Leveraged Portfolios Battle 1X: Picture Perfect Portfolio Challenge 100%

Welcome to the Picture Perfect Portfolio Challenge!

Before we dial things up a notch one, two or three times with leverage, we’ll take all of the classic portfolios (including the balanced 60/40, Ray Dalio All Weather, Risk Parity and Harry Browne Permanent Portfolio) and compete head to head in an unleveraged performance meets risk management contest at the 100% canvas level.

Have you ever wondered how the 80/20 Growth portfolio compared with the Ray Dalio All-Weather Portfolio in terms of returns versus drawdowns?

How about the classic 60/40 portfolio versus Risk Parity in terms of rolling returns, Sharpe ratio, Sortino ratio and worst year?

We’re going to find out how they all stack up relative to each other in the Picture Perfect Portfolio Challenge.

Leveraged Portfolios Battle 1X:

Hey guys! Here is the part where I mention I’m a travel vlogger! This Battle of the Leveraged Portfolios series is entirely for entertainment purposes only. Most investors should not use leverage. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

Picture Perfect Portfolio Challenge 100% Canvas

100% Canvas Game Rules

At the 1X level there are basically no rules!

None of the portfolios featured in this contest have a year worst than our benchmark of the US Total Stock Market coming in at -37%.

Thus, every portfolio is allowed to roam freely at the unleveraged level of this picture perfect portfolio challenge.

The scoring was explained in detail in the Leveraged Portfolios Battle introduction.

TL;DR version is that all 10 portfolios are ranked from 1st to last in terms of five different categories with a maximum amount of points being 50 and minimum being 5.

Nothing more needs to be said.

Let the games begin!

Picture Perfect Portfolio Challenge

US Total Stock Market Portfolio = 100%

Initial Balance: $10,000
Final Balance: $1,442,461
CAGR: 11.89%
RISK: 15.38%
Worst Year: -37.04
Sharpe Ratio: 0.53
Sortino Ratio: 0.77

We find the US Total Stock Market portfolio returning an impressive 11.89% CAGR overall but with an overall RISK of 15.38%.

It is a wild ride to the top with a -50.89% maximum drawdown, -37.04% worst year and 35.79% best year.

Given the volatility of this portfolio it is unsurprising to see its Sharpe Ratio of 0.53 and Sortino Ratio of 0.77.

However, if performance was what you were after no portfolio did better at the 100% canvas level.

A full commitment to the 100% US Total Stock Market portfolio meant having to endure a rough early 2000s and devastating blow in 2008.

However, the long-term results show a portfolio that is far more successful than it is frightening.

The real test for the 100% only US Total Stock Market portfolio came in terms of its rolling returns.

If you can imagine holding this portfolio tightly through a worst case scenario of 10 year sequence of returns of -2.57%, 7 years -3.02%, five years -6.23%, three years -16.27% and 1 year -43.18% you’re braver than most.

Balanced 60/40 Portfolio = 100%

Initial Balance: $10,000
Final Balance: $964,661
CAGR: 10.88%
RISK: 10.33%
Worst Year: -13.22%
Sharpe Ratio: 0.64
Sortino Ratio: 0.97

Given the results here it is easy to see why the 60/40 is considered to be the classic or balanced portfolio of stocks and bonds.

With a 10.88% CAGR and RISK of 10.33% this portfolio featured returns that were above its standard deviation.

With a best year of 33.52% and worst year of -13.22% the 60/40 provided impressive returns and significant stability.

Relative to the 100% US Total Stock Market featured above, the 60/40 Portfolio had a higher Sharpe Ratio of 0.64 and Sortino Ratio of 0.97.

This portfolio has been used by investors who seek decent returns without the rollercoaster of equity only allocations.

2008 and 2022 have been the toughest years for this portfolio to date with another challenge in the early 2000s.

Aside from that this portfolio has mostly been above water and recovers strongly after facing difficulties.

Interestingly enough investors would have had to endure a worst case scenario roll period of five years at -0.25%, 3 years at -5.21% and 1 year at -22.53%.

This is certainly better than a 100% equity portfolio but it also isn’t nearly as optimal as the Ray Dalio All-Weather, Harry Browne Permanent Portfolio and Risk Parity Portfolio that only had a negative 1 year roll period.

