Let’s find out how the Balanced 60/40, Ray Dalio All Weather, Risk Parity and seven other portfolios compare relative to each other when leverage is applied at the 3X level.
Round 3 of the Leveraged Portfolios Battle has arrived with a gigantic 300% canvas!
The 3X Picture Perfect Portfolio Challenge has a new King/Queen.
The winner of the un-leveraged and 2X leverage games is no longer in first place.
In many ways, this round of the games is where we start to see certain leveraged portfolios emerge from their shadows whereas others are eaten alive.
I’d say more but let’s not spoil things shall we.
Let the 3X Leveraged Portfolios Battle begin!
300% Canvas Game Rules
We’ve now entered the stage of the games where a volatility limit is no longer applied.
It’s just merely a matter of these portfolios staying below -37.04% (Our US Total Stock Market benchmark worst year performance).
Certain portfolios at the 3X leverage competition don’t even come close to achieving a 300% canvas because they get tripped up by the worst year clause.
You’ll find a comprehensive guide for the rules/scoring in the introduction post of this series.
TL;DR version is that the 10 different 3X leveraged portfolios line up head to head in five different categories and are ranked from first to last with scores of 10 to 1.
The points are then added up for a maximum of 50 and basement of 5.
Enough about the scoring let’s see who the winner is!
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: 3X 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
Well, my friends here we have the 100% US Total stock market serving as our benchmark for the third time in a row in this leveraged portfolios contest.
What can I say that I haven’t said already?
Not much.
With an 11.89% CAGR, 15.38% RISK, -37.04% Worst Year (I’ve memorized it now) and 0.53 Sharpe Ratio and 0.77 Sortino Ratio this is the only portfolio we won’t be leveraging in round 3.
Yikes!
Check out 2008 for a warning for those considering an equity only strategy.
-37.04% is no joke.
The potential for the 100% stock only strategy to lose money over a 10 year Roll period is a real possibility.
Balanced 60/40 Portfolio = 270% / 2.7X Leverage
Initial Balance: $10,000
Final Balance: $710,266,291
CAGR: 28.72%
RISK: 27.90%
Worst Year: -35.89%
Sharpe Ratio: 0.90
Sortino Ratio: 1.46
In the previous round, the Balanced 60/40 only made it to 1.9X leverage instead of 2X given the volatility rules of that round but this time around in round 3 it fails to reach 3X leverage (maxes out at 2.7X leverage) due to it tripping up over the worst year clause.
At 2.8X leverage the Classic 60/40 Portfolio would have posted a worst year of -37.20%, so at 2.7X it settles in at -35.89%.
In its favour, the Balanced 60/40 Portfolio still had a CAGR (28.72%) above its RISK (27.90%).
It had a Sharpe Ratio of 0.90 and Sortino Ratio of 1.46
The leveraged 60/40 Portfolio really only let investors down, from an annual returns perspective, in the early 2000s, 2008 and this year (2022).
From a Roll Period perspective, the leveraged 60/40 Portfolio could have frustrated investors with a 5 years low of -3.05%, 3 years at -16.06% and 1 year at -54.21%.
Conservative 40/60 Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $1,074,765,138
CAGR: 29.93%
RISK: 27.66%
Worst Year: -23.66%
Sharpe Ratio: 0.94
Sortino Ratio: 1.63
The 3X Leveraged Conservative 40/60 Portfolio clearly passes the 60/40 Portfolio in this round of the games.
With a CAGR of 29.93% versus its RISK of 27.66%, the 3X 40/60 Portfolio is 227 basis points above its standard deviation.
Its worst year was only -23.66% and it had a Sharpe Ratio of 0.94 and Sortino Ratio of 1.63.
The 40/60 Portfolio leveraged at 3X has been remarkably durable, from an annual returns point of view, only having a truly weak year in 2022.
The Conservative 40/60 Portfolio with 3X Leverage provided investors with a stable Roll Period with a worst case scenario being 3 years at -5.11% and 1 year at -38.43%.
