“Everybody has a game plan, but the plan changes after the first punch.” – Cris Cyborg

Our June 2017 piece “How Bad Can It Get?” responded to David’s estimate of the pain he might experience given a severe market down-turn with his non-retirement portfolio. Fortunately, we’ve not yet experienced that downturn, but as he often does, he advised strongly that investors assess their portfolios based on the potential for drawdown. Better yet is for investors to do this when skies are blue, not when its raining and the roof starts leaking. The idea here is to help set expectations and avoid panic during the downturn, which until you’ve lived through one (and perhaps even then) is very hard to do.

We’ve just gone live on the MFO Premium site with a new tool that can help.

It’s called Portfolios. It enables users to assign allocation weightings to each fund in their portfolio(s), so that risk and return metrics can be evaluated at the rolled-up portfolio level. Like the site’s Watchlists feature, users can define up to 10 portfolios with each portfolio holding up to 25 funds. The portfolios can be saved to the user’s profile.

Below is the analysis for the older funds in David’s portfolio: FPA Crescent (FPACX), T Rowe Price Spectrum Income (RPSIX), Artisan International Value Inv (ARTKX), Matthews Asian Growth & Income Inv (MACSX), and Intrepid Endurance Inv (ICMAX). For this portion of his portfolio, he allocated 31, 18, 18, 11 and 22%, respectively. All these funds have been around since at least November 2007, the beginning of the current market cycle, which means they survived the heavy drawdowns of the Great Recession through February of 2009.

First off, over this full market cycle, or just under 12 years through July, this portfolio has delivered 5.7% per year absolute, which is 1.9% per year better than its peers based on category averages of the same portfolio allocations. That’s a pretty impressive long-term record, placing it in the top quintile of absolute return (the latter based strictly on weighted averages).

The five-fund portfolio drew down 26.7%, which is modest compared to the overall market, if still painful. The MFO Risk score reflects various volatility measures, including Ulcer Index and Downside Deviation. The portfolio has an MFO Risk of 3 or “Moderate,” which is exactly where David wants his risk level to be.

A unique feature of Portfolios is that it computes in real-time the actual drawdown of weighted returns based on the allocations assigned. This approach is required since, as was pointed out by long-time contributor bee and others on the MFO Discussion Board, drawdown cannot be calculated from a weighted average of the individual drawdowns unless the funds are perfectly correlated. The example bee used was SPY and TLT, a sort of “ying and yang” of the US broad market, traditionally at least.

To illustrate, here are the Portfolio results of a 50/50 SPY and TLT split over the current full cycle, same period as above.

This appears to be an extraordinary illustration of the benefit of diversification and the importance of looking at risk at the rolled-up portfolio level.

Over the current full cycle, both the S&P 500 and long-term US Treasury bonds have provided 6-8% growth per year and, when combined in this way, they’ve done so in a way as to reduce the overall portfolio volatility and improve risk adjusted returns. Basically, when one is up the other has been down … but both have been increasing. I’d call it the near perfect hedge, where a slight reduction in return of one holding (TLT) yields a much-reduced portfolio volatility, as evidenced by much lower standard deviation (STDEV) and Ulcer Index (a measure of drawdown intensity and extent).

While our Portfolios tools was launched in this basic form, we intend to add more of the metrics enjoyed on our main MultiSearch tool, in addition to the analytics provided by our Analyze tools, like returns by Calendar Year and Rolling Averages … at the portfolio level!