One year ago today I started posting the portfolio positions so others could see in real time how Geometric Balancing works. It’s been quite a year, and in many ways you’ve gotten to see the response in a variety of markets.
We had three strong stock bull runs: early last summer and then from the fall through much of the winter, and of course a huge run this spring. A mild but meaningful pullback in August, and a major historic drawdown in March provided varying experiences on the downside.
Gold performed strongly (up 24%), but it still went through a 12% pullback in March.
Treasury bonds have also gained but their returns have been volatile, experiencing a 15.7% pullback in March, and then an 8.9% pullback which may still be ongoing.
Different market responses, with strong gains and strong pullbacks in each asset throughout the year. A perfect time period to test the capabilities and responsiveness of the strategy.
Portfolio Composition
The following is the portfolio composition over the year.
Notice, it’s certainly not static, as it dynamically moves based on market conditions. But neither is the strategy and On/Off switch that goes fully in or out of an asset.
Geometric Balancing Year Over Year Results
The backtest of the strategy essentially matched the S&P 500 with half the volatility and about a quarter of the drawdown over 40 years. Would the results over this year match those lofty expectations?
Lets see:
VAMI starts each at 1,000, therefore shows the %return
All Data from broker and includes transaction costs and dividend reinvestment. They do not include an advosry fee, as this is my family’s account and I am not an advisor. Past Performance is not indicative of future performance.
- Match the S&P 500 return – CHECK, outperformed by one percent
- Half the volatility – CHECK and then some
- Quarter of the Drawdown – CHECK at 26.7%
My favorite part: the S&P 500’s average daily return is 30% higher than Geometric Balancing. Yet because the market’s volatility is 4 times larger, the long term return — the geometric return — of my strategy is higher.
I couldn’t be happier with these results. So much so, I’m fearful some readers’ expectations are now higher than they should be. The Sharpe ratio came in at nearly 1.5 — about three times both the S&P 500 and a diversified stock/bond mix. That level of outperformance is likely not sustainable.
The market held a furious rally in the last week aiming to close the gap in total return, but still came up a bit short.
Returns are net of trading costs. They do not include an advisory fee, as this is my family’s account and I am not an advisor. Past Performance is not indicative of future performance. Dividends are re-invested.
This is the exact type of performance I wrote about in the welcome post– “high returns with low risk of loss”. Steady gains with smaller, less stressful drawdowns. No month fell more than 1.5%.
Returns are net of trading costs. They do not include an advisory fee, as this is my family’s account and I am not an advisor. Past Performance is not indicative of future performance. Dividends are re-invested.
It’s been good year. The strategy held up well under the microscope.
Weekly Portfolio
Down a third of a percent for the week. Things are getting volatile again: upwards this time for stocks, downwards for bonds. Unexpectedly, this caused cash to come back into the portfolio. On June 5th, 2020, the strategy rebalanced to:
43% SPY , 29% TLT , 18% GLD, 10% CASH
Hi BTM,
You really ought to show the Permanent Portfolio and a 1/3 split of risk assets (gold, S&P, TLT) in any comparison graphs.
After all, they are your real benchmarks, especially the 1/3 split, since that is similar to Geometric in that it tends to hold little cash.
Another benchmark would be a fixed-weight portfolio of what Geometric has tended towards – 50% stocks, 35% bonds, 5% gold and 10% cash.
It’s not fair to compare Geometric Rebalancing against only stocks.
James
Permanent portfolio with the same assets was around 15% return, Sharpe of just under 1.4, and drawdown of 11%.
Hi BTM and James, I am curious. I notice that active managers post hoc choose beatable benchmarks. I notice further that, if James is right, 50/35/5/10 seems to be the geometric “chosen” average allocation. I wonder therefore about the value of gold or bonds in the mix. How does your strategy compare to 59% equities and 41% gold – otherwise known as 60/40?
Another approach would be to regard bonds and cash as reserve assets and gold and equities as risk assets. That again gets to approx 60/40 by another route.
I think 30/30/30/10 is the correct benchmark since this is an opportunistic variant on 25/25/25/25 where the normal or no view position is not Harry Browne but is about 10% in cash?
I posted the 60/40 chart on https://breakingthemarket.com/geometric-balancing-unlevered/. The strategy’s backtest shows better returns with less volatility and drawdown.