful as references from which to design a portfolio suitable for you
  • OWN / LOAN / RESERVE and sub-class composition
  • 1-mo, 3-mo, 1-yr, 3-yr, and 5-yr total returns
  • Trailing yield, standard deviation, Sharpe Ratio and maximum drawdown, duration of drawdown, safe withdrawal rate and perpetual withdrawal rate since 1970
  • ETFs representing each of the sub-classes used in the portfolios

These portfolios may be useful to you a starting reference points to design a portfolio best suited to you and your life stage, goals, means, limitations preferences, risk tolerance and other factors.

There are many model investment portfolios, perhaps too many, model portfolios to be found.  The could be bewildering.  This is an attempt to present a limited number of portfolios that cover the broad spectrum of investor needs and circumstances.

Before we look at them, remember that asset allocation is a far more important determination of your investment returns and portfolio volatility and periods of maximum drawdown than the specific securities you chose to represent asset categories in your portfolio.

FIVE STEP PORTFOLIO DESIGN PROCESS

The five steps might be best divided between long-term ideas and intermediate-term to short-term ideas (Investment Policy and Investment Strategy).

Investment Policy:

  • Decide the mixture of the three “Super Classes” OWN, LOAN and RESERVE to use in the portfolio
  • Decide which asset Sub-Classes to include and which to exclude within each super-class for the portfolio (e.g domestic or international stocks or gold or commodities or real estate in the OWN super class)
  • Decide upon the normal, or long-term, weights for each of the Super Classes, and to the Sub-Classes in the portfolio

Investment Strategy

  • Deviate from the long-term policy weights of asset classes up or down (overweight or underweight) in attempt to capture excess return, or to manage portfolio volatility, or maximum drawdown risk
  • select individual securities or funds within an asset class to achieve superior returns relative to that asset class (expense levels are a major contributor to differences in returns for funds)

It is best to commit the Investment Policy to writing, along with other important factors such as goals, means and risk tolerance and other limitations, to serve as a reference and possible behavioral control when markets, news and situations rise your positive or negative anxiety. 

Before doing anything rash or spontaneously, take a deep breath, pull out and read your written Investment Policy, then ask yourself whether what you are about to do is appropriate.  Maybe referring back to that document prepared when your emotions were calm and news flow was normal will modify the action you are about to take.

The portfolio models below deal only with the three steps of Investment Policy.

Note that investment models for pension plans and endowments are of necessity generally different from those suitable for most individuals.  Pensions and endowments are generally presumed to be perpetual, or at least to last longer than a typical human life.

Individuals generally have finite time frames for their portfolios (let’s ignore the ultra-wealthy whose portfolios that may be perpetual).  Individuals go through three broad phases:

  • accumulation with aggressive risk investing with gains priority (early stage years)
  • continued accumulation with moderate risk investing, seeking gains, with some income focus (middle stage years)
  • withdrawal with conservative investing, with income priority at least equal to gains priority and limiting volatility and maximum drawdown risk (late stage years). 

As a result, “glide path” considerations come into play for individuals.  There is certainly variation among institutions and advisors about an appropriate glide path, but the glide path published by Vanguard is somewhat in the middle of the pack. That makes it a useful data point to consider (not to be bound to it, but to consider it when designing a portfolio).

This is their glide path.  I have added the concept of the ratio of Human Capital to Financial Capital to the customary age or years to retirement dimensions as a glide path issue.

Human Capital (“HC”) is the present value of future savings to be added to the portfolio from money earned by work.  Financial Capital (“FC”) is the market value of the portfolio.  The Human Capital-to-Financial Capital Ratio is HC/FC and is an important consideration along the portfolio allocation glide path.

(Click images to enlarge)

19 Model Portfolios:

The tables that follow pursue different levels of risk, or life stage utility as contemplated by their authors:

Growth:

  • IVY portfolio
  • Pinwheel portfolio
  • Swensen portfolio

Moderate:

  • 3 Fund portfolio
  • Bernstein portfolio
  • Golden Butterfly portfolio

Conservative:

  • Permanent Portfolio
  • Dalio portfolio
  • Swedroe portfolio

Classic:

  • Bogle 60/40 portfolio

Vanguard Life Stage (age / years before retirement):

  • 35 / -30
  • 45 / -20
  • 55 / -10
  • 65 / 0
  • 75 / +10

Vanguard Risk Levels:

  • Aggressive Growth
  • Moderate Growth
  • Conservative Growth
  • Income

This table shows these metrics for the portfolios:

  • OWN / LOAN / RESERVE allocation
  • # of positions in the portfolio
  • Total return: 1 mo, 3 mo, 6 mo, 1 yr, 3 yrs and 5 yrs
  • Trialing 12-month trailing yield
  • 3-year standard deviation
  • 3-year Sharpe Ratio (basically return over risk)
  • Maximum drawdown in last 6 years

This table for the same 19 models, repeats the very important OWN, LOAN, RESERVE Super Class allocation, then shows key sub-class allocations between US stocks, International Stocks, US Bonds, International Bonds, Cash and Other.

In this chart we have selected an ETF to represent each of the sub-classes that each model specifies, showing the percentage allocation per sub-class.

In this last table, for all but the Vanguard models, you see these performance dimensions of each portfolio since 1970, as rendered by portfoliocharts.com.

The two most obvious findings are that the Classic John Bogle 60/40 portfolio consisting of 60% S&P 500 and 40% US Aggregate Bonds has the least attractive history; and the Golden Butterfly has the most attractive set of long-term metrics.

Pinwheel has the highest average return and the most attractive overall metrics set in the Growth group. 

Golden Butterfly has the highest average return and the most attractive metrics set in the Moderate group. 

Permanent may have the most attractive set in the Conservative group, but does not have the highest average return (4.8% versus 5.3% for the other two).  Dalio has a 5.3% average return, a better maximum drawdown than Swedroe, but a 10-year duration of the maximum drawdown versus only 5 years for Permanent.

The long-term metrics for the models are (in order):

  • Average Return Since 1970
  • Baseline 15-Year Return*
  • Baseline 15-Yr / Av Since 1970
  • Baseline 3-Year Return*
  • Standard Deviation
  • Ulcer Index
  • Deepest Calendar Drawdown
  • Longest Drawdown (yrs)
  • Safe 30-Yr Withdrawal Rate
  • Perpetual Withdrawal Rate

* Baseline excludes the worst 15% of annual periods.

“Ulcer Index” measures short-term downside risk (depth and duration of price declines), over 14 days in this case.

Note: Golden Butterfly is data mined since 1972, whereas the others were developed using data from periods ending various multiple years ago and/or are based on investment logic.

Note: Swensen revised his model a few years ago to increase emerging markets to 10% and reduce real estate to 15%.

These are the ETFs used as proxies for the sub-classes in the portfolios to generate the short-term metrics, sub-class and sector composition via Morningstar.  PortfolioCharts.com used other data to generate the long-term metrics from 1970.

Total US Stocks VTI
Large-Cap Value SPY
Mid-Cap Blend MDY
Small-Cap Blend IWM
US Small-Cap Value VBR
Developed ex US VEA
International VXUS
International Small-Cap Value DLS
Emerging Markets VWO
Emerging Markets Value DEM
Equity REITs VNQ
Gold GLD
Commodities DBC
Aggregate US Bonds BND
Aggregate Int’l Bonds BNDX
ST Inflation Protected Treas. VTIP
Long-Term Treasuries TLT
Intermediate-Term Treas. IEF
Short-Term Treasuries SHY
Cash BIL

There are many more portfolio models, but these are a good departure point for thinking about what may be best for you.

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