All good things come to an end with the 4X Leveraged Portfolio Battle reaching its final challenge of the Ray Dalio All Weather Portfolio, Risk Parity Portfolio and 60/40 Portfolio competing head to head.
It’s still hard for me to believe this is the final post of the series!
My oh my what a portfolio challenge it has been going from unlevered to 2X to 3X and now finally to 4X in the final battle.
In this final picture perfect portfolio competition it’s truly a war of attrition.
Not many portfolios make it to the full 400% canvas before having a year worse than the US Stock Market benchmark of -37.04%.
Thus, in many ways it’s a battle of the walking wounded.
Just to reiterate from the introduction post of the series, the purpose of this entire challenge wasn’t to recommend a 2X, 3X or 4X leveraged portfolio.
It was instead to stress test these portfolios to see if/when/where they fall apart under the pressure of “extreme” leverage.
So with this being the final portfolio challenge let’s see who wins, loses and limps across the finish line!
400% Canvas Game Rules
So now that we’re in round 4 of the picture perfect portfolio challenge the only rule is a simple one.
The portfolios lever-up buttercup until they have a year worse than the benchmark US Stock Market of -37.04%.
Hence, not all of the portfolios are able to achieve a 400% canvas at this point in the games.
Furthermore, the scoring system is based on five categories: CAGR, Growth of $10,000, Sharpe Ratio, Sortino Ratio and Worst Year
Portfolios are ranked relative to each other with a maximum score of 10 in each category.
The totals are tallied up for a maximum of 50 and basement of 5 points.
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: 4X 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
One last time to trot out the 100% US Total stock market without leverage as our benchmark.
We had a CAGR of 11.89%, RISK of 15.38% and worst year of -37.04%.
It had a Sharpe ratio of 0.53 and Sortino ratio of 0.77.
The early 2000s and 2008 highlight what an equity only strategy can look like without any uncorrelated assets to help buffer drawdowns.
And we’re once again reminded of what an equity only strategy looks like from a roll period low with 10 years at -2.57%, 7 years at -3.02%, 5 years at -6.23%, 3 years -16.27% and 1 year -43.18%.
Balanced 60/40 Portfolio = 270% / 2.7 X 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
If you read the Battle of the leveraged portfolios 300% canvas article you’re likely experiencing deja vu.
The 60/40 is halted at 2.7X leverage (with a max canvas of 270%) due to its worst year clause kicking in.
What you end up with is a CAGR of 28.72 which is 82 basis points ahead of it RISK of 27.90%.
Its worst year was -35.89% with an overall Sharpe Ratio of 0.90 and Sortino Ratio of 1.46.
Investors committed to the 60/40 Portfolio with this amount of leverage had to endure a challenging early 2000s, 2008 and 2022.
When it comes to Roll Period the 2.7X leveraged 60/40 portfolio would have frustrated investors with a low of 5 years at -3.05%, 3 years at -16.06% and 1 year at 54.21%.
Conservative 40/60 Portfolio = 400% / 4 X Leverage
Initial Balance: $10,000
Final Balance: $23,516,054,388
CAGR: 39.31%
RISK: 36.87%
Worst Year: -30.72%
Sharpe Ratio: 0.98
Sortino Ratio: 1.71
The 4X 40/60 Portfolio was able to achieve its full mandate of a 400% canvas in the 4th round of this challenge.
With a CAGR of 39.31% and RISK of 36.87 it featured a worst year of -30.72%.
Its Sharpe ratio was 0.98 and it had a Sortino ratio of 1.71.
When it comes to annual returns, the 4X leveraged 40/60 portfolio never had two negative years in a row and its worst year was this year (2022).
From a Roll Period low, the 4X Conservative 40/60 Portfolio clocked in a 3 year -9.07% and 1 year -51.03% worst case scenario.
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
Ah, what can we say at this point about the Growth 80/20 Portfolio?
It’s still stuck in round 2 of the games not even making it to a 200% canvas.
The worst year clause (-37.04%) kept leverage to 1.5X where the 80/20 portfolio delivered a CAGR at 16.97%, RISK at 18.77% and worst year at -36.24%.
It featured a Sharpe Ratio of 0.71 and Sortino Ratio of 1.07.
The 2000s crushed the 1.5X levered 80/20 Portfolio with 4 negative years including a disastrous 2008.
You’d have to be willing to endure a 10 year underwater scenario with the 80/20 leveraged portfolio including a backtest roll period low of 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 = 400% / 4 X Leverage
Initial Balance: $10,000
Final Balance: $4,732,250,018
CAGR: 34.35%
RISK: 38.08%
Worst Year: -33.72%
Sharpe Ratio: 0.86
Sortino Ratio: 1.53
The Income 20/80 Portfolio was able to achieve its 4X leverage mandate in this round of the games but still featured a CAGR (34.35%) lower than its RISK (-33.72%).
With a worst year of -33.72% the 4X 20/80 Portfolio had a Sharpe ratio of 0.86 and Sortino Ratio of 1.53.