Growth 80/20 Portfolio = 150% / 1.5X 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
Poor little Growth 80/20 Portfolio.
It’s stuck in the 2X leveraged game maximum leverage of 1.5X.
Why?
Because of the worst year clause.
It’s not able to leverage up and therefore is hanging out with the 100% Stock only portfolio at the bottom of the standings.
Overall, we’ve got a CAGR of 16.97%, RISK of 18.77%, Worst Year of -36.24%, Sharpe Ratio of 0.71 and Sortino Ratio of 1.07.
The modestly leveraged 80/20 Portfolio was a disaster in the 2000s and especially in 2008.
From a Roll Period perspective, the Growth 80/20 Portfolio with modest leverage is a scary proposition with a low 10 years of -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 = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $326,496,895
CAGR: 26.48%
RISK: 28.56%
Worst Year: -26.10
Sharpe Ratio: 0.82
Sortino Ratio: 1.45
The Income 20/80 Portfolio is able to achieve its full mandate of 3X leverage but it still embarrassingly has a CAGR (26.48%) that is 208 basis points below its RISK (28.56%).
In its favour, the leveraged 20/80 Portfolio only has a worst year of -26.10%.
Finally, the 20/80 Portfolio with 3X leverage has a Sharpe Ratio of 0.82 and Sortino Ratio of 1.45.
Not unlike the leverage 40/60 Portfolio, the 20/80 Portfolio has had its worst year in 2022!
The leveraged 20/80 Portfolio offers stability from a roll period perspective with a low of 3 years at -13.94% and 1 year at -37.66%.
Harry Browne Permanent Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $178,286,983
CAGR: 24.76%
RISK: 21.37%
Worst Year: -17.15%
Sharpe Ratio: 0.95
Sortino Ratio: 1.70
Finally we turn our attention to the leveraged portfolios with alternatives as an asset class.
The 3X Leveraged Harry Browne Portfolio boasted a CAGR (24.76%) 339 basis points above its RISK (21.37%).
Amazingly, even with 3X leverage, its worst year was only -17.15%.
It increased its Sharpe Ratio to 0.95 and Sortino Ratio to 1.70 in this round.
You have to go all the way back to 1981 to find the leveraged Harry Browne Permanent Portfolio’s worst year.
Amazingly the 3X Leveraged Harry Browne Permanent Portfolio had a roll period with a low of only 1 year at -29.72%.
Ray Dalio All Weather Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $579,543,353
CAGR: 28.13%
RISK: 23.82%
Worst Year: -17.32%
Sharpe Ratio: 0.99
Sortino Ratio: 1.76
Things just keep improving for the Ray Dalio All Weather Portfolio in each round of the games.
The 3X Leveraged Ray Dalio All Weather Portfolio has a CAGR of 28.13% that absolutely steamrolls its RISK of 23.82% by 431 basis points.
Its all-weather capabilities are on full display, even with 3X leverage, featuring a worst year of only -17.32%.
It closes things off with a Sharpe Ratio of 0.99 and Sortino Ratio of 1.76.
From an annual returns point of view, the leveraged Ray Dalio All-Weather portfolio had its worst years in 1981 and 2022.
The Ray Dalio 3X leveraged All-Weather Portfolio had a Roll Period with a single low of 1 year at -33.02%.
Risk Parity Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $267,131,139
CAGR: 25.90%
RISK: 22.29%
Worst Year: -16.56%
Sharpe Ratio: 0.96
Sortino Ratio: 1.74
The Risk Parity Portfolio with 3X Leverage is a juggernaut of returns meets risk management.
The 3X Risk Parity Portfolio has a CAGR of 25.90% that demolishes its RISK of 22.29% by 361 basis points.
With a worst year of only -16.56% it is the cream of the crop in terms of its defensive coverage in this round.
The leveraged Risk Parity Portfolio closes of with a Sharpe Ratio of 0.96 and Sortino Ratio of 1.74.