Conservative 40/60 Portfolio = 100%

Initial Balance: $10,000
Final Balance: $704,943
CAGR: 10.09%
RISK: 9.22%
Worst Year: -8.31%
Sharpe Ratio: 0.63
Sortino Ratio: 1.00

The Conservative 40/60 Portfolio is the first one in our picture perfect portfolio challenge to have a single digit RISK of 9.22% versus its 10.09% CAGR.

It provided outstanding defence in this portfolio challenge featuring a worst only year of -8.31% versus its best year of 36.46%.

Compared to the 60/40 the 40/60 Portfolio had a slightly lower Sharpe Ratio of 0.63 but higher Sortino Ratio of 1.00.

It is easy to see how investors seeking stability, first and foremost, have used this portfolio to sail smoothly through recent decades.

The only significant challenge for the 40/60 portfolio has been this year!

Its Achilles heel appears to be stagflation.

Compared to the 60/40 the 40/60 offered far more drawdown protection in the 2000s.

From a Roll Period perspective the 40/60 has provided excellent results with a worst case scenario of only a negative 3 years at -0.62% and 1 year at -12.64%.

No lost decades with this portfolio.

Growth 80/20 Portfolio = 100%

Initial Balance: $10,000
Final Balance: $1,226,807
CAGR: 11.48%
RISK: 12.51%
Worst Year: -25.13%
Sharpe Ratio: 0.59
Sortino Ratio: 0.87

The 80/20 Growth Portfolio provided investors an impressive 11.48% CAGR with a slightly higher 12.51% RISK.

It slots nicely in between an equity only portfolio and the 60/40 Portfolio in terms of having a best year of 34.65% versus -25.13% worst year.

With a Sharpe Ratio of 0.59 and Sortino Ratio of 0.87 it is lower middle of the pack relative to other portfolios in the picture perfect portfolio challenge.

The 2000s were not kind to the 80/20 Growth portfolio.

Investors would have had to endure three negatives years to kick off the 21st century followed by a crushing 2008 surprise.

The Growth 80/20 Portfolio has the same sequence of returns risk of a lost decade as the equity only 100% US Total Stock Market.

Investors facing a worst case scenario of returns would have to hold tight through a roll period of seven years at -0.17%, five years at -3.03%, three years at -10.72% and one year at -32.81%.

Income 20/80 Portfolio = 100%

Initial Balance: $10,000
Final Balance: $479,595
CAGR: 9.14%
RISK: 9.52%
Worst Year: -9.25%
Sharpe Ratio: 0.52
Sortino Ratio: 0.84

Let’s examine the Portfolio (20/80 Income) that is in last place in the competition.

The Income 20/80 Portfolio, given its conservative allocation to equities, has an astonishing level or RISK (9.52%) that is higher than CAGR (9.14%).

Yikes!

Its anemic Sharpe Ratio of 0.52 and Sortino of 0.84 are relatively very weak versus its peers.

Ouch!

In its defence the Income 20/80 Portfolio provided relatively strong downside protection in the early 2000s.

Its most challenging year to date has been 2022 when inflation has reared its ugly head.

A worst case scenario Roll Period paints a brighter picture for the Income 20/80 Portfolio with 3 years at -3.21% and 1 year at -12.99%.

No lost decades here for the 20/80.

Harry Browne Permanent Portfolio = 100%

Initial Balance: $10,000
Final Balance: $331,677
CAGR: 8.23%
RISK: 7.12%
Worst Year: -5.20%
Sharpe Ratio: 0.55
Sortino Ratio: 0.87

The first of the portfolios featuring an alternative sleeve is the Harry Browne Permanent portfolio which had a CAGR of 8.23% over 100 basis points higher than its RISK of 7.12%.

The Harry Browne Portfolio had an incredible best year of 39.80% versus its worst year of -5.20%.

Finally its Sharpe Ratio was 0.55 and Sortino Ratio was 0.87.

The Harry Browne Portfolio sailed through the 2000s with ease having its worst year all the way back to 1981.

Its never had two negative years in a row.

You’ll notice from a Roll Period point of view that the Harry Browne Portfolio provided a highly durable worst case scenario of only a 1 year negative period of -10.04%.

Its worst 10 year period featured an impressive above water performance of 5.21%.

