Darwin Portfolio Review: 23 December 2021

The Rhine from Rudesheim, Germany

The Darwin is a “Core” Portfolio with monthly review/adjustments to account for changes in the volatility/risk associated with the individual assets held in the portfolio.  Construction is simple in that the portfolio holds only five ETFs – VTI (US equities), VSS (Global ex US equities – with emphasis on small-cap), VNQ (US Real Estate), TLT (US Treasuries) and GLD (Commodities – Gold).

Allocations to these five ETFs is calculated, based on volatility, so as to target equal risk to each asset. Current allocations are as shown in the bottom line below:

The volatility target for each asset is set to 10% (aggressive) and I am allowing 25% leverage.

On top of this portfolio I have added a volatility position for additional diversification beyond the 5 core assets.  For this I have allocated an additional $1,000 (~10%) as additional margin that takes me to a ~35% leveraged account. At the present time (and under periods of “normal” volatility) I am long SVXY, an ETF that is short the short-term VIX futures – i.e. I am selling volatility to collect excess premiums paid by investors that want to hedge their portfolios. At the beginning of this month I made a mistake by switching to VXX (an ETF that is long short-term VIX futures) too soon, anticipating a “Buy” signal that never came. I quickly switched back but it cost me ~$200 🙁

The current recommended share holdings in the core portfolio required adjustments as shown below:

i.e. I sold shares in VTI and VNQ and added shares in TLT and GLD.  Holdings in VSS remain the same since the recommended adjustment of 1 share was less than the 20% difference that I am using to justify adjustments (especially when my costs in this account are rather high for a small account).

Due to my mistake with the volatility trade and the high transaction costs this portfolio is slightly under water (-0.9%) since its inception 7 months ago.

Performance to date looks like this:

The stacked allocation areas of the above graph show the relative allocations to each asset at each adjustment date. The red line shows the net returns of the total portfolio.

The SPX (S&P 500 Index) has increased ~10% over this period – so diversification has not helped. But this may not be the case over the long term.

David