With 2X leverage applied to all of the classic portfolios (ranging from the Balanced 60/40 to the Ray Dalio All Weather Portfolio to the Risk Parity Portfolio) we’re going to find out in the Picture Perfect Portfolio Challenge (Leveraged Portfolios Battle) which asset allocations buckled under the pressure versus which portfolios were enhanced in ways confined previously by a 100% canvas.
With leverage introduced it is a whole different ball game being played.
The results from round 1 of the Picture Perfect Portfolio Challenge mean nothing in round 2.
Things change.
Considerably.
Rankings shift.
I don’t want to spoil the results.
Thus, let the Picture Perfect Portfolio Challenge begin with 2X leverage!
200% Canvas Game Rules
With the canvas expanding to 200%, given that 2X leverage is now being applied, we’re introducing one new rule in particular to the previous unleveraged games.
A volatility limit of 20% standard deviation.
The whole point of the Picture Perfect Portfolio Challenge is to ensure that this game remains a returns versus risk management competition.
Thus, having a RISK constraint ensures that portfolios maintain a level of stability in round 2.
The only other rule is the same one that applies to every single game of the Picture Perfect Portfolio Competition.
Which is a worst year constraint of -37% (our US total stock market benchmark).
In other words, no portfolio can have a year worse than -37%.
Leverage stops immediately once that happens.
I go into detail with all of the rules/scoring for each leverage game in the Leveraged Portfolios Battle introduction.
TL;DR version is that all 10 portfolios that are competing against each other are ranked from 1st to last in terms of five different categories with a maximum amount of points being 50 and minimum being 5.
I’ve rambled long enough.
Let the Picture Perfect Portfolio Challenge begin with 2X leverage!
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: 2X Leverage
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
As a friendly reminder the US Total Stock Market is the benchmark for this leveraged portfolio challenge.
And this portfolio isn’t being leveraged at all given its worst year -37% is being used as a “breaking point” for all other portfolios in these games.
No portfolio, whether at the 2X, 3X, or 4X leverage challenge can have a year worse than -37%.
In terms of annual returns the 100% US Total Stock market has 8 negative years total.
The 2000s were its harshest test with three consecutive negative years in the early 2000s followed by a catastrophic 2008.
Investors in a 100% US Total Stock Market portfolio would have had to endure a roll period of 10 years at -2.57%, 7 years at -3.02%, 5 years at -6.23%, 3 years at -16.26% and 1 year at -43.18%.
That requires “insane levels of patience” to put up with a portfolio as it struggles for over a decade of being underwater.
Balanced 60/40 Portfolio = 190% / 1.9 X Leverage
Initial Balance: $10,000
Final Balance: $38,191,467
CAGR: 20.49%
RISK: 19.63%
Worst Year: -25.27%
Sharpe Ratio: 0.84
Sortino Ratio: 1.33
Let’s move on to the Balanced 60/40 at 2X leverage!
With a second round volatility constraint, in this round of requiring risk to be below 20, the Classic 60/40 portfolio shows signs of buckling under the pressure as leverage maxed out at 1.9X with its risk at 19.63%.
In its favour, the leveraged 60/40 portfolio delivered a CAGR of 20.49% which is higher than its standard deviation.
Its worst year was -25.27% (considerably better than 100% US Stock Market at -37%) and it had a best year of 71.96%.
Its Sharpe Ratio of 0.84 and Sortino Ratio of 1.33 is higher than in the first round of the portfolio challenge (without leverage).
Aside from a traumatic 2008, the Balanced 60/40 provided investors with stability even at the 1.9X leverage level, not coming anywhere close to having a year worse than -20% again.
Overall, I counted 10 negative years dating back to 1978.
Even with leverage the Balanced 60/40 was remarkably stable with a worst case scenario Roll Period of returns being 5 years at -1.34%, 3 years at -10.51% and 1 year at -40.40%.
Conservative 40/60 Portfolio = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $33,412,515
CAGR: 20.13%
RISK: 18.44%
Worst Year: -16.19%
Sharpe Ratio: 0.86
Sortino Ratio: 1.46
In round two of the Picture Portfolio Challenge, the Conservative 40/60 Portfolio passes the Balanced 60/40 in a significant manner with regards to numerous statistics.
