238 Investment Portfolios Tested: This Is #1

the-best-investment-portfolio

Do you know that you can earn $ 100,000’s of additional dollars just by implementing the right investment portfolio? It isn’t more expensive, and it isn’t more complicated. AND you are going to beat out 99% of everyone else in the investment community – even the hedge funds! We have tested 238 Investment portfolios – this is #1!

238 Investment Portfolios Tested: This Is #1

Which funds should I buy – the question that trips up investors (you and me!)

The right portfolio mix is what trips up investors. Which funds should I buy? Should I invest in tech stocks, what about dividend stocks?

The right asset allocation is the best determinant of the success of your portfolio. This is why you should focus most of your energy on getting your asset allocation right so that it jives with your situation.

Luckily there have been tons of research done on the topic, and tons of portfolios have been constructed to serve every need – your’s too!

There’s no need to make your own portfolio. The portfolio you can get from the professionals is just that: Professional!

Don’t pick the allocation yourself, and don’t pick the funds yourself.

DO pick a portfolio constructed by investing professionals.

But how do you pick the right portfolio? One way and not the best way is to look for solid performing portfolios.

In this post, we’ll cover some of these best performing portfolios.

What do you mean by “the best investment portfolio”?

The best investment portfolio is a moving target. Taking cues from Einstein and the Theory of Relativity, we know that the speed of light is just about the only constant in the universe.

We’ll make things simple and present the best investment portfolio by its cumulative returns. This means we will be ignoring a swathe of factors, among these:

  • Risk-adjusted returns (e.g., Sharpe ratio)
  • Risk of the portfolio (e.g., standard deviation, ulcer index, Sortino ratio)
  • The investor’s tolerance for risk
  • The timeframe of the investment (what is best for a 20-year portfolio is not best for a 1-year portfolio)
  • The starting year of the investment (the starting year plays a big part when measuring performance)
  • Rolling returns (looking at rolling returns gives yet another perspective of best investment portfolio)
  • Drawdowns (a portfolio can have huge drawdowns and still have the best returns)
  • Diversification analysis (have the portfolio earned its returns by concentration, and if so, is it replicable?)
  • Income requirements (does the portfolio need to sustain a constant stream of income?)
  • Expense ratios (how expensive is the portfolio to implement and maintain?)

Investment returns are significant when viewed over a long time frame. In the short term, however, the most critical factor in reaching your financial goals is your ability to save money.

Our methodology

The basis for our measurement is the portfolios that are tracked by portfolioeinstein.com. As per 13/09/2018, we are tracking 235 portfolios. All the portfolios are buy-and-hold and assume a lump sum investing in 1989 along with yearly rebalances.

The years tracked are from 1989 to 2017.

We are only looking at the compound annual growth rate of the investments (CAGR). This is the standard way of measuring returns of investments on portfolios. CAGR takes interest-on-interest into account.

For example, $1 earning 10 percent interest this year would be worth $1.10 by the end of the year. ($1 times 1.1)  Next year the $1.10 grows to $1.21.  ($1.1 times 1.1). In ten years that $1 grows to $2.5. This is the compounding effect in action.

All the portfolios are using the same data. Here are the sources for the data.

How did the US stock market do?

The benchmark in investing is usually the US stock market, either the S&P500 or the Wilshire 5000.

We use the total stock market index. It has a marginally higher return than the S&P 500 due to the inclusion of small, mid-cap stocks and value stocks. All of which have historically done slightly better than large-cap growth stocks, which comprise the S&P 500.

The US total stock market is the benchmark because it is straightforward to gain exposure to through mutual funds (e.g., VTSMX) or through ETFs (VTI, ITOT, SCHB) (see our best-in-class recommendations for ETFs and mutual funds).

Several authors recommend holding the total stock market portfolio as the only fund making up the entire portfolio. Among these is JL Collins of The Simple Path to Wealth: Your road map to financial independence and a rich, free life and John Bogle, Supreme hero of the investing world in his book The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns.

Here are the stats for the US Total Stock Market 1989-2017.

NameReturnRiskDrawdown
Total US Stock Market10.42%17.58%-37.07%

 

That is a high return, and is the reason why active managers and individual investors cannot hope to beat the market. In the most recent SPIVA study, only 8% of active managers beat the market over 15 years. This number decreases when the timeframe increases to the point where outperformance becomes an impossibility. See Why Does All Active Management Suck for details and check out Rick Ferri’s book The Power of Passive Investing: More Wealth with Less Work, which has tons more data and evidence backing up why active management is a loser’s game.

If we go further back to 1871, the longest back we have data, the return for the total stock market is 8.71%. The return for our measurement is thus higher than the average on record.

The best investment portfolio, the #1 investment portfolio

So here is the #1 investing portfolio:

NameReturnRiskDrawdown
Paul Merriman’s Target Date Portfolio (25-year-old)11.67%18.14%-37.29%


Paul Merriman’s Target Date Portfolio (25-year-old) 

Paul Merriman’s portfolio is characterized by tilting heavily into small-cap value stocks. Historically the best performing asset class. It is the most aggressive and concentrated of all his target-date funds. Together with Chris Pedersen, Paul Merriman has constructed what he calls the ultimate target-date fund. These are characterized by tilting heavily into small-cap value, historically the best performing asset class. This is what the allocation looks like:

  • 70.00%  US Small Cap Value         (VIOV)
  • 5.00%    Emerging Markets           (VWO)
  • 20.00%  International Small Cap Value             (DLS)
  • 5.00%    Emerging Markets Small Cap       (EWX)

You can find the allocation for this portfolio here. I also strongly recommend you read his article and listen to his podcast on this particular portfolio.

Paul Merriman, educator, entrepreneur, and all-around good in investing have a host of portfolios. They all express massive diversification and a slight to an extreme bias towards value and small-cap, especially small-cap value, which historically has been the best performing asset class. Paul Merriman’s podcast is highly recommended, as are the many articles on his site. His finance book Get Smart or Get Screwed: How To Select The Best and Get The Most From Your Financial Advisor easily wins as the best-titled book on personal finance. His book Financial Fitness Forever: 5 Steps to More Money, Less Risk, and More Peace of Mind is fantastic and stuffed with sage advice, statics, and evidence-based best-investing practices.

The second best investment portfolio

In the second place, we find the next tier of Paul Merriman’s target-date funds.

Portfolio NameReturnRiskDrawdown
Paul Merriman’s Target Date Portfolio (35-year-old)11.43%17.90%-37.13%

It is more diversified than the one above but still has a lot of concentration of small-cap value.

See the allocation here.

The rest of the best investment portfolios (#3-8)

Portfolio NameReturnRiskDrawdown
Scott Adams Dilbert’s Portfolio11.17%22.68%-44.93%
Index Fund Advisors, Portfolio 10010.90%17.91%-39.64%
Paul Merriman 2-Fund-Value-Portfolio10.87%16.65%-36.32%
Paul Merriman 4-Fund-Portfolio10.81%16.79%-35.35%
Paul Merriman’s Target Date Portfolio (45-year-old)10.77%16.23%-34.03%
Dan Solin SuperSmart Portfolio, High Risk10.68%16.94%-39.56%

 

Scott Adams, the author of the comic strip, Dilbert, proposed a portfolio consisting of 50% emerging markets and 50% total stock market. This is the result. The portfolio is going to have massive drawdowns but also massive upswings. You are going to feel like a failure a lot of the time if you hold this portfolio. Something Scott Adams is quite accustomed to failing according to his fantastic little book How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life that teaches that failure is the preamble to success. This goes for investing as well.

At the #4 spot, we find Index Fund Advisors. IFA’s portfolios are all highly diversified and with a significant tilt towards small-cap and value. Mark Hebner heads up IFA and is on a mission to educate about index investing, his book Index Funds: The 12-Step Recovery Program for Active Investors is very recommended.

At spot number 5-6, we find two portfolios by Paul Merriman again. The #5 spot is a portfolio consisting of 50% small value and 50% large value. The #6 is an attempt to build The Ultimate Portfolio by using only value funds.

At spot #7, we find yet another(!) Paul Merriman portfolio. (No I’m not getting paid by Paul).

Finally, at spot number 8, we find one of Dan Solin’s many portfolios. I consider Dan Solin, one of the good guys in investing and promoting evidence-based, sound principles in investing. He has a history with Index Fund Advisors, which probably influenced his investing methodology. Or maybe he was just attracted by IFA’s reliance on academic work done by Fama/French. His SuperSmart portfolios have a tilt towards small-cap and value. All of IFA’s portfolios have this as well, as does DFA’s David Booth’s. They all rely on the work by Eugene Fama and Kenneth French. Dan Solin is the author of some great books on investing, most notably The Smartest Portfolio You’ll Ever Own: A Do-It-Yourself Breakthrough Strategy and The Smartest Investment Book You’ll Ever Read: The Proven Way to Beat the “Pros” and Take Control of Your Financial Future.

Why these portfolios?

As can be seen in the above portfolios containing a tilt towards value and small-cap has outperformed the broader market, so any portfolio that has a strong tilt towards value and small-cap will have outperformed the broader market.

How much money would the best investment portfolio have given me?

There is a 0.99% difference (less than 1%) between number 8 and the best portfolio. Can that make that much of a difference?

Yes, it can! That 1% difference can make a HUGE difference over long periods of time. So how much money would the eight portfolios have given us over these over 29 years?

 

#Portfolio NameFinal Amount
#1Paul Merriman’s Target Date Portfolio (25 year old) $         245,490.26
#2Paul Merriman’s Target Date Portfolio (35 year old) $         230,855.90
#3Scott Burns Dilbert’s Portfolio $         215,721.79
#4Index Fund Advisors, Portfolio 100 $         200,832.99
#5Paul Merriman 2-Fund-Value-Portfolio $         199,466.89
#6Paul Merriman 4-Fund-Portfolio $         196,310.86
#7Paul Merriman’s Target Date Portfolio (45 year old) $         194,370.70
#8Dan Solin SuperSmart Portfolio, High Risk $         189,917.12

The difference of  $55,573.14  underscores the power of compounding but also of choosing the right portfolio. The end amount is a 29% increase in the number of dollars from the lowest to the highest!

In comparison, the worst-performing portfolio on portfolioeinstein.com is David Booth (DFA) Fixed Income Portfolio, with a CAGR of 4.48%. This is not bad at all, considering its extremely low risk. David Booth (DFA) Fixed Income Portfolio’s final amount would have been $35,622.63.

How do I build these portfolios?

So you saw the numbers, and now you want to implement the portfolio.

But hold on a minute!

Remember, when I said there were a lot of factors that I did not take into account when presenting the best portfolios? I’m talking about these guys:

  • Risk-adjusted returns (e.g., Sharpe ratio)
  • Risk of the portfolio (e.g., standard deviation, ulcer index, Sortino ratio)
  • The investor’s tolerance for risk
  • The timeframe of the investment (what is best for a 20-year portfolio is not best for a 1-year portfolio)
  • The starting year of the investment (the starting year plays a big part when measuring performance)
  • Rolling returns (looking at rolling returns gives another perspective of best investment portfolio)
  • Drawdowns (a portfolio can have huge drawdowns and still have the best returns)
  • Diversification analysis (have the portfolio earned its returns by concentration, and if so, is it replicable?)
  • Income requirements (does the portfolio need to sustain a constant stream of income?)
  • Expense ratios (how expensive is the portfolio to implement and maintain?)
  • Tracking error.

Because we are all unique, just like everyone else, your situation might call for a different portfolio than what is considered the best performing investment portfolio.

Now, this is important. The Dilbert portfolio, #3, is extremely volatile and may not be up when you want it to be up. It might have a large drawdown just when you need the money. The same goes for #1 and #2, but emerging market stocks is a very volatile asset class.

Also note, past performance is not indicative of future returns. What we have recorded in history will NOT come to pass in the future. History may rhyme, and it may look a lot like the past. But it will not be the past.

Let me repeat that: The returns you see on the portfolios and everywhere else in the financial media are NOT the returns you will experience. But it is our best guess!

Do your due diligence or wait a few weeks for our forthcoming best risk-adjust-article.

If you want to see, the allocations for the above portfolios go here.

Summary and your next steps

Whether you are saving for retirement or building a nest egg, the returns on your investment play a huge role. But so does saving money regularly. Money can only compound on other money.

There is a massive difference in returns and dollar amount between the best investment portfolio and number eight. The difference is almost 30%.

All investment decisions should be made in comparison to a benchmark, for example, the total US stock market.

Are you still confused or more confused?

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