Now that I’ve presented several variations and updates to the IVY portfolios, in this post I update all the relevant portfolio statistics and compare them to some commonly held diversified portfolios. I provide the definitions of the portfolio stats and the various portfolios. I conclude with some brief observations.
In the table below, you’ll find the various IVY Portfolios I’ve presented along side some commonly recommended portfolios and benchmarks. The statistics presented are all for the period from 1973 through 2012.
The statistics presented are as follows:
- CAGR: Compound Annual Growth Rate. Basically, the annual return of the portfolio over the period from 1973 through 2012.
- Standard Deviation: aka the Volatility of the portfolio. Most often used as a measure of the riskiness of the portfolio.
- Best year: the highest return year during the 1973 to 2012 period.
- Worst year: the lowest return year during the 1973 to 2012 period. This is the same as max drawdown if the investment decisions are only made on annual basis. More often max drawdown is measure on a monthly basis and is thus higher.
- Sharpe ratio: risk adjusted return or return per unit of risk. The higher the sharpe ratio the better.
- $1 Becomes: What $1 invested in the portfolio becomes by the end of 2012. This allow you to see how important even small differences in returns can make when compounded over long periods of time. For example, $1 invested in a 60/40 portfolio at the beginning of 1973 became $28.9 dollars by the end of 2012.
- Safe Withdrawal Rate ( SWR ): the most important statistic for retirement portfolios. It represents the maximum annual percentage that a retiree can withdraw from their portfolio and have the portfolio last through their 30 year retirement period. Caveat: unfortunately there is no performance data for the 30 year period, starting 1966, that defines the worst SWR going back to before the great depression. That SWR is 4.33% which compares to the 5.3% SWR for the period starting in 1973. For more realistic figures I would use an adjusted SWR which is 20% less than the figures in the table.
- Average End Wealth (AEW) Retired: My first of two stats purely for retirement portfolios. For all 30 yr retirement periods in the 1973 to 2012 period, this is the average ending portfolio value, in millions of dollars, for the retirees at the maximum safe withdrawal rate (SWR).
Below is a description of the portfolios presented in the table.
- S&P500: the most popular measure of the US Stock Market. While almost no one would carry a 100% US stock portfolio this is the benchmark most often used when discussing portfolio performance especially in bull markets.
- VBINX (60/40): the most common portfolio recommended for retirees or risk averse investors. The portfolio is composed of 60% US stocks and 40% US Bonds. I use the Vanguard 60/40 fund, VBINX, to represent this allocation.
- IVY B&H 5: the original IVY buy and hold 5 asset class portfolio. It consists of equal weights of US stocks (VTI), foreign stocks (VEU), US real estate (IYR), US intermediate term gov’t bonds (IEF), and commodities (DBC).
- GTAA 5: the timing version of the IVY buy and hold portfolio using the 200-day (10 month) simple moving average based on dividend adjusted closing prices.
- IVY B&H 13: a broader more diversified version of the original IVY buy and hold portfolio using 13 assets classes. See this post for more information on the composition of this portfolio.
- GTAA 13: the timing version of the IVY buy and hold 13 using the 200-day (10 month) simple moving average based on dividend adjusted closing prices.
- GTAA AGG 6 and GTAA AGG 3: portfolios that combine timing using the 200-day moving average plus momentum, described in this post.
- Permanent Portfolio . Another popular diversified portfolio made famous in the books by Harry Browne. The portfolio consists of equal weights of US stocks (SPY), US long term bonds (TLT), Gold (GLD), and Cash (SHY).
- 10 yr bond. The bench mark 100% US intermediate gov’t bond portfolio. Used here to book end the 100% US stock portfolio (SPY). Only the most risk averse investors would carry a 100% bond portfolio.
- Inflation. US inflation as measured by the CPI index published by the US gov’t.
All right. Enough definitions. There is a ton that can be said about the results in the table above since I’m running a bit long for today I’ll conclude with a few observations and have more to say about these results in the future.
At the most basic level, the biggest and most important take away from the results presented is that passive investing, diversification, and re-balancing work wonders. The more diversified portfolios of the IVY B&H 5, the IVY B&H 13, and the Permanent Portfolio provide better results across the board versus the most commonly recommended passive diversified portfolio, 60% US stocks, 40% US bonds. And not to mention the fact that even the passive 60/40 portfolio beats most mutual funds over time. The IVY portfolio’s results in particular, with their broad diversification, have impressive results across the board whether it be annual return, risk adjusted return, or safe withdrawal rates. Combined with a focus on low fees these are great portfolios for a great many investors who want to spend the minimum amount of time managing their investments whether they are in the wealth building or retirement phase of their lives. Also, the broadly diversified portfolios are best for investors that believe the more active portfolios presented below are a result of data mining or a statistical anomaly or that the out performance will go away in the future.
Unfortunately many investors cannot stick with the simple broadly diversified portfolios mostly due to behavioral biases that we all as humans have. Investors tend to chase markets, buy high and sell low, give up on stocks at exactly the wrong time, etc… So for many investors portfolios with automatic risk management rules are better choices. This is particularly true for investors in the the withdrawal phase (retirement) of their life. Negative returns during the withdrawal phase are particularly harmful for the survival rate of portfolios. For this class of investors the IVY timing portfolios are a better option. Investors get better returns with less risk as shown by the markedly higher sharpe ratios and most importantly much higher withdrawal rates (SWR) in retirement. These portfolios require more effort than the passive portfolios (buy and sell decisions made once per month) but come along with much better results. The GTAA 5, GTAA 13, or the GTAA AGG 6 or 3 portfolios are impressive all around. I’m particularly impressed with the performance of the aggressive IVY timing portfolios – this is the first time I’ve run the full portfolio stats with them. I’ll focus some more on these in future IVY updates. It seems well worth the effort.
There’s a ton that can be said about these results but that seems to be enough for now. What are your thoughts about the performance of these portfolios?