In the winter of 2019 I found myself trying to narrow my list of investment strategies down to about 10 or so specific portfolios. The year was coming to a close and I had some extra money. I really wanted to do something fun with this extra cash. My idea was to pick 10 of my favorite portfolios and invest $1000 in each of them on the first trading day of 2020. Then I’d sit back and watch what happened. No buying, no selling, no rebalancing. Turned out, it was too hard to pick just 10 so I ended up with 13 picks:

Blue Chips
Dogs of the Dow
Dividend Dogs
All-Weather
Permanent Portfolio
Golden Butterfly
Holy Talmud
Couch Potato
Core Four
Three Fund
Simple Path to Wealth
Ultimate Buy & Hold
Dow Jones Industrial Average (Equal Weighted)

So how did these strategies do in 2020? Well stick around and lets find out.

RISK MANAGEMENT

Before we dig into the portfolio results, I want to spend a few minutes talking about risk. As I record this in December of 2020 the US stock market is back to all-time highs as drug producers being deploying a coronavirus pandemic vaccine. There’s a lot of excitement in the markets right now and very few people are considering their risk exposure. Let me try to articulate this risk idea without having to get into industry technical jargon like standard deviation, mean reversion, and co-efficients.

Real World Scenario

I want you to imagine that you are a typical investor with a $100,000 dollar portfolio. Let me ask you this question, and I want you to think seriously about your answer. How much of this $100,000 portfolio can you realistically bare to lose? Would you be okay losing $50,900? How about $36,100?

Take a look at the following table. This is a classic asset allocation matrix. This table spans the past 40 years and it shows us the average annual return and maximum drawdown for each type of asset allocation.

If you are in a 100% stocks portfolio you need to imagine what it would feel like to see your balance reduced from $100,000 to $50,000. Look over these values and try to decide what level of risk you are willing to take. If you think the maximum loss you can realistically withstand is a 25% loss then you should be targeting a 50/50 portfolio.

Its imperative to understand that losses are detrimental to your portfolio, in a big way.

Comparing the Risk of Portfolios

This is a performance chart for the previous two years, 2019 and 2020. It compares a 50/50 stocks/bonds portfolio with a 100% stocks portfolio. The 100% stocks portfolio finished slightly ahead of the 50/50 and that’s great and all but it was not a forgone conclusion that this is what would happen.

Notice how the blue line, which is the 50/50, is nice and smooth whereas the red line is erratic. The 50/50 maximum loss was -4% whereas the maximum loss for the 100% stocks was -20%.

If you sold out of the market in March you had to put your money somewhere. Wherever you moved your money to needed to produce a return of at least 25% just to break even.

My point with all this is just to say that losses matter. Whenever possible you should strive to invest in portfolios that produce the highest returns given the specific level of risk you can tolerate.

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PORTFOLIO CHALLENGE RESULTS

This is the google sheets scorecard I created to monitor the project results. Keep in mind this is real money, not paper trades. This experiment is a lot less interesting if all this data is theoretical. Note that these returns are just the capital gains (no dividends or interest) so portfolios that rely on dividends or interest may be a bit understated.

Portfolio Challenge 2020 Year End Results Download

The gray bars are not part of the portfolios, they are benchmarks. I tried to peg most of the portfolios to a fair benchmark to see if our portfolios did better or worse than a benchmark investment.

The columns we most care about are the percentage of gain/loss and the standard deviation.

To measure which portfolios performed the best, we are looking for the portfolios that produced the highest return at the lowest standard deviation. Keep in mind this just a single year and you can’t judge investment strategies by a single year. This is just a fun experiment for our own amusement.

Portfolio #1: Blue Chips

Portfolio #1 is what I’m calling Blue Chips. These are just stocks I picked that I felt were healthy, stable US companies. As you can see, these stocks got killed. It ended up only down by around -4% but for most of the year it was sitting around 18%-19% loss.

Portfolio #2: Dogs of the Dow

Portfolio #2 is the Dogs of the Dow. I have not yet covered this strategy but I will cover it in season 2 of Portfolio Analysis so be sure to subscribe if you want to see that. This strategy has actually done very well over the last decade but got crushed in 2020. A loss of -12%. The DOGs ETF benchmark did better but that 34% standard deviation is extreme volatility.

Portfolio #3: Dividend Dogs

Portfolio #3 is the Dividend Dogs. This is also usually a great strategy for people who need investment income but this year dividend stocks were crushed. A loss of -13% and also an insane 30% standard deviation. The NOBL ETF benchmark which has 100 dividend stocks did do much better.

Portfolio #4: Ray Dalio’s All-Weather

Portfolio #4 is Ray Dalio’s All Weather. It lost to the 40/60 benchmark but is an overwhelming winner on the merits of risk to reward. We received a 13% return for just 8% standard deviation. This is a fantastic result.