Firstly, it survives the game constraints of 20 standard deviation posting a RISK of 18.44% at 2X complete leverage.
Its CAGR of 20.13% was a solid 169 basis points above its volatility equaling a worst year of only -16.19%.
It considerably improved upon its Sharpe Ratio with 0.86 and Sortino Ratio at 1.46.
The 2X leveraged Conservative 40/60 Portfolio didn’t feel the wrath of 2008 (quite like the 60/40) but actually has felt its biggest shock this year in 2022.
It kept investors above water in the 2000s and had a rip roaring stretch of performance in the 2010s.
With a worst case scenario of a Roll Period being 3 years at -2.31% and 1 year at -25.35% the 200% canvas Conservative 40/60 Portfolio provided tremendous overall stability.
Consider. for instance, that a 100% equity portfolio had an entire lost decade while the leveraged 40/60 only had a mildly frustrating 3 year period.
Growth 80/20 Portfolio = 150% / 1.5 X Leverage
Initial Balance: $10,000
Final Balance: $10,273,587
CAGR: 16.97%
RISK: 18.77%
Worst Year: -36.24%
Sharpe Ratio: 0.71
Sortino Ratio: 1.07
The Growth 80/20 Portfolio had absolutely catastrophic results when leveraged was applied in round 2 of the Battle of the Leverage Portfolios.
Instead of tapping out with volatility it succumbed rather quickly (with only 1.5X leverage applied) to the worst year clause set by our benchmarket 100% US Total Stock Market of -37%.
Hence, had I dialed things up to 1.6X Leverage the Growth 80/20 Portfolio would have had a year worse than the US Total Stock Market.
Overall the Growth 80/20 had a RISK level of 18.77% that was higher than its CAGR of 16.97%.
It posted a worst year of -36.24% and best year of 55.72%.
Its Sharpe Ratio bottomed out at 0.71 and its Sortino Ratio came in at 1.07.
In terms of Annual Returns the leveraged Growth 80/20 Portfolio had a risk profile similar to the US Total Stock Market.
The 2000s were devastating to the leveraged 80/20 portfolio with four negative years overall with a particularly nasty offering in 2008.
The Roll Period for the leveraged Growth 80/20 highlights an even worse case scenario with 10 years at -0.50%, 7 years at -0.83%, 5 years at -5.06%, 3 years at -16.24% and 1 year at -46.07%.
Income 20/80 Portfolio = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $15,257,328
CAGR: 18.02%
RISK: 19.04%
Worst Year: -17.95
Sharpe Ratio: 0.75
Sortino Ratio: 1.29
In round 1 of the unleveraged portfolio challenge, I lamented how the Income 20/80 Portfolio ought to be permanently retired.
I continue that stance in round 2, given that its RISK of 19.04% is higher than its CAGR of 18.02%.
In its favour it performed considerably better than its exact opposite (Growth 80/20) with a worst year of only -17.95% versus a best year of 96.71%.
At 2X leveraged 20/80 Portfolio closed things off with a Sharpe Ratio of 0.75 and Sortino Ratio of 1.29.
Annual Returns were relatively kind to the 2X leveraged 20/80 Portfolio with 9 negative years overall with only 2022 being a particularly difficult one.
The 200% 20/80 Portfolio provided a stable worst case scenario Roll Period with 3 years at -7.93% and 1 year at -25.61%.
Harry Browne Permanent Portfolio = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $8,649,938
CAGR: 16.51%
RISK: 14.25%
Worst Year: -10.96%
Sharpe Ratio: 0.85
Sortino Ratio: 1.47
Let’s say goodbye to the equity/bond only portfolios and hello to the portfolios featuring an alternative sleeve.
First up, we have the Harry Browne Permanent Portfolio at 2X leverage posting a CAGR of 16.51% that was 226 basis points higher than its RISK of 14.25%.
The leveraged Harry Browne Permanent Portfolio had a worst year of only -10.96% and a best year of 91.31%.
Its Sharpe Ratio came in at 0.85 and its Sortino Ratio was 1.47.
In terms of annual returns the leveraged 2X Harry Browne Portfolio has been as defensive of a portfolio as you could possibly imagine with its worst year happening all the way back in 1981.
Remarkably, even with 2X leverage applied, the Harry Browne Permanent Portfolio only had a worst case scenario Roll Period of 1 year at -19.96%.