From an annual returns perspective the Income 20/80 4X Levered Portfolio had its worst year in 2022.
A worst case scenario roll period low for the 20/80 leveraged portfolio featured 3 years at -21.00% and 1 year at -48.95%.
Harry Browne Permanent Portfolio = 400% / 4 X Leverage
Initial Balance: $10,000
Final Balance: $2,907,525,891
CAGR: 32.88%
RISK: 28.50%
Worst Year: -23.65%
Sharpe Ratio: 1.00
Sortino Ratio: 1.81
The Harry Browne Permanent Portfolio continued to thrive even with 4X leverage applied.
Its CAGR was 32.88% while its RISK was 28.50%.
The 4X Permanent Portfolio had a worst year of only -23.65%.
The Permanent Portfolio, even with 4X leverage, never had two down years in a row from an annual returns perspective.
The 4X Permanent Portfolio had a sequence of returns low of 1 year at -39.55%.
Ray Dalio All Weather Portfolio = 400% / 4X Leverage
Initial Balance: $10,000
Final Balance: $12,570,472,715
CAGR: 37.35%
RISK: 31.77%
Worst Year: -25.05%
Sharpe Ratio: 1.03
Sortino Ratio: 1.86
The Ray Dalio All Weather Portfolio handled the burden of additional leverage and a 400% canvas with ease.
With a CAGR of 37.35% and RISK of 31.77% it featured a worst year of -25.05%.
It had its highest Sharpe ratio at 1.03 and Sortino ratio of 1.86 of the entire competition.
The Ray Dalio All Weather 4X Leveraged Portfolio offered investors an impressive sequence of annual returns with no decades that raised eyebrows of concern.
From a Roll Period low perspective, the 4X Ray Dalio All Weather Portfolio had only a year -42.64% period of concern.
Risk Parity Portfolio = 400% / 4X Leverage
Initial Balance: $10,000
Final Balance: $4,842,569,766
CAGR: 34.42%
RISK: 29.72%
Worst Year: -23.90%
Sharpe Ratio: 1.01
Sortino Ratio: 1.86
Next up it’s time to examine the defensive stalwart Risk Parity Portfolio when 4X Leverage is applied.
With a CAGR of 34.42% and RISK of 29.72%, the levered Risk Parity Portfolio had a worst year of -23.90%.
It clocked in a Sharpe Ratio of 1.01 and Sortino Ratio of 1.86.
With only 6 down years the 4X Leveraged Risk Parity portfolio had one of the highest annual returns success rates of any portfolio in the competition.
The levered Risk Parity Portfolio gave investors no real reasons for concern when it came to roll period lows with just 1 year at -44.31%.
Nomadic Samuel = 400% / 4X Leverage
Initial Balance: $10,000
Final Balance: $71,234,156,896
CAGR: 42.84%
RISK: 37.64%
Worst Year: -28.14%
Sharpe Ratio: 1.04
Sortino Ratio: 1.76
The Nomadic Samuel 4X Leveraged Portfolio had a CAGR of 42.84% and RISK of 37.64%.
Its worst year was -28.14% and it closed off the competition with a Sharpe ratio of 1.04 and Sortino ratio of 1.76.
From an annual returns perspective, the 4X Levered Nomadic Samuel Portfolio had 4 negative years in the 21st century and five in the 20th century but never two down years in a row.
From a Roll Period low the levered Nomadic Samuel Portfolio struggled at 3 years with -12.04% and 1 year at 63.14%.
Nomadic Samuel Risky Parity = 400% / 4X Leverage
Initial Balance: $10,000
Final Balance: $10,534,045,546
CAGR: 36.81%
RISK: 30.09%
Worst Year: -15.61%
Sharpe Ratio: 1.06
Sortino Ratio: 1.96
Last but not least we’ll check in to see how the Nomadic Samuel Risk Parity portfolio performed with 4X leverage.
The Portfolio featured over 600+ basis points of outperformance with a CAGR of 36.81% versus its RISK of 30.09%.
The Nomadic Samuel Risk Parity Portfolio was the most defensive of all having a worst year of only -15.61%.
The Nomadic Samuel Risk Parity Portfolio with 4X leverage had an impressive sequence of returns featuring above water results from the year 2000 until the end of 2012.
A worst case scenario Roll Period low for the levered Nomadic Samuel Risk Parity Portfolio was 1 year at -37.62%.
