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Valued Contributor

"How Are Diversified Portfolios Holding Up During the Crash?"

Some very illuminating graphs from Ben Carlson with multiple time frames.

https://awealthofcommonsense.com/2020/03/how-are-diversified-portfolios-holding-up-during-the-crash/

YMMV. :-)

Bob

22 Replies
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Participant ○○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

My portfolio was about 60-40 before the markets started to go down. On Friday it was 49-51 with total value loss of 20%.  I rebalanced (bonds to a high cap growth index fund) on Monday morning back to 60-40 .

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

Carlos,

I assume my balanced funds did what they are supposed to do.

I have several distributions this week and they will be reinvested at a noticeably lower price from last time! :-)

Bob

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Explorer ○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

We are down 15% today, we were down 17% yesterday before today’s bounce back

stats

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Explorer ○○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

Hi,

As of Monday close we were down 4.5%. This is because we hold so much cash, TIAA traditional (0.89%), and TIAA Real Estate (-1.22%). All percent's are YTD.

This allocation kept us at only about 8% growth for 2019. You must look at both the good markets and the bad markets to get a real feel on how you are doing.

S

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Explorer ○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

I set up several virtual portfolios to see how they would fare during a downturn. I have not re-balanced them.

1. Two Fund 60/40 -16% YTD (way to go)
2. Diversified 60/40 -17% YTD (yeah, well)
3. Diversified with alternatives -19% YTD (was it worth it?)
4. Small Cap/Value/Heavy in ST USTs -9% YTD (boring)
5. Int & Dom Value/Heavy in ST USTs -5% (winner, very boring)
6. Balanced: EM/TIPS/REIT/INT/ST USTs -22% (joint loser, wow!)
7. Balanced: Total Mkt/Inflation protection/Agg Bond/S&P/RE -22% (joint loser, wow!)
8. Yale: Heavy in Alternatives -15% (Huh!)
9. Enhanced Income: Floating/GNMA/High Yld/Mutli-Sector -8% YTD (pat on the back)
10. Inverse Funds: Broad/Oil +282% YTD (a bit of fun)

Note these are unbalanced YTD figures, but it gives a snapshot of which portfolios are more hedged during this rough patch. I used descriptions as opposed to symbols. After years of languishing following their huge credit crisis gains, inverse funds appear to be doing what they are supposed to do. However, you wouldn't hold only inverse funds and that big spike is coming from a very low base. The clear winners are portfolios with outsized short term USTs, though why anyone would invest in something like this is a puzzle. Moreover, we've yet to see if the tiny allocation to small cap and value will outpace the market to provide the needed growth. Using alternatives may have helped with yield but they are relatively untested in a downturn.

 

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

From the article "If you want higher returns, you must accept a higher probability of large losses or other unforeseen risks. And if you want to dampen large losses, you must accept the prospect of lower returns. There is no stronger relationship in all of investing than risk and reward."

I love to show why the above generic advice isn't accurate. 

First, the author like more others is talking only about treasuries for his bond.

Second, volatility and return correlation isn't one to one.  If your portfolio has 50% more volatility, do you get 50% more return? of course not. The bigger question, end especially for retirees, how much more volatility do you need/want to meet your goal and as usual, these generic articles hardly ever have the answer.

Easy case..I'm rounding...VWINX (40/60) vs VWELX (60/40) vs VFINX(100% stocks) since 1985.  PV(link) shows VWELX had only 10.7% higher annual performance (10.4 vs 9.4) but SD(volatility) was 52% higher and why VWINX Sharpe+Sortino are better.  VWELX numbers against the SP500 is even more impressive.

If you were OK with the lower annual performance because it meets your goals you don't have to go with higher volatility.  Show me any reasonable investor who would not prefer to get 10.3 return vs 10.9 and skip the SP500 volatility. I know, this was the past and the future will be different.

PortfolioCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino Ratio
VWINX(40/46)9.34% 6.45%28.91%-9.84%-18.82% 0.911.52
VWELX(60/40)10.34% 9.83%32.92%-22.30%-32.53% 0.721.08
VFINX (100)10.89% 14.82%37.45%-37.02%-50.97% 0.550.8
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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

FD,

I don't recall coming across any of your publications, but at least make it clear what Ben Carlson used as a sample portfolio--

e.g.," I built these portfolios using total stock and bond index funds (VGTSX, VTSMX and VBMFX) and weighted the U.S. and international holdings 50/50 since that’s basically what the world stock market weighting is."

