Pauling Portfolio Review: 11 December 2025

Where is the next treat?

Pauling is the asset allocation portfolio up for review today.  I added one significant ETF to this portfolio and it is the Exchange Traded Fund, RSP.  RSP is an equal-cap asset.  Why include this security?

“For equal-cap investing, the most prominent ETF ticker is RSP (Invesco S&P 500 Equal Weight ETF), which gives equal weight to S&P 500 companies, reducing reliance on mega-caps, with other options including GSEW (Goldman Sachs), EUSA (iShares MSCI USA Equal Weighted), and EQAL (Invesco Russell 1000 Equal Weight) for different market segments.”

The current market is overvalued based on the Shiller PE Ratio and the Buffett Indicator.  Check out my blog on these indicators.  RSP will give exposure to stocks within the S&P 500, yet minimize exposure to the seven to ten high tech stocks that are priced much too high.

Check out and read Robert D. Arnott’s book, “The Fundamental Index.”  By using equal-cap assets during the tech bubble one did not experience the same level of draw-down.  With an anticipated correction or recession sometime over the next 18 months RSP will not to take the same hit as VOO.  While I have not made the change in other portfolios, I plan to do so as portfolios come up for review.  The Copernicus portfolio is one that is in for a major change in the ETF selections.

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Pauling Asset Allocations

Below is the current makeup of the Pauling.  I lowered the Max AA for VOO and shifted the target percentage over to RSP.  As the current asset allocation stands, the portfolio is exposed to all cap levels of the U.S. Equities market, both developed and emerging international markets, real estate, domestic and international bonds.  Think of the Pauling as a basic broad based and well diversified portfolio that is quite easy to manage.  Pauling is a classic asset allocation portfolio.

Pauling Rebalancing Recommendations

The following Manual Risk Adjustment worksheet is part of the Kipling spreadsheet.  Five of the ten ETF or asset classes are currently showing a Buy signal.  VOO is out of balance to the upside so I will do nothing.  Let VOO run at this time.

International stocks (VEA) is below target so I have a limit order set to purchase 60 shares of VEA.  ETFs showing either Hold or Sell are left alone. No sell orders are in place as I don’t want to incur taxes do due to further sales.

If a number of ETFs showing Sell showed up as a Buy when the Pauling is updated, I will sell shares of SHV in order to raise cash to meet the Buy recommendations.  In the meantime SHV is a holding tank so we can collect higher yields that are available compared to a money market.

Pauling Performance Data

Since 12/31/2021 the Pauling failed to keep pace with the AOR benchmark and is far behind the S&P 500 (SPY).  The current goal is to preserve capital and not chase returns.  Should we eventually see a recession, the Pauling will close the Internal Rate of Return (IRR) gap.

Pauling Risk Ratios

When a portfolio is not keeping pace with a benchmark, as is the case with the Pauling, we look to these four risk ratios as a further check on performance.

• The Sortino Ratio gives us a clue as to the overall value of the portfolio.  The current value is higher than it was a year ago.  That is good news.
  • “The Sortino Ratio is a financial metric that measures an investment’s risk-adjusted return, focusing only on harmful volatility (downside deviation) rather than total volatility, unlike the Sharpe ratio. It tells you how much excess return an investment generates for each unit of downside risk, helping investors understand performance relative to the risk of loss, with a higher ratio indicating better risk-adjusted returns, ideal for conservative investors.”
• The Jensen Performance Index or Jensen Alpha is the most important of the four risk ratios.  The current value is essentially unchanged over most of the year.  The slope of the Jensen is barely positive.  The goal is to see the Jensen move above zero sometime next year.
• Treynor Ratio is the least important of the four ratios as it is too dependent on the portfolio beta.
• The Information Ratio tells us how well the portfolio is performing compared to the benchmark.  As readers can see, this ratio has not hit a positive level all year.

Portfolio Construction: Where to Begin?

Recession: Will Equities Drop In The Next 18 Months?