Ray Dalio All Weather Portfolio = 100%

Initial Balance: $10,000
Final Balance: $520,019
CAGR: 9.34%
RISK: 7.94%
Worst Year: -5.61%
Sharpe Ratio: 0.63
Sortino Ratio: 1.00

It’s time to see what the Ray Dalio All Weather Portfolio has done over the past decades.

The Ray Dalio All-Weather Portfolio has returned an outstanding 7.94% RISK versus its 9.34% CAGR reward.

With a worst year of only -5.61% and best year of 31.90% it has provided the all-weather benefits it advertises.

You’ll notice its Sharpe Ratio at 0.63 and Sortino at 1.00 rank relatively higher than most portfolios in this challenge.

Check out the above water coverage the Ray Dalio All-Weather Portfolio provided in the 2000s.

While most investors were likely losing their heads, this all-weather portfolio sailed through the decade with absolute ease.

You’ll also notice several less negative years overall compared to other portfolios in the picture perfect portfolio challenge.

Sequence of returns are a Ray Dalio All-Weather portfolio speciality. You’ll notice the worst case scenario of a -11.59% 1 year roll period.

Risk Parity Portfolio = 100%

Initial Balance: $10,000
Final Balance: $386,403
CAGR: 8.61%
RISK: 7.43%
Worst Year: -4.50%
Sharpe Ratio: 0.58
Sortino Ratio: 0.93

The Risk Parity Portfolio offered stalwart defensive coverage with a 7.43% RISK profile versus a 8.61% CAGR.

Imagine only having a worst year of -4.50% with this portfolio whereas you’d have enjoyed a 31.13% best year.

Its Sharpe Ratio of 0.58 is not as impressive as its Sortino Ratio of 0.93.

The Risk Parity portfolio was above water for every single year in the 2000s!

Impressive!

Its worst year has been 2022 so far.

The Risk Parity Portfolio has been extraordinarily kind to investors from a roll period perspective having its worst case scenario of 1 year at -12.42%.

Nomadic Samuel = 100%

Initial Balance: $10,000
Final Balance: $989,303
CAGR: 10.94%
RISK: 9.41%
Worst Year: -6.09%
Sharpe Ratio: 0.70
Sortino Ratio: 1.08

The 40/40/20 Nomadic Samuel Portfolio provided returns of 10.94% CAGR versus its 9.41% RISK.

With a worst year of only -6.09% and best year of 39.59% it offered investors a lot to get excited about.

The Nomadic Samuel portfolio was a monster performer for both Sharpe Ratio at 0.70 and Sortino Ratio at 1.08.

The Nomadic Samuel portfolio cruised through the 2000s and has actually had a more turbulent 2010s.

From a Roll Period analysis you’ll notice the Nomadic Samuel portfolio having its worst case scenario manifest at 3 years at -0.58% and 1 year at -16.45%.

Nomadic Samuel Risky Parity = 100%

Initial Balance: $10,000
Final Balance: $476,720
CAGR: 9.13%
RISK: 7.52%
Worst Year: -3.86%
Sharpe Ratio: 0.63
Sortino Ratio: 1.03

The Nomadic Samuel Risk Parity portfolio with its optimized equity strategy of US small cap value provided hypothetical investors returns of 9.13% CAGR versus 7.52% RISK.

It has the most defensive worst year of all the portfolios only reaching -3.86% with a best year of 33.85%.

Its Sharpe Ratio was 0.63 with a Sortino Ratio of 1.03.

The Nomadic Samuel Risk Parity Portfolio ate the 2000s for breakfast but has found the 2010s to be more turbulent waters.

As like the Risk Parity Portfolio, The Nomadic Samuel Risk Parity Portfolio only had one negative year of -10.16% from a Roll Period worst case nightmare point of view.

Picture Perfect Portfolio Challenge Rankings

CAGR PORTFOLIO RANKINGS

100% US STOCK MARKET PORTFOLIO = 11.89% (10)

GROWTH 80/20 PORTFOLIO = 11.48% (9)

NOMADIC SAMUEL PORTFOLIO = 10.94% (8)

BALANCED 60/40 PORTFOLIO = 10.88% (7)

CONSERVATIVE 40/60 PORTFOLIO = 10.09% (6)

RAY DALIO ALL-WEATHER PORTFOLIO = 9.34% (5)

INCOME 20/80 PORTFOLIO = 9.14% (4)

NOMADIC SAMUEL RISK PARITY PORTFOLIO = 9.13% (3)

