Conservative vs. Aggressive Portfolios

David Alan Carter
November 1, 2020

Are you a conservative investor, or aggressive? In other words, how much risk are you willing to take in return for potentially higher returns?

It’s generally assumed that folks approaching retirement age become more risk-averse and therefore more conservative in their investment choices. When risk equals the prospect of losing money, or losing greater sums of money, it’s easy to see why this might be the case.

After all, at retirement age and beyond there are fewer years to make up for significant losses to one’s portfolio. A stock market crash that takes 20-40% off the top of one’s retirement-age portfolio could end up translating into a significant lifestyle reduction.

But risk aversion isn’t limited by age. Anyone at any age with money on the line could be hardwired to choose the preservation of capital over the potential for a higher-than-average return.

At the other end of the spectrum are the guns blazing, pedal to the metal investors who are seeking huge gains and willing to throw caution to the wind to get there.

In the lineup of strategies at Trendline Profits, there is a monthly trading model for investors at either end of the spectrum – and something for those in between. Because I’ve been fielding an unusual number of questions lately regarding the riskiness of the models, and how to go about combining models to achieve diversity, I thought it would be a good idea to put some thoughts down in a post.

The Models Ranked By Risk

In the first place, it’s never a bad idea to be cautious. In this market especially, cash is the safe trade. As I’ve mentioned in recent newsletters, cash is - in fact - a position. It means you’re prepared to act when circumstances better align with your risk tolerance.

But on to the strategies. On the scale of risk, from lowest risk to highest, here's how I would rank the strategies. Note: This is based only on max drawdown. There are other risk metrics to consider as well (e.g. Sharpe ratios, volatility, etc.).

Bond Bulls
Lean Muscle (an offshoot of American Muscle)
The 12% Solution
American Muscle
Global Trader
The White Knuckle
The Bare Knuckle (an offshoot of The White Knuckle)

A Brief Note About Each Strategy

Bond Bulls was built to be low risk, with 80% of the portfolio in one or two of some type of bond fund. The remaining 20% is a hedge to the bonds funds, which can include currencies, utilities, and occasionally silver. This hedge, while normally pretty laid back, can get volatile when silver (SLV) is selected. Even then, the one or two bond funds making up the 80% will tend to keep SLV in check.

Overall, Bond Bulls comes out consistently lowest on the scale for max drawdowns, and lowest in terms of volatility. That’s not to say that some months won’t see the strategy miss the mark and go negative by multiple percentage points, especially if bonds temporarily lose their ability to hedge the broader equity market. Still, it remains the “safest” strategy of the bunch.

And yes, all that safety takes a toll in terms of returns. But the model has still managed to outperform the S&P 500 over the long term (i.e., 2008 - present).
Lean Muscle is basically American Muscle but without the individual stock component. It’s all ETFs all the time. What gives Lean Muscle the edge over some of the other models in terms of risk aversion is an ever-present component of the Treasury fund TLT. That component adjusts with each new month depending on perceived risk; some months it will occupy a larger percentage of the portfolio, some months less. In addition, 60% of the portfolio is protected by a cash trigger.

Lean Muscle ranks second only to Bond Bulls in terms of the least max drawdown, and third only to Bond Bulls and The 12% Solution when it comes to low volatility.

Returns are a bit lower than its cousin American Muscle, but still quite superior to the S&P 500 over the long term (2008-present).
The 12% Solution is a good strategy relative to risk for two reasons: 1) it holds an ever-present bond allocation representing 40% of the portfolio, and 2) the equity side of the equation is protected by a cash trigger. Readers who have read the book by the same name are quite familiar with the workings of this strategy, and have access to it as a DIY model.

The 12% Solution ranks third in terms of the least max drawdown. In terms of Total Returns, it outperforms Bond Bulls, but underperforms the other strategies long term. And of course, it beats the socks off the S&P 500 over that long term.
American Muscle differs from Lean Muscle by incorporating individual stocks into the mix. This tends to ratchet up volatility and max drawdown, but also improves returns over the long run. As per Lean Muscle, it includes an adjustable TLT component, and a cash trigger protecting 60% of the portfolio.

American Muscle delivers the third highest Total Returns of the bunch, bested only by The White Knuckle and its cousin, The Bare Knuckle.
Global Trader provides excellent exposure to international equities, but has done so with a slightly higher max drawdown than four of the strategies. While the model lacks a cash trigger, 50% of the portfolio has the ability to act as a hedge against those international equities, providing currency plays, global utilities, or even the volatile silver ETF (SLV) at opportune times.

