Defense Without Bonds

In 2022 we wrote a couple of posts about the Dragon Portfolio which an interesting idea inspired by the Permanent Portfolio which allocates 25% each to stocks, long bonds, cash and gold. Dragon is similar to the Cockroach Portfolio in that it is offered at a high minimum to sophisticated investors. Maybe. As I look at the Dragon website, pages are not populating correctly and I found some hits on Google that talked about outflows due to poor performance. I don't know what is going on but when we looked at it two years ago, our attempts to replicate it resulted in a CAGR below two. It can still be interesting to study and after two years could the allocation have started to pay off?

• Equities 24%
• Long Volatility 21%
• Gold 19%
• Bonds 18%
• Commodity Trend 18%

This is how I tried to replicate it in 2022

Keep in mind that, like Cockroach, anything we might do with ETFs and mutual fund won't really capture what the actual fund can access to include in its portfolio. It's more like, the asset allocation idea is interesting, is there a way to get close? Whatever Dragon does/did, it's a good bet it is using a manager(s) that gets a result for long volatility that is much better than the manner in which VIXM bleeds. A small allocation to VIXM can be effective but 21% is a huge weight to something that goes down very frequently.

The last couple of years though improved the results slightly, the CAGR got above 2%.

Dragon was a decent place to hide in 2022 dropping about half as much is VBAIX but in 2023 it had literally no upcapture. While I am certain that the volatility sleeve was better than our backtest with VIXM, if the fund had trouble with poor returns, that huge of a weighting to long volatility is the first place I would look. 

I like the phrase too clever by half, I've used it here several times and some of these portfolios we look at seem like they could be too clever by half to actually implement but I would double down on the idea that studying them is beneficial. I used TLT which seems like a reasonable proxy for long bonds but that fund is down 50% from its all time high. Removing that money loser in favor of one of the floating rate funds we use for blogging would help the result as would greatly reducing the allocation to VIXM and putting that into equities.

Now Portfolio 2 has more equities, less VIXM and owns TFLO instead of TLT. The CAGR came up quite a bit, it still doesn't look too much like 60/40 for growth but the standard deviation is very low, lower than our attempt to replicate the Dragon Portfolio and the portfolio stats look better. When tinkering with these things, don't be afraid to have a normal-ish allocation to equities. 25% in stocks means having to get a lot of growth out of other asset classes that probably not as growthy. 

All of that is a preamble to today's post. Blogger Nomadic Samuel is do-it-yourself investor who writes a lot of very fun posts about some thought portfolio ideas that are very highly leveraged. While I think all the leverage is a Black Swan waiting to happen, it's still fun. He has a portfolio he calls The Sloth which he says is Dragon Inspired. 

He is big on the ReturnStacked Fund suite but they are all so new that backtesting with them doesn't tell us much but we can replicate them on Portfoliovisualizer and still capture the leverage. First up is the allocation of The Sloth.

BTAL is a client and personal holding. TAIL is the newest fund but goes back to 2017 so we get a decent backtest. Portfolio 2 is the same allocation but reduced proportionally to cut out the leverage so ACWI has an 18.75% weight, TAIL is 9.375% and so on. For Portfolio 3 (Roger's Version), I built the following.

It's a tweak on The Sloth but no bonds, less to TAIL and BTAL with more to equities. It's still not a normal allocation to equities but that's ok. 

None of them keep up with VBAIX' growth rate but the Sloth and my version are kind of close. The standard deviation to my version is about half that of VBAIX. The 2022 results are interesting.

You can decide for yourself whether there is any validity to any of this. The idea from me was to create a similar result without the added layer of risk from so much leverage as well as avoiding bond duration. The result from my version is not so far off that I'd conclude NFW like I would from the Dragon Portfolio, there's NFW with that one. My version is yet another example where the defense that people hope to get from bonds can be had without taking on what has become unreliable, equity-like volatility that now exists in the bond market. And repeating for emphasis, twenty something percent in something like tail risk or long VIX should be expected to create a huge drag on a portfolio. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.