Perhaps Morningstar would like to feature your ideas on its home page.

Bob

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"


@GLI2019 wrote:

FD,

I don't recall coming across any of your publications, but at least make it clear what Ben Carlson used as a sample portfolio--

e.g.," I built these portfolios using total stock and bond index funds (VGTSX, VTSMX and VBMFX) and weighted the U.S. and international holdings 50/50 since that’s basically what the world stock market weighting is."

Perhaps Morningstar would like to feature your ideas on its home page.

Bob


Bob, no problem let's use Carlson 3 funds and show the risk/reward using PV(link) since 1996(the longest time frame they have).  The table below clearly shows that 80/20 risk/reward was much worse than 40/60.

PortfolioCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino Ratio
80/206.63% 12.20%29.47%-31.44%-44.68% 0.410.58
60/406.51% 9.13%23.10%-22.32%-33.59% 0.50.72
40/606.22% 6.28%16.72%-13.20%-21.47% 0.650.97

 

Looks to me the claim..."If you want higher returns, you must accept a higher probability of large losses or other unforeseen risks. And if you want to dampen large losses, you must accept the prospect of lower returns. There is no stronger relationship in all of investing than risk and reward."...is not really that accurate.

OOPS

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Explorer ○○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

Very interesting, FD.  Your statistics make a compelling case for 60/40 in general, and Wellington in particular.  I'm especially happy to see them since a lot of my and my family members' money is in Wellington.

John

PS  I think that Wellington is actually more like 65/35.

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

According to M*, in the last 5 years, VWELX has about 65-66% stocks and VWINX has about 37-38% stocks.

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

I look at numbers and think holding periods.

I know the reported differences between fund and investor returns.

Ultimately, we face ourselves out of public sight. Those are the only numbers that matter.

Bob

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Participant ○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

FD, I find your assertion and reasoning unconvincing.  Here is the statement again (red added by me):

""If you want higher returns, you must accept a higher probability of large losses or other unforeseen risks. And if you want to dampen large losses, you must accept the prospect of lower returns."

higher probability...  other unforeseen risks...  prospect...  These are the words used.  It is carefully worded.  These words refer to the future, not to the past.

If they referred to the past, one can find numerous instances of selected funds and selected time periods to refute the statement quoted above.  I can easily find a low-risk investment instrument that performed better than a high-risk investment instrument for a selected time period.  This does not disprove the statement quoted above.  

Bonds are seen as less risky than stocks.  For a selected 5-year, 10-year or longer period; one can find examples of bonds outperforming stocks. 

Again, the statement is referring to the future, which is unknown, not to the past.  It is about probabilities, not certainties.

Bob wrote in his reply to you:  "Perhaps Morningstar would like to feature your ideas on its home page."  I hope M* won't do it.

 

 

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"


@Learner wrote:

FD, I find your assertion and reasoning unconvincing.  Here is the statement again (red added by me):

""If you want higher returns, you must accept a higher probability of large losses or other unforeseen risks. And if you want to dampen large losses, you must accept the prospect of lower returns."

higher probability...  other unforeseen risks...  prospect...  These are the words used.  It is carefully worded.  These words refer to the future, not to the past.

If they referred to the past, one can find numerous instances of selected funds and selected time periods to refute the statement quoted above.  I can easily find a low-risk investment instrument that performed better than a high-risk investment instrument for a selected time period.  This does not disprove the statement quoted above.  

Bonds are seen as less risky than stocks.  For a selected 5-year, 10-year or longer period; one can find examples of bonds outperforming stocks. 

Again, the statement is referring to the future, which is unknown, not to the past.  It is about probabilities, not certainties.

Bob wrote in his reply to you:  "Perhaps Morningstar would like to feature your ideas on its home page."  I hope M* won't do it.

 

 


M* charts go along way, see since 1970 (chart)

Also look at this site(link) for SP500 calculation. Since 1970, the SP500 made about 10% average annually, VWINX 9.5% and VWELX about 10.5%.  So now you have 70 years of history...mmm...was I looking for a specific 5-10 periods?

and the LT SD also shows similar results as I presented before.  

I need to pass the article "carefully worded" narrative to my attorney for accuracy.  Give me a break, the article is among hundreds of similar generic articles without any depth.