You have to roll the clock all the way back to 1981 to find the 3X Leveraged Risk Parity Portfolio’s worst year.
The Risk Parity Portfolio with more aggressive leverage continues its stability streak with a roll period low of only 1 year at -34.61%.
Nomadic Samuel Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $2,672,650,317
CAGR: 32.63%
RISK: 28.23%
Worst Year: -19.22%
Sharpe Ratio: 1.00
Sortino Ratio: 1.68
How does the Nomadic Samuel Portfolio perform with 3X leverage in this round of the games?
It still does great but it is no longer the King as it has been supplanted in the standings by the Nomadic Samuel Risk Parity Portfolio.
With 3X Leverage the Nomadic Samuel Portfolio features a CAGR of 32.63% that is 440 basis points above its RISK of 28.23%.
Even with its equity sleeve reaching 120% in this round it still keeps its worst year impressively low at -19.22%.
Even with 3X leverage, the Nomadic Samuel Portfolio has never had consecutive down years.
You have to go back to 1990 to find its worst year.
From a Roll Period point of view the leveraged Nomadic Samuel Portfolio had a low of 3 years at -6.39% and 1 year at -48.67%.
Nomadic Samuel Risk Parity Portfolio = 300% / 3X Leverage
Initial Balance: $10,000
Final Balance: $486,743,028
CAGR: 27.62%
RISK: 22.57%
Worst Year: -11.67%
Sharpe Ratio: 1.02
Sortino Ratio: 1.84
We’ve got a new king to crown in round 3 of the leveraged portfolio challenge!
The Nomadic Samuel Risk Parity Portfolio had its coming out party with 3X leverage applied to the portfolio.
With a CAGR of 27.62 it is whopping 505 basis points ahead of its RISK of 22.57%.
Even with 3X leverage its worst year is otherworldly defensive at -11.67%.
You have to head back to the 20th century to find the Nomadic Samuel Risk Parity 3X leverage portfolio’s worst year in 1994.
The Nomadic Samuel Risk Parity 3X Portfolio had a low Roll Period of 1 year at -29.04%.
Picture Perfect Portfolio Challenge 3X Leverage Rankings
CAGR PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = 32.63% (10)
CONSERVATIVE 40/60 PORTFOLIO = 29.93% (9)
BALANCED 60/40 PORTFOLIO = 28.72% (8)
RAY DALIO ALL-WEATHER PORTFOLIO = 28.13% (7)
NOMADIC SAMUEL RISK PARITY PORTFOLIO = 27.62% (6)
INCOME 20/80 PORTFOLIO = 26.48% (5)
RISK PARITY PORTFOLIO = 25.90% (4)
HARRY BROWNE PERMANENT PORTFOLIO = 24.76% (3)
GROWTH 80/20 PORTFOLIO = 16.97% (2)
100% US STOCK MARKET PORTFOLIO = 11.89% (1)
GROWTH OF 10K PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = $2,672,650,317 (10)
CONSERVATIVE 40/60 PORTFOLIO = $1,074,765,138 (9)
BALANCED 60/40 PORTFOLIO = $710,266,291 (8)
RAY DALIO ALL-WEATHER PORTFOLIO = $579,543,353 (7)
NOMADIC SAMUEL RISK PARITY PORTFOLIO = $486,743,028 (6)
INCOME 20/80 PORTFOLIO = $326,496,895 (5)
RISK PARITY PORTFOLIO = $267,131,139 (4)
HARRY BROWNE PERMANENT PORTFOLIO = $178,286,983 (3)
GROWTH 80/20 PORTFOLIO = $10,273,587 (2)
100% US STOCK MARKET PORTFOLIO = $1,442,461 (1)