4X PORTFOLIOS = 400%
CAGR PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = 42.84% (10)
CONSERVATIVE 40/60 = 39.31% (9)
RAY DALIO ALL-WEATHER = 37.35% (8)
NOMADIC SAMUEL RISK PARITY = 36.81% (7)
RISK PARITY PORTFOLIO = 34.42% (6)
INCOME 20/80 = 34.35% (5)
HARRY BROWNE PERMANENT = 32.88% (4)
BALANCED 60/40 = 28.72% (3)
GROWTH 80/20 = 16.97% (2)
100% US TOTAL STOCK MARKET = 11.89% (1)
GROWTH OF 10K PORTFOLIO RANKINGS
NOMADIC SAMUEL PORTFOLIO = $71,234,156,896 (10)
CONSERVATIVE 40/60 = $23,516,054,388 (9)
RAY DALIO ALL-WEATHER = $12,570,472,715 (8)
NOMADIC SAMUEL RISK PARITY = $10,534,045,546 (7)
RISK PARITY PORTFOLIO = $4,842,569,766 (6)
INCOME 20/80 = $4,732,250,018 (5)
HARRY BROWNE PERMANENT = $2,907,525,891 (4)
BALANCED 60/40 = $710,266,291 (3)
GROWTH 80/20 = $10,273,587 (2)
100% US TOTAL STOCK MARKET = $1,442,461 (1)
SHARPE RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = 1.06 (10)
NOMADIC SAMUEL PORTFOLIO = 1.04 (9)
RAY DALIO ALL-WEATHER = 1.03 (8)
RISK PARITY PORTFOLIO = 1.01 (7)
HARRY BROWNE PERMANENT = 1.00 (6)
CONSERVATIVE 40/60 = 0.98 (5)
BALANCED 60/40 = 0.90 (4)
INCOME 20/80 = 0.86 (3)
GROWTH 80/20 = 0.71 (2)
100% US TOTAL STOCK MARKET = 0.53 (1)
SORTINO RATIO PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = 1.96 (10)
RISK PARITY PORTFOLIO = 1.86 (8.5)
RAY DALIO ALL-WEATHER = 1.86 (8.5)
HARRY BROWNE PERMANENT = 1.81 (7)
NOMADIC SAMUEL PORTFOLIO = 1.76 (6)
CONSERVATIVE 40/60 = 1.71 (5)
INCOME 20/80 = 1.53 (4)
BALANCED 60/40 = 1.46 (3)
GROWTH 80/20 = 1.07 (2)
100% US TOTAL STOCK MARKET = 0.77 (1)
WORST YEAR PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = -15.61% (10)
HARRY BROWNE PERMANENT = -23.65% (9)
RISK PARITY PORTFOLIO = -23.90% (8)
RAY DALIO ALL-WEATHER = -25.05% (7)
NOMADIC SAMUEL PORTFOLIO = -28.14% (6)
CONSERVATIVE 40/60 = -30.72% (5)
INCOME 20/80 = -33.72% (4)
BALANCED 60/40 = -35.89% (3)
GROWTH 80/20 = -36.24% (2)
100% US TOTAL STOCK MARKET = -37.04% (1)
TOTAL OVERALL PORTFOLIO RANKINGS
NOMADIC SAMUEL RISK PARITY = 44
NOMADIC SAMUEL PORTFOLIO = 41
RAY DALIO ALL-WEATHER = 39.5
RISK PARITY PORTFOLIO = 35.5
CONSERVATIVE 40/60 = 33
HARRY BROWNE PERMANENT = 30
INCOME 20/80 = 21
BALANCED 60/40 = 16
GROWTH 80/20 = 10
100% US TOTAL STOCK MARKET = 5
Nomadic Samuel Final Thoughts
What can be said that hasn’t been said already in this portfolio challenge!
One thing that comes to mind is that I’m astonished, even with 4X leverage, that 6 portfolios were able to achieve a 400% canvas while not experiencing a year worse than the US Total Stock Market at -37.04%.
That blows my mind.
It truly shows the power of diversified asset allocation with an emphasis on uncorrelated assets.
For me the message is loud and clear.
For anyone considering aggressive leverage a 1-2-3 step process of asset allocation between stocks, bonds and alternatives is crucial.
Going all in on one asset class fails almost immediately and two asset classes (in the case of stocks and bonds) is not enough either.
Without alternatives you’re not stabilizing your portfolio with 4X leverage.
It’s just as simple as that.
Let’s compare results with round 3 of the challenge.
CAGR 3X vs 4X Leverage
We once again see a boost in CAGR at the 4X leverage level.
In round 3 of the games leveraged portfolios were between 24.76% to 32.62% and in round 4 jumped to a range of 32.88% to 42.84% amongst the portfolios that achieve full leverage.
These are wacky numbers at this point.
Sharpe Ratio 3X vs 4X Leverage
In terms of Sharpe Ratio, we had 3X Leveraged Portfolios offering 0.82 to 1.02 whereas with 4X leverage we’re settling in at 0.86 to 1.06.
The spread between CAGR and RISK is remarkable at this level of the competition when referring specifically to the Ray Dalio All Weather Portfolio, Risk Parity Portfolio and Harry Browne Permanent Portfolio.
Desire to Own a 4X Leveraged Portfolio
Would I ever want to have a 4X leveraged portfolio?
Nope.
Absolutely not.
It’s just too risky, with 4X leverage applied, when you consider the potential of black swan events.
With a 400% canvas we’re just having fun at the crash test simulation level.
Thus, we’ll finish things off with a simple statement.
4X leverage is ridiculous.