RISK PARITY PORTFOLIO = 8.61% (2)

HARRY BROWNE PERMANENT PORTFOLIO = 8.23% (1)

GROWTH OF 10K PORTFOLIO RANKINGS

100% US STOCK MARKET PORTFOLIO = $1,442,461 (10)

GROWTH 80/20 PORTFOLIO = $1,226,807 (9)

NOMADIC SAMUEL PORTFOLIO = $989,303 (8)

BALANCED 60/40 PORTFOLIO = $964,661 (7)

CONSERVATIVE 40/60 PORTFOLIO = $704,943 (6)

RAY DALIO ALL-WEATHER PORTFOLIO = $520,019 (5)

INCOME 20/80 PORTFOLIO = $479,595 (4)

NOMADIC SAMUEL RISK PARITY PORTFOLIO = $476,720 (3)

RISK PARITY PORTFOLIO = $386,403 (2)

HARRY BROWNE PERMANENT PORTFOLIO = $331,677 (1)

SHARPE RATIO PORTFOLIO RANKINGS

NOMADIC SAMUEL PORTFOLIO = 0.70 (10)

BALANCED 60/40 PORTFOLIO = 0.64 (9)

RAY DALIO ALL-WEATHER PORTFOLIO = 0.63 (7)

CONSERVATIVE 40/60 PORTFOLIO = 0.63 (7)

NOMADIC SAMUEL RISK PARITY PORTFOLIO = 0.63 (7)

GROWTH 80/20 PORTFOLIO = 0.59 (5)

RISK PARITY PORTFOLIO = 0.58 (4)

HARRY BROWNE PERMANENT PORTFOLIO = 0.55 (3)

100% US STOCK MARKET PORTFOLIO = 0.53 (2)

INCOME 20/80 PORTFOLIO = 0.52 (1)

SORTINO RATIO PORTFOLIO RANKINGS

NOMADIC SAMUEL PORTFOLIO = 1.08 (10)

NOMADIC SAMUEL RISK PARITY PORTFOLIO = 1.03 (9)

RAY DALIO ALL-WEATHER PORTFOLIO = 1.00 (7.5)

CONSERVATIVE 40/60 PORTFOLIO = 1.00 (7.5)

BALANCED 60/40 PORTFOLIO = 0.97 (6)

RISK PARITY PORTFOLIO = 0.93 (5)

HARRY BROWNE PERMANENT PORTFOLIO = 0.87 (3.5)

GROWTH 80/20 PORTFOLIO = 0.87 (3.5)

INCOME 20/80 PORTFOLIO = 0.84 (2)

100% US STOCK MARKET PORTFOLIO = 0.77 (1)

WORST YEAR PORTFOLIO RANKINGS

NOMADIC SAMUEL RISK PARITY PORTFOLIO = -3.86% (10)

RISK PARITY PORTFOLIO = -4.50% (9)

HARRY BROWNE PERMANENT PORTFOLIO = -5.20% (8)

RAY DALIO ALL-WEATHER PORTFOLIO = -5.61% (7)

NOMADIC SAMUEL PORTFOLIO = -6.09% (6)

CONSERVATIVE 40/60 PORTFOLIO = -8.31% (5)

INCOME 20/80 PORTFOLIO = -9.25% (4)

BALANCED 60/40 PORTFOLIO = -13.22% (3)

GROWTH 80/20 PORTFOLIO = -25.13% (2)

100% US STOCK MARKET PORTFOLIO = -37.04 (1)

TOTAL OVERALL PORTFOLIO RANKINGS

NOMADIC SAMUEL PORTFOLIO = 42

BALANCED 60/40 PORTFOLIO = 32

NOMADIC SAMUEL RISK PARITY PORTFOLIO = 32

RAY DALIO ALL-WEATHER PORTFOLIO = 31.5

CONSERVATIVE 40/60 PORTFOLIO = 31.5

GROWTH 80/20 PORTFOLIO = 28.5

100% US STOCK MARKET PORTFOLIO = 24

RISK PARITY PORTFOLIO = 22

HARRY BROWNE PERMANENT PORTFOLIO = 16.5

INCOME 20/80 PORTFOLIO = 15

Nomadic Samuel Final Thoughts

The first round of the leveraged portfolios battle was fascinating at the non-leveraged level of a 100% canvas.