SHARPE RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY PORTFOLIO = 1.02 (10)
NOMADIC SAMUEL PORTFOLIO = 1.00 (9)
RAY DALIO ALL-WEATHER PORTFOLIO = 0.99 (8)
RISK PARITY PORTFOLIO = 0.96 (7)
HARRY BROWNE PERMANENT PORTFOLIO = 0.95 (6)
CONSERVATIVE 40/60 PORTFOLIO = 0.94 (5)
BALANCED 60/40 PORTFOLIO = 0.90 (4)
INCOME 20/80 PORTFOLIO = 0.82 (3)
GROWTH 80/20 PORTFOLIO = 0.71 (2)
100% US STOCK MARKET PORTFOLIO = 0.53 (1)
SORTINO RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY PORTFOLIO = 1.84 (10)
RAY DALIO ALL-WEATHER PORTFOLIO = 1.76 (9)
RISK PARITY PORTFOLIO = 1.74 (8)
HARRY BROWNE PERMANENT PORTFOLIO = 1.70 (7)
NOMADIC SAMUEL PORTFOLIO = 1.68 (6)
CONSERVATIVE 40/60 PORTFOLIO = 1.63 (5)
BALANCED 60/40 PORTFOLIO = 1.46 (4)
INCOME 20/80 PORTFOLIO = 1.45 (3)
GROWTH 80/20 PORTFOLIO = 1.07 (2)
100% US STOCK MARKET PORTFOLIO = 0.77 (1)
WORST YEAR PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY PORTFOLIO = -11.67% (10)
RISK PARITY PORTFOLIO = -16.56% (9)
HARRY BROWNE PERMANENT PORTFOLIO = -17.15% (8)
RAY DALIO ALL-WEATHER PORTFOLIO = -17.32% (7)
NOMADIC SAMUEL PORTFOLIO = -19.22% (6)
CONSERVATIVE 40/60 PORTFOLIO = -23.66% (5)
INCOME 20/80 PORTFOLIO = -26.10 (4)
BALANCED 60/40 PORTFOLIO = -35.89% (3)
GROWTH 80/20 PORTFOLIO = -36.24% (2)
100% US STOCK MARKET PORTFOLIO = -37.04 (1)
TOTAL OVERALL PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY PORTFOLIO = 42
NOMADIC SAMUEL PORTFOLIO = 41
RAY DALIO ALL-WEATHER PORTFOLIO = 38
CONSERVATIVE 40/60 PORTFOLIO = 33
RISK PARITY PORTFOLIO = 32
HARRY BROWNE PERMANENT PORTFOLIO = 27
BALANCED 60/40 PORTFOLIO = 27
INCOME 20/80 PORTFOLIO = 20
GROWTH 80/20 PORTFOLIO = 10
100% US STOCK MARKET PORTFOLIO = 5
Nomadic Samuel Final Thoughts
It has been said that comparison is the thief of joy.
Well, not if you’re talking about the leveraged portfolio challenge!
In round 3 of the battle of the leveraged portfolios we see significantly boosted performance in all categories aside from worst year.
Let’s examine those ranges specifically.
CAGR 2X vs 3X Leverage
At the 200% canvas level portfolios had a CAGR range of 16.51% to 21.90% but when the canvas extends to 300% we’ve now got CAGR scores of between 24.76% to 32.62%.
We’re talking some ridiculous numbers at this point.
But of course, these higher returns come with greater risk and worse years overall.
We’ll examine that later.
Sharpe Ratio 2X vs 3X Leverage
With 3X Leveraged Portfolios we finally break the 1.00+ Sharpe ratio!
2X Leveraged Portfolios ranged between 0.71 and 0.93 whereas 3X Leveraged Portfolios offered 0.82 to 1.02.
It’s at this stage of the games where we’re noticing 400 to 500+ basis points of CAGR above RISK.
The only equity/bond portfolios to achieve that were the 60/40 and 40/60.
Every single one of the portfolios featuring an alternative sleeve (all 5 of them) had returns far greater than their standard deviation.
Worst Year 2X vs 3X Leverage
So all of this performance meets stability comes with a bit of an extra cost, right?