Ray Dalio All Weather Portfolio = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $20,069,497
CAGR: 18.75%
RISK: 15.88%
Worst Year: -11.07%
Sharpe Ratio: 0.90
Sortino Ratio: 1.55
The Ray Dalio All-Weather Portfolio really shines, with a bit of leverage applied, as indicated by its CAGR of 18.75% being 287 basis points above its RISK of 15.88%.
With 2X leverage applied the Ray Dalio All-Weather Portfolio had a worst year of only -11.07% and best year of 70.17%.
You’ll notice its Sharpe Ratio of 0.90 and Sortino Ratio of 1.55 is considerably higher than in game one of this competition.
Even with 2X leverage the Ray Dalio All-Weather Portfolio hasn’t offered investors any reasons for concerns with regards to its annual returns.
The 2X Leveraged Ray Dalio All Weather Portfolio has endured a worst case scenario Roll Period of only 1 year at -22.64%.
Source: PortfolioVisualizer.com
Risk Parity Portfolio = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $11,519,211
CAGR: 17.27%
RISK: 14.86%
Worst Year: -9.95%
Sharpe Ratio: 0.87
Sortino Ratio: 1.52
Like a fine wine that requires breathing room, the Risk Parity Portfolio comes alive with a bit of leverage applied at the 2X level.
The 2X Leveraged Risk Parity Portfolio features a CAGR of 17.27% that crushes its RISK of 14.86% by more than 241 basis points.
Remarkably, the 2X Risk Parity Portfolio has a worst year of only -9.95% and best year of 68.71%.
Its Sharpe Ratio of 0.87 and Sortino Ratio of 1.52 are much higher than in round 1 of the competition.
From an Annual Returns perspective the Risk Parity Portfolio (even with leverage) has only 6 negative years with a remarkable stretch of consecutive positive years ranging from 1995 until the end of 2012.
The leveraged Risk Parity Portfolio Roll Period was remarkably stable with only a 1 year blip at -23.97%.
Nomadic Samuel = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $63,809,917
CAGR: 21.90%
RISK: 18.82%
Worst Year: -12.38%
Sharpe Ratio: 0.93
Sortino Ratio: 1.52
The Nomadic Samuel Portfolio said “please” and “thank you” to 2X leverage producing a competition best performance of 21.90% CAGR which was 308 basis points higher than its RISK of 18.82%.
A worst year of -12.38% versus its best year of 89.42% showcases how stable the portfolio was given its tremendous performance.
Finally, the Nomadic Samuel Portfolio boosted its Sharpe Ratio to 0.93 and Sortino Ratio to 1.52.
With 8 negative years the Nomadic Samuel Portfolio has been stable relative to its competition but not quite at the same level as say the Risk Parity Portfolio or Ray Dalio All Weather Portfolio.
For those committed to the 2X leveraged Nomadic Samuel Portfolio a worst case scenario of Roll Period featured 3 years at -2.65% and 1 year at -32.91%.
Nomadic Samuel Risk Parity = 200% / 2 X Leverage
Initial Balance: $10,000
Final Balance: $17,363,895
CAGR: 18.36%
RISK: 15.04%
Worst Year: -7.75%
Sharpe Ratio: 0.92
Sortino Ratio: 1.62
The 2X leveraged Nomadic Samuel Risk Parity Portfolio had the highest level of relative CAGR (18.36%) vs RISK (15.04%) outperformance at 332 basis points.
It also featured the most defensive worst year at -7.75% with a best year coming in at 75.37%.
It posted a remarkably improved Sharpe Ratio of 0.92 and Sortino Ratio of 1.62.
The leveraged Nomadic Samuel Risk Parity Portfolio had seven negative years with four of them happening since 2013.
The 2X Leveraged Nomadic Samuel Risk Parity Portfolio had a “Low” from a Roll Period perspective of 1 year at -19.87%.