Most don't understand the meaning of risk, especially in a meltdown.  Just in the last month from the top on 2/19 to the bottom on 3/23 VBIAX (60/40) lost 22+% while VSCGX (40/60) lost only 15+%.  This was another proof that just 20% additional in stocks caused more than 40% more loss.

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

I don't know if my portfolio qualifies as "well diversified", it is MAINLY in equities. I started out about 82% equity, 11% cash, and 7% bonds in mid January, before the selloff started, and I have selectively added as the carnage worsened. Now I'm at 84% equity, 10% cash, and 6% bonds. So I am NOT "well diversified"- it's MAINLY an equity portfolio. I'm 61, still working for two more years, and have a fairly large portfolio and will eventually have a pension (about 1/3 required income) plus both of us will have SS and NO debt. Also, we have a tree farm from which we can sell timber periodically, so I have felt OK staying "more aggressive" than normal for our age. 

However, the equities have held up "relatively" well- our entire portfolio is down 18% since the selloff started, which is still PAINFUL in absolute terms. Nearly all of our stocks are "wide moat dividend growers"- ie. dividend aristocrats/ contenders/ champions, etc.  They have fallen, but many now appear relatively "cheap". WISH I had more cash!!!! Good news is none of our stocks have announced any dividend cuts, BUT we're still real early in this Covid19 selloff. 

I have been more surprised by the BOND carnage, granted it's not as bad as equities, but "higher quality bonds" DID NOT provide as much downside protection as I thought they might. Been surprising, and part of why I sold a little of my bond funds.  

Win
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Participant ○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

FD, my comments are about the two quoted sentences and your reaction to them.  That is my focus.  I am not interested in other elements you introduce into the discussion.

If you are quoting me, do it correctly.  I wrote 5-year, 10-year, or longer periods

Once again,you are looking at it retroactively.  The quoted sentences are looking at it prospectively.  Check the difference.

Once again, the quoted sentences are about probabilities.  Check the meaning.

Enough repetition and explanation. 

Good-bye!

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

Win,

I hold several Balanced funds, and I haven't yet experienced a "bond carnage" within the funds.

The bonds are investment grade, some Treasury, some municipal, with a duration around six. I have no intention or reason to feel let down.

Were many bonds vastly overvalued?  Absolutely. But that's the price of participation. Anyway, tomorrow my dividends will be reinvested at a discount. Ok by me.

Bob

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"


@Learner wrote:

FD, my comments are about the two quoted sentences and your reaction to them.  That is my focus.  I am not interested in other elements you introduce into the discussion.

If you are quoting me, do it correctly.  I wrote 5-year, 10-year, or longer periods

Once again,you are looking at it retroactively.  The quoted sentences are looking at it prospectively.  Check the difference.

Once again, the quoted sentences are about probabilities.  Check the meaning.

Enough repetition and explanation. 

Good-bye!


I understand completely, you rather discuss generic wording and meaning of each word instead of investment concepts. (does the sentence “It depends on what the meaning of the word ‘is’ is" reminds you something?)  .

How about looking at the essence of the article at hand and what I posted and please come up with real numbers.

The future is unknown but usually, the past repeats itself otherwise you can claim anything and say well, I'm just talking about the future.

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Valued Contributor

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

Bob,

Maybe I should change the word “carnage” to a less profound word? What I was referring to is the fact that many of the medium to higher quality bond funds I held (VBILX, VICSX, etc.) with investment grade corporates/ treasuries, FELL as stocks sold off. I would have expected them to have held up better.

Granted, they fell a fraction of equity funds and individual stocks, but still did not provide as much “downside protection” as I was expecting.

Win
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Contributor ○○○

Re: "How Are Diversified Portfolios Holding Up During the Crash?"

My 2X portfolio dropped more than twice what the underlying non-leveraged funds or indexes fell.  I received, YTD, 2.1 times the portfolio income that the unleveraged funds generated.  I won't know how much my total portfolio cash flow will go down, going forward, until the middle of April.  I won't be surprised if it drops down, from 2.1X to 1X, still covering my retirement withrawals.

My portfolio, a month ago, was roughly 2X, consisted of 1 CEF, PCI (20%) and 3 ETNs (SDYL (30%), PFFL (20%), and MORL (30%))  Today, it is roughly 40% SDYL, 50% PFFL, 10% cash.

So far, it's doing what I expected it to do, regardless of whether the market went down, or up.

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