Yeah.
The worst year scores of the 2X versus 3X leveraged portfolios is predictably worse but not as bad as you might expect.
2X leveraged portfolios have a range of -7.75% to -37.04% whereas 3X leveraged portfolios offered -11.67% to -37.04%.
Long gone are the single digit only worst years of the 2X leveraged competition.
But surprisingly five portfolios managed to keep their worst years below -20%.
Any guesses as to which ones?
The five with allocations to alternatives (gold) in the portfolio.
The 3X leveraged portfolios challenge firmly establishes the need for an alternative sleeve in the portfolio for those seeking returns meets stability at this particular 300% canvas.
Every single one of the equity/bond only combinations failed to be below -20% (as a worst year) and many failed to reach their full potential of 3X leverage without being halted full stop by the worst year benchmark clause.
Death Of The 60/40 Portfolio
Ready for a bold statement?
The 3X leveraged portfolios challenge is where the 60/40 portfolio is murdered.
Its dead.
We see clearly where it falls apart.
It doesn’t meet its leverage threshold before it has a year worse than its benchmark 100% US total stock market.
The 60/40 portfolio no longer is able to manage its risk at an acceptable level with this amount of leverage.
RIP 60/40.
Nice knowing ya!
In all seriousness, the fact it made it this far in the games before croaking was actually a little bit surprising to me.
I thought it would fall apart sooner.
40/60 Portfolio Hangs Around
Now things are considerably different for the 40/60 portfolio when 3X leverage is applied.
This portfolio can still hang around with the likes of the classic Risk Parity and Harry Browne Permanent Portfolio.
It finishes in second place in terms of performance (CAGR) and growth of 10K.
And although it scores worse than all 5 of the portfolios with an alternative sleeve for its defensive qualities, it doesn’t embarrass itself in terms of its worst year, Sharpe ratio and Sortino ratio.
Risk Parity Nomadic Samuel = New King
All hail the new king!
The Nomadic Samuel Risk Parity portfolio has emerged as #1.
What happened to the Nomadic Samuel portfolio?
Did it fall off of a cliff?
NO.
Not exactly.
But we’re now at the stage of the competition (with 3X leverage) where we can see very clearly that it makes sense, from a risk/reward perspective, to have a greater allocation to bonds than towards stocks in the portfolio.
A 1:1 stocks to bonds ratio is no longer optimal once 3X leverage or more is applied to portfolios.
Bonds + Alternatives = Success with 3X Leverage
The take-home message of the 3X leveraged portfolios challenge is clear.
Bonds + alternatives is the secret sauce once leverage starts to get a bit wacky.
When you’re tripling up asset classes having too much exposure to equities is lethal given its risk profile.
Containing the risk of equities with bonds is essential and adding an uncorrelated asset class (in this case gold) is even more paramount.
We see the 20/80 Portfolio have a return/risk profile that is worse than the 40/60.
Having too much allocation to any one asset class (in this case bonds) is far from optimal as well.
It is balance that is needed.
source: Optimized Portfolio on YouTube
Balance = Key Takeaway
When it comes to the optimal portfolio at the 3X leverage competition balance is what it is all about.
Here are the key takeaways IMO:
- Equities need to be limited at this level
- Bonds need to be greater than 1:1 equities in order to provide adequate stability
- Bonds ought to be capped at 60% given that when they’re extended to 80% stability is reduced
- 10-20% allocation to alternatives (uncorrelated asset class) provides the ultimate stability
Thus, the perfect portfolio at the 3X level ought to be something like this:
20-30% Equities
50-60% Bonds
10-20% Alternatives
Without balance we see things fall apart quickly at the 3X leverage portfolio challenge.
Too much exposure to stocks.
Leverage stops almost straight away before the worst year clause kicks in.
Too much exposure to bonds.
Your risk profile exceeds your returns.
No alternatives?
Middle of the pack performance (40/60 portfolio).
Yes to alternatives.
Winner of the games.