Picture Perfect Portfolio Challenge 2X Leverage Rankings
CAGR PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = 21.90% (10)
BALANCED 60/40 = 20.49% (9)
CONSERVATIVE 40/60 = 20.13% (8)
RAY DALIO ALL-WEATHER = 18.75% (7)
NOMADIC SAMUEL RISK PARITY = 18.36% (6)
INCOME 20/80 = 18.02% (5)
RISK PARITY PORTFOLIO = 17.27% (4)
GROWTH 80/20 = 16.97% (3)
HARRY BROWNE PERMANENT = 16.51% (2)
100% US TOTAL STOCK MARKET = 11.89%% (1)
GROWTH OF 10K PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = $63,809,917 (10)
BALANCED 60/40 = $38,191,467 (9)
CONSERVATIVE 40/60 = $33,412,515 (8)
RAY DALIO ALL-WEATHER = $20,069,497 (7)
NOMADIC SAMUEL RISK PARITY = $17,363,895 (6)
INCOME 20/80 = $15,257,328 (5)
RISK PARITY PORTFOLIO = $11,519,211 (4)
GROWTH 80/20 = $10,273,587 (3)
HARRY BROWNE PERMANENT = $8,649,938 (2)
100% US TOTAL STOCK MARKET = $1,442,461 (1)
SHARPE RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = 0.93 (10)
NOMADIC SAMUEL RISK PARITY = 0.92 (9)
RAY DALIO ALL-WEATHER = 0.90 (8)
RISK PARITY PORTFOLIO = 0.87 (7)
CONSERVATIVE 40/60 = 0.86 (6)
HARRY BROWNE PERMANENT = 0.85 (5)
BALANCED 60/40 = 0.84 (4)
INCOME 20/80 = 0.75 (3)
GROWTH 80/20 = 0.71 (2)
100% US TOTAL STOCK MARKET = 0.53 (1)
SORTINO RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = 1.62 (10)
RAY DALIO ALL-WEATHER = 1.55 (9)
RISK PARITY PORTFOLIO = 1.52 (7.5)
NOMADIC SAMUEL PORTFOLIO = 1.52 (7.5)
HARRY BROWNE PERMANENT = 1.47 (6)
CONSERVATIVE 40/60 = 1.46 (5)
BALANCED 60/40 = 1.33 (4)
INCOME 20/80 = 1.29 (3)
GROWTH 80/20 = 1.07 (2)
100% US TOTAL STOCK MARKET = 0.77 (1)
WORST YEAR PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = -7.75% (10)
RISK PARITY PORTFOLIO = -9.95% (9)
HARRY BROWNE PERMANENT PORTFOLIO = -10.96% (8)
RAY DALIO ALL-WEATHER PORTFOLIO = -11.07% (7)
NOMADIC SAMUEL PORTFOLIO = -12.38% (6)
CONSERVATIVE 40/60 PORTFOLIO = -16.19% (5)
INCOME 20/80 PORTFOLIO = -17.95 (4)
BALANCED 60/40 PORTFOLIO = -25.27% (3)
GROWTH 80/20 PORTFOLIO = -36.24% (2)
100% US STOCK MARKET PORTFOLIO = -37.04% (1)
TOTAL OVERALL PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO PORTFOLIO = 43.5
NOMADIC SAMUEL RISK PARITY PORTFOLIO = 41
RAY DALIO ALL-WEATHER PORTFOLIO = 38
CONSERVATIVE 40/60 PORTFOLIO = 32
RISK PARITY PORTFOLIO = 31.5
BALANCED 60/40 PORTFOLIO = 29
HARRY BROWNE PERMANENT PORTFOLIO = 23
INCOME 20/80 PORTFOLIO = 20
GROWTH 80/20 PORTFOLIO = 12
100% US STOCK MARKET PORTFOLIO = 5
Nomadic Samuel Final Thoughts
In many ways the unleveraged picture portfolio challenge of round 1 was merely a formality.
Something that had to be done.
But we’ve all REALLY been waiting for round 2, when leverage is applied at the 2X level and the canvas of the portfolios extends to 200%.
What a difference leverage makes to all of these portfolios.
We see some enhanced greatly whereas others buckle almost immediately.
Sharpe Ratio + Sortino Ratio Boost at 2X Leverage
Before we discuss the portfolios individually (or by group) let’s first examine the Sharpe Ratio and Sortino Ratio ranges relative to the first round of the portfolio challenge.
In the unleveraged portfolio competition Sharpe ratios ranged from 0.52 to 0.70 whereas with 2X leverage we’re now at 0.71 to 0.93. (excluding the 100% US Equities which was not leveraged)
A big overall boost overall.
