GBA Workbench – 60/40 Portfolios

The decision as to the amount of stocks versus bonds or other assets in a portfolio is very probably the most important investing decision of all. Holding too great a proportion of high risk assets can result in panic selling in a bear market. Investors would be unwise to over estimate their tolerance for severe losses.

Different assets perform differently in different market and economic conditions and are not perfectly correlated. Diversification can reduce the overall risk in terms of the variability of returns for a given level of expected return. Asset diversification has been described as “the only free lunch” in investing.

Reference should be made to Modern Portfolio Theory, the well known hypothesis published by Harry Markowitz in his paper “Portfolio Selection,” published in 1952 by the Journal of Finance.

An investor need not stick to stocks and bonds as asset classes and obviously is free to deviate from the conventional 60/40 stocks bond split.

Parameter Choices Include:

  • Base Currency
  • Up to 4 portfolios
  • Top level Allocation Weighting
  • Different weighting strategies within each of the 4 portfolios
  • Re-allocation Period

In the back test below the portfolios and their weightings were as follows:

  • Base Currency: USD
  • Portfolio 1: Gold – 5% weighting in the overall asset allocation
  • Portfolio 2: S&P 500 Total Return – 30% weighting
  • Portfolio 3: 12 US bond funds – equal weighting within portfolio, 50% weighting in the top level asset allocation
  • Portfolio 4: 17 MSCI Country Fund ETFs equal weighting within portfolio, 15% weighting in the top level asset allocation
  • Re-allocation Period: monthly at both individual portfolio level and asset allocation lever
  • Benchmark: S&P 500 Total Return Index

It is important to note that users can choose from non US markets and can choose their base currency from a wide range of international currencies.

UK based users could for instance choose UK listed investment trusts or stock denominated in GBP together with the S&P 500 and gold each denominated in USD but converted to GBP for the purposes of the back test.

assetAllocation

Stat                 Asset Allocation    Benchmark
-------------------  ------------------  -----------
Start                1996-06-20          1996-06-20
End                  2016-12-20          2016-12-20
Risk-free rate       0.00%               0.00%

Total Return         286.77%             311.33%
Daily Sharpe         0.85                0.50
CAGR                 6.82%               7.14%
Max Drawdown         -28.59%             -50.02%

MTD                  0.66%               3.18%
3m                   -0.83%              6.30%
6m                   1.24%               9.55%
YTD                  5.87%               12.65%
1Y                   6.58%               14.73%
3Y (ann.)            4.20%               9.32%
5Y (ann.)            6.37%               13.99%
10Y (ann.)           5.42%               6.49%
Since Incep. (ann.)  6.82%               7.14%

Daily Sharpe         0.85                0.50
Daily Mean (ann.)    7.10%               8.50%
Daily Vol (ann.)     8.39%               16.99%
Daily Skew           -0.10               -0.09
Daily Kurt           6.07                7.07
Best Day             4.43%               9.83%
Worst Day            -4.00%              -7.78%

Monthly Sharpe       0.91                0.60
Monthly Mean (ann.)  6.90%               7.71%
Monthly Vol (ann.)   7.56%               12.96%
Monthly Skew         -0.83               -0.54
Monthly Kurt         3.26                0.76
Best Month           5.51%               9.65%
Worst Month          -11.47%             -14.76%

Yearly Sharpe        0.82                0.50
Yearly Mean          6.99%               8.09%
Yearly Vol           8.49%               16.04%
Yearly Skew          -1.18               -1.04
Yearly Kurt          2.46                1.00
Best Year            19.86%              29.38%
Worst Year           -17.52%             -33.30%

Avg. Drawdown        -1.01%              -2.06%
Avg. Drawdown Days   22.35               35.16
Avg. Up Month        1.81%               2.91%
Avg. Down Month      -1.64%              -3.16%
Win Year %           80.00%              80.00%
Win 12m %            83.05%              76.27%
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