This Post provides a back test analysis of Lowell’s Aristotle Portfolio over the past seven years. The portfolio is adjusted monthly. No Cluster analysis is involved.
The strategy uses a simple seven asset Strategic Asset Allocation (SAA) Plan and the portfolio is momentum filtered using SHY as a cut-off filter.
The assets and SAA allocations are as follows:
VTI – 40%
TLT – 20%
EFA – 10%
VWO – 10%
VNQ – 10%
RWX – 5%
AGG – 5%
The rules for portfolio construction are simple
– assets ranked higher than SHY in the momentum rankings (provided weekly on this blog) are included in the portfolio according to the SAA Plan allocations.
– allocations assigned to assets ranking lower than SHY in the moment rankings are invested in SHY.
The results of the back test are shown below:
While this portfolio does not generate the same high returns (CAGR) as some of the Feynman portfolios, it has a number of very attractive characteristics for the conservative investor.
Key performance characteristics are as follows:
CAGR – 9.41%
Volatility – 7.59%
Return/Risk (Sharpe) – 1.24
Max DD – 6.13%
Volatility (Risk) is extremely low, especially since the test includes the 2008 financial crisis period. A maximum draw-down of only 6.13% is almost unbelievable – even the most risk averse investor should be able to stomach that!
The green line in the above figure is the “Aristotle Index” i.e. it is the Buy-and Hold value of the SAA Plan assets. It is interesting to compare this with the Vanguard VTTVX Fund (~70%/30% Equities & Bonds (US & Int’l) – no REITS).
The Figure below shows the monthly composition of the portfolio:
In the above figure we can see the rotations between the different assets/classes and note that the portfolio is invested in cash (SHY) a very high percentage of the time. This explains why the CAGR may be lower than might be preferred, but also accounts for the low volatility and draw-downs. The Return/Risk ratio is a very respectable 1.24. The above figure also provides an idea of the level of “churn” in the portfolio.
As emphasized many times on this site, note how the SHY filter keeps us out of the market and avoids the ~50% 2008 draw-down. This virtually ensures that, over the long term, we will outperform the market/index.