And we also notice a big jump in Sortino ratios going from a range of 0.77 to 1.08 to a new territory of 1.07 to 1.62 with 2X leverage applied.
What does this mean exactly?
It means that risk adjusted returns were enhanced with a modest amount of leverage applied to portfolios with uncorrelated assets.
Indeed.
300+ Basis Points Performance vs Risk
Consider that portfolios, at the 2X leverage level, now outperformed from a CAGR/RISK by 300+ basis points.
The Nomadic Samuel Portfolio and the Nomadic Samuel Risk Parity Portfolio, swapping the US Total stock market with US Small Cap Value, each reached that 300+ basis point outperformance margin.
With extended canvas portfolios of 200% we also notice returns jumping massively from game 1 with a CAGR range of 8.23 to 11.89% to 16.51% to 21.90%.
This of course, comes at a cost from a worst year perspective where in the first game seven portfolios had only single digit negative worst years versus just two this time around.
However, only three portfolios at the 2X leverage challenge had negative worst years of -20% or worse.
80/20 Portfolio = Biggest Loser with 2X Leverage
So who were the winner and losers of round 2?
Let’s start with the losers.
No bigger loser than the Growth 80/20 portfolio.
It failed miserably in round 2 of the games (and spoiler alert) it doesn’t get any better as the competition moves to a 3X and 4X level.
Why?
Because it concentrates most of its risk in equities at 80% (a volatile asset class) and when the portfolio is dialed up with leverage to 1.6X it triggers the benchmark clause of a worst year of -37%.
The Growth 80/20 Portfolio is clearly not a portfolio that is worth leveraging at any level from a performance/risk standpoint.
The other biggest loser, which was also a loser in game 1, was the Income 20/80 Portfolio.
Given its high concentration of bonds you’d figure its RISK would be lower than its CAGR but that is not the case.
40/60 Portfolio Emerges from the Shadow of 60/40
The two equity + bond only portfolios that performed well at the 2X leverage competition were the Balanced 60/40 and Conservative 40/60.
However, the 40/60 Portfolio pulled ahead of the 60/40 Portfolio in this round of the competition.
Leveraging a 60/40 Portfolio at the 200% canvas level starts to highlight its inability to control its RISK levels.
We had to stop leverage at 1.9X due to it triggering the 20% volatility upper limit.
The 40/60 Portfolio on the other hand did not have to be dialed down and outperformed the 60/40 in terms of Sharpe ratio, Sortino ratio and Worst Year by quite a large margin.
Thus, I think a take home message here is that any aggressive uses of leverage to stock/bond only combinations should come closer to the 40/60 asset allocation versus the 60/40 classic one.
The 40/60 Portfolio offers superior risk adjusted returns versus the 60/40 and you’ll notice in future games this gap is further widened.
Enough about the equity and bond only portfolios.
Alternative Sleeve = Success with 2X Leverage?
How did the portfolios featuring an alternative sleeve perform with 2X leverage applied?
In a word.
Amazing.
They all came alive in a way that didn’t happen in round 1 of the competition when returns were relatively anemic.
Every single portfolio including the Harry Browne Permanent, Ray Dalio All Weather, Risk Parity, Nomadic Samuel and Nomadic Samuel Risk Parity had CAGR returns considerably higher than RISK level.
All of these portfolios ate Sharpe Ratios and Sortino Ratios for breakfast.
The worst case year for these five portfolios ranged from -7.75% -12.38%.
Compare that to the equity/bond only combinations which were -16.19% to -36.24%.
Adding an alternative sleeve to the portfolio and keeping equities equal to or below bond allocations meant greater stability for all of these portfolios compared to the 80/20, 60/40, 40/60 and 20/80.
We can think of round 2 as the coming out party for these portfolios versus the equity/bond only combination.
We’ll have to find out what happens in game number 3!
Stay tuned for the Picture Perfect Portfolio Challenge 3X leverage competition!
Coming soon!
When you use portfolio visualizer there is a link on the page to save a URL that allows you to share it with others. Can you start using that to provide direct links to the portfolios you show?
That’s a great suggestion! I’ll try doing that in a future post!
This was a very interesting post. I take it you just applied theoretical leverage (margin) equally to each of the assets in the portfolio?
And these are all long leverage only?