My White Whale Portfolio

A fun rabbit hole over the years has been the 75/50 portfolio devised by John Serrapere which he wrote about several times at the old IndexUniverse site. I used to know John in the 90's, he was a client of the institutional equity desk I worked on at Schwab back then. For anyone new, the big idea is for the portfolio to capture 75% of the upside with only 50% of the downside. If you play with the numbers, it outperforms over the long term and obviously it is a smoother ride. Actually pulling it off is very difficult but creating some measure of that effect (smoothing out the ride) is not that difficult and thanks to product innovation has gotten easier over the years. 

Here's a link to a post about 75/50 at SeekingAlpha. I wrote about this more times than this back then but most of the posts were lost when my original blog site migrated to AdvisorShares. I wrote about it a couple of years ago here on the current version of the blog. I referenced it a couple of other times too. In the post from a couple of years ago I dug in a little to creating something that might come close to achieving 75/50 but they weren't realistic for using just a couple of funds including larger weightings to managed futures than I would ever consider in real life. 

If you're inclined to read the SeekingAlpha post, it is from 2009, you might find some interesting things. There are a few points made that pretty much are exactly what we talk about today but then I think it is possible to read where some other ideas have evolved, I would say slowly, since then. It's sort of reassuring that the writing from back then is recognizable from how we view portfolio construction.

If the idea is a smoother ride with 75/50 then we should be trying avoiding being overly vulnerable one one alternative hitting the skids in a year like 2022. Not getting taken down by one malfunctioning alt would seem to be a key ingredient to a resilient portfolio. It's probably one of the tenets of the Permanent Portfolio although 25% sleeves might be a little too large.

Let's take another run at getting closer to a realistic implementation of 75/50. Portfolio 1 is new, Portfolio 2 is from a post last October and Portfolio 3 just popped into my head without much thought to it. 

Results;

The latest iteration of 75/50 is of course compelling but there's almost no equity exposure. Traits related to volatility and drawdowns can probably stand up longer term but it might be a tall order to think it will compound at 9%. Testfol.io can simulate the S&P 500 back to 1885, as in 140 years ago, and over that time it has the S&P 500 compounding at 9.56% and for the last 50 years it has it compounding at 11.69%. Inflation going back to 1885 compounded at 2.65% and for the last 50 years it compounded at 3.65%. 

Portfolio 2 has a normal, even if not heavy, allocation to equities. That the return backtested so well is nice of course but I would focus more the idea of a competitive return with quite a bit less volatility than the S&P 500 and VBAIX. Repeating for emphasis, volatility characteristics have a better chance of standing up than a short period of price outperformance. 

Portfolio 3 is heavy in momentum of course. It would surprise me if any factor could lag market cap weighting the way value has for so long but the way to address that is just use market cap weighting instead of momentum or some other factor that you find compelling. 

Back to the inflation numbers. Since the start date of the above backtest, Testfo.io has price inflation compounding at 4.31% but the TIP ETF has negatively compounded by a few basis points because it got crushed in 2022. STPZ which is shorter dated TIPS compounded at 2.48%. A popular rule of thumb is that a real return of 2%, so inflation plus 2%, is considered attractive. Note that 2021 was a partial year. The real return is sort of consistent but was heavily skewed to 2024. 

Where the current 75/50 is probably not going to look like equities or keep up with them over the intermediate term (it might catch up when there are bear markets), the real return with such a low volatility seems pretty solid. It would be solid, if 75/50 had compounded at 200 basis points less than it had with that same volatility profile. 

It's too bad ETF.com took down the old IndexUniverse content. I think I've said before but ETF.com has evolved to have light content versus what they use to put out which is too bad.

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