It is clear to me why investors seeking performance, above all else, might gravitate towards the all-out aggressive 100% US Total Stock Market or 80/20 growth portfolio.

That commitment to being aggressively invested in stocks clearly comes with a “price tag” from a sequence of returns risk perspective (rolling returns equaling a harsh decade) and the requirement for a cast-iron stomach for when -37% bear markets manifest.

If performance meets risk-management was the main objective having an optimized equity portfolio (small-cap value over market-cap weighted indexes) combined with bonds and alternatives makes the most sense.

Consider that the Nomadic Samuel portfolio won this competition from a performance meets risk standpoint quite convincingly with a 40/40/20 stocks/bonds/alternatives ratio but it finished in 3rd place from a performance perspective.

Now for those wanting to outperform the 100% US Total Stock Market and 80/20 growth portfolio is it possible to do this by adding more equities to the Nomadic Samuel portfolio?

Let’s find out.

We’ll first test out the 50/30/20 portfolio that is gaining popularity today as being modern diversification versus the classic 60/40. All we do with this configuration is shave down 10% from equities and bonds to create an alternative sleeve.

Here is what the adjusted Nomadic Samuel portfolio looks like by boosting 10% equities and shaving down 10% bonds.

Nomadic Samuel 50/30/20

Here we leapfrog the 80/20 portfolio from a CAGR and growth of 10K perspective with a 11.57% CAGR and $1,269,450 growth of $10,000 versus 11.48% CAGR and $1,226,807 10K.

Also consider how much more defensive this modified Nomadic Samuel portfolio is versus the 80/20 from a worst year point of view coming in at -8.41% vs -25.13%.

But we’ve yet to wrestle away first place from the 100% US Total Stock Market portfolio.

Can we accomplish that?

Let’s try 60/20/20.

Nomadic Samuel 60/20/20

Ah, there we go.

A 60% optimized equity plus 20% bond (long-term treasury) and 20% alternative sleeve (gold) allocation defeats the 100% US Total Stock Market portfolio at this point while offering considerably better defence.

The further modified Nomadic Samuel Portfolio 60/20/20 returns 12.15% CAGR and grows $10,000 to 1,597,753 versus the 100% US Total Stock Market portfolio offering 11.89% CAGR and $1,442,461 expansion of 10K.

And from a worst year perspective -13.75% vs -37.04%.

Given these results a portfolio at the 100% canvas level featuring 50/30/20 or 60/20/20 optimized equities, bonds and alternatives makes a whole lot of sense from a performance meets risk management standpoint.

Modern 60/40 = 50/30/20

Modern 80/20 = 60/20/20

This to me is the modern 60/40 portfolio and 80/20 portfolio.

Now the 60/40 and 40/60 certainly did well at the 100% canvas level.

As leverage is dialed up at the 2X, 3X and 4X level you’ll notice these portfolio configurations starting to crack under the pressure.

However, the 60/40 at the 100% canvas level ties for second place in this competition and offers investors the right combination of risk meets reward when the canvas is not extended.

We need to discuss the 20/80. It finished dead last.

As you’ll find out in future games when leverage is further dialed up this portfolio doesn’t do well ever relative to its competition.

From my point of view it ought to be retired permanently.

Not only does it offer anemic returns it also doesn’t provide the defensive coverage of a risk-parity or all-weather solution.

Going 80% bonds doesn’t make a lot of sense when you can shave down 10-20% of that and add an uncorrelated alternatives in the sleeve of your portfolio (making it risk parity).

Let’s move on to the Risk Parity and All-Weather solutions.

From a defensive standpoint the Ray Dalio All-Weather Portfolio, Harry Browne Permanent Portfolio, Risk Parity Portfolio and the Nomadic Samuel Risk Parity Portfolio were remarkably durable posting a worst year of -4.50, -5.20, -5.61 and -3.86 respectively.

However, this came at a performance cost of being 200 to 300+ basis points inferior to some of the top performing portfolios.

It is not until the actual leverage challenges that these portfolios showcase a higher Sharpe and Sortino ratio along with improved performance versus their peers.

In the unleveraged portfolio challenge they very much offer incredible drawdown protection and sequence of return durability with diminished long-term returns.

It ended up being a fascinating first round for these portfolios.

Stay tuned as the 2X leverage portfolio challenge (200% canvas) is next!

Ciao for now.