While max drawdown has been as high as -22.2% since 2008 (namely during the height of the pandemic in March 2020), its Total Returns are pushing up against those of American Muscle.
The White Knuckle (and its even scarier cousin The Bare Knuckle) is the ‘guns blazing’ strategy of the bunch. While at first blush the model doesn’t seem that frightening, with a max drawdown of -22% (or -43.6% for The Bare Knuckle), looks can be deceiving.

Because the other strategies all employ non-leveraged ETFs in the main (American Muscle can additionally employ one or two individual stocks in up to 60% of the portfolio), none of these other strategies have the ability to go down to zero. That is, to lose all their value. ETFs represent baskets of individual stocks (or bonds), in most cases hundreds of stocks (or bonds). For a model like Bond Bulls or Global Trader or either of the Muscles to go to zero, you’d be looking at an economic collapse on the order of an asteroid hit.

Not so with The White Knuckle. Because it uses 3x leveraged ETFs, a severe crash or black swan event that takes down equities while simultaneously taking down Treasuries could technically result in the total collapse of the portfolio. Ditto with The Bare Knuckle.

I don’t say this to scare you away from the strategy. I say it as a reminder as to why I recommend only a 10-20% allocation of this model in one’s overall investment portfolio, depending on one’s level of risk tolerance. Some folks might not want to mess with this model at all – and that’s fine. But it’s there for aggressive investors. Just employ it in moderation.

Combining Strategies to Achieve Your Target

While a single strategy like Bond Bulls or The 12% Solution might well satisfy the needs of the conservative investor, and both represent core strategies for that reason, a combination of strategies has the potential to achieve conservative risk targets – while providing increased diversity and the prospect of improved returns.

The Returns Calculator [available to subscribers] can be of help. With Version 5.0, it now includes Lean Muscle in the lineup. For those with access to Excel spreadsheets, the calculator can be accessed via the blue “Download File” link on the page.

Starting with Bond Bulls (the least risky model), a 100% allocation from 2008 to 2019 (last full year) looks like this:

With 100% Bond Bulls, we’ve been able to achieve an 11.6% CAGR with a max drawdown of only -8.7% over the course of more than 12 years. [As a side note, the calculations from this spreadsheet may not exactly match the figures on the Members Pages. They’re close, but not a mirror image. The difference being a matter of precision between the strategies’ algorithms vs. Excel spreadsheet formulas.]

Let’s experiment a bit, and bring in Lean Muscle for a good dose of U.S. powerhouse equities. Let’s go with a 60/40 mix of the two. We’re still overweight Bond Bulls. Here’s what that looks like:

Image: Moderately Conservative Portfolio

Notice that we’ve increased our CAGR from 11.6% to 14.0% while only raising the max drawdown by a little over 1 percentage point.

Let’s experiment a bit further, and bring in Global Trader for some international exposure. Let’s go with a 60/20/20 mix of the three. We’re still overweight Bond Bulls. Here’s what that looks like:

Image: Moderately Conservative Portfolio, II

CAGR has increased further, to 14.4%, but for that fractional increase we paid the price by increasing max drawdown by an additional 2 percentage points. Given that we’ve added some valuable diversity to our portfolio, that might be worth the increase in risk. In any event, max drawdown continues to remain considerably less than that of SPY for the same time period (at -51.9%).

One final experiment. Let’s swap Lean Muscle for American Muscle. We’ll keep the same 60/20/20 mix of the three. We’re still overweight Bond Bulls. Here’s what that looks like:

Image: Conservative/Aggressive Portfolio Mix

In this last example, we’ve boosted CAGR to 15.1% at a “cost” of an additional -0.8% max drawdown.

Now, there are a near infinite number of combinations you can play with. Change the percentage allocations. Bring the low volatility The 12% Solution into the mix. And if you go to the second sheet (the second tab at the bottom left of the spreadsheet), you can invite The White Knuckle to the party.

Additional sheets (tabs) allow you to see the performances of various combinations for shorter time frames.

Conservative vs. Aggressive

The above examples were structured to have some appeal to conservative investors. For aggressive investors, the same concepts apply, only you might be using different strategies and proportions thereof.

Instead of 60% Bond Bulls, you might be reducing that to 40% or less. Instead of Lean Muscle you might be using American Muscle. And you most likely will be allocating a portion of your portfolio to The White Knuckle. Just keep in mind my cautionary note on that strategy – 10% to 20%, depending on your tolerance for risk.

Further regarding The White Knuckle: a combination that only incorporates American Muscle and The White Knuckle (or The Bare Knuckle) is not diversified – and quite risky for that reason. If you’re going to use one of the Knuckles, better to pair it with Bