I just completed a review of how each of our Model Portfolios performed in 2016, the first full year in which we’ve used them with a majority of our clients. As some background, we use Riskalyze to determine our client’s tolerance for volatility, balanced against their desire for high returns. Once clients are assigned a Risk Number between 1 and 100, we can then match each client to one of our Model Portfolios with a similar Risk Number.
We break down our portfolios into Income vs. Growth, Conservative vs. Aggressive vs. Moderate, and Low-Cost vs. Optimal. Our low-cost models all utilize commission-free ETFs and mutual funds, with below average expense ratios. The holdings in our Income Models have above average yields. Our Aggressive Models exclude the most conservative of funds, while our Conservative Models exclude the most aggressive ETFs and mutual funds.
In 2016, the 21 model portfolios that we use in client accounts averaged 7.9%, after-fees (coincidentally, 7.9% was also the 2016 return of the Naked Alpha Fund). Our best performing portfolio out-performed its benchmark by 4.5% when adjusted for risk. Our worst performer was our “Conservative Growth” portfolio (+1.8%), which under-performed the S&P Conservative Index (+5.6%) by 5.9%, after adjusting for risk. We use benchmarks that are well-matched, and well-diversified: indices like the S&P Conservative and Moderate Indexes, and the iShares Aggressive Allocation. For our “all-stock” and hedge fund portfolios, we use the Russell 3000 and the SGI Wise Long/Short Index, respectively. Our “Ultra-Conservative” model (+4.0%) was a pleasant surprise in 2016, out-performing the 1-3 Year Treasury Portfolio (+0.8%) by over 2.5% when adjusted for risk.
In order to determine which Portfolio and benchmark is right for you, we suggest that you update your Risk Number annually. Here’s hoping 2017 provides similar out-performance, only with more spectacular total returns!