Portfolio #5: Harry Browne’s Permanent Portfolio

Portfolio #5 is Harry Browne’s Permanent Portfolio. This portfolio killed it this year. We got 13% for just a 7.8% standard deviation. I don’t have the metrics in front of me but 2020 has got to be one of the best years in this portfolio’s history. This strategy usually returns 5%-7% so this is a big win here.

Notice how the benchmark ETF returned less for almost 3 times the risk… hmm.. I might have to investigate that. That’s really interesting.

Portfolio #6: Golden Butterfly

Portfolio #6 is the Golden Butterfly. Value stocks got crushed this year but it looks like the S&P 600 value index made a comeback late year because ticker symbol IJS only ended up down -35 basis points. Great overall portfolio result here, 12% standard deviation for 13% returns.

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Portfolio #7: Robert Gibson’s Holy Talmud Portfolio

Portfolio #7 is Robert Gibson’s Holy Talmud Portfolio. Notice the moderately high risk for a low return. This portfolio is working exactly the way it is intended to. Real estate had a bad year but stocks and bonds had a good year so the portfolio balanced itself out for a return of 449 basis points.

Portfolio #8: Scott Burns’ Couch Potato

Portfolio #8 is Scott Burns’ Couch Potato.

To be honest this one shocked me. In fairness this is my modified version of the couch potato that uses long term US treasuries rather than an aggregate bond index fund. Pay special attention to this result, notice how long term treasuries beat the S&P 500! Let me say that again for all the people who keep repeating this idea that bonds are worthless just because they don’t pay much interest.

20+ year long term US treasuries returned a whopping 15% whereas the S&P 500 returned 14%.

This portfolio returned an astonishing 15% for just 12% standard deviation. This is frankly an amazing result.

Portfolio #9: Rick Ferri’s Cour Four

Portfolio #9 is Rick Ferri’s Core Four Portfolio. It suffers from poor performing real estate holdings but returned 10% for a 20% deviation. That deviation is a bit too high but still a good showing here.

Portfolio #10: Jack Bogle’s Boglehead Three Fund Portfolio

Portfolio #10 is Jack Bogle’s Boglehead Three Fund Portfolio. Pretty much the same as the core four but since it lacks the 8% real estate it wins by about 142 basis point.

Portfolio #11: JL Collins Simple Path to Wealth

Portfolio #11 is JL Collins Simple Path to Wealth Portfolio. This one had a wild ride throughout Q1 but ended up very well with a 14% return. Note again how the long term US treasuries beat the S&P500.

Portfolio #12: Paul Merriman’s Simple Path to Wealth

Portfolio #12 is Paul Merriman’s Ultimate Buy & Hold Strategy. We haven’t covered factor investing yet or this specific portfolio strategy so if you wanna see that be sure to subscribe to see my video on this in 2021.

The results here look okay but this portfolio gave me a heart attack all year long. At one point it was down by -35%. Small-cap, value, real-estate, foreign stocks, emerging markets all had a very tough year and this portfolio in particular took some determination to stick with. It ended the year in the green but this one has to go in the L[oss] column for its heart attack factor.

Portfolio #13: Dow Jones (Equal Weight)

Portfolio #13 is a strategy is the Dow Jones Index but instead of being price weighted you equal weight them. You put 3% of your balance into each position. This portfolio was in the red for most of the year but surprisingly it has rallied into the green.

We lost to the benchmark but overall this one was okay. It returned 90 basis points for nearly 28% standard deviation. This is a clear example of how higher risk often leads to bad underperformance.

CHALLENGE WINNER

Best Overall Portfolio of 2020

Okay so after having reviewed the results its clear to me that we have an undeniable champion here.

The best overall portfolio of 2020 goes to …

Scott Burns’ Couch Potato Portfolio.

This one really surprised me. My mind has trouble comprehending how a medium risk 50% stock and 50% bonds portfolio could produce the highest return.

This just goes to show you that all bonds are not created equal. If you pick bonds that are loosely or negatively correlated (based on the correlation co-efficient) then you can produce a result that both gives you protection and high returns.

Best ‘Safest’ Portfolio of 2020

The best safest portfolio of 2020 goes to …

Harry Browne’s Permanent Portfolio.

In terms of pure risk to reward, this portfolio had maybe its best showing ever. Gold, long term US treasuries, and the S&P 500 all had huge years and when you put all of those asset classes together you end up with a truly amazing year.

RESOURCES

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Portfolios

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Recommended Books

A Random Walk Down Wall Street (Burton Malkiel)
The Simple Path to Wealth (JL Collins)
I Will Teach You To be Rich (Ramit Sethi)

Please consider buying any of these books as audiobooks from Audible.com!

13 Portfolio Challenge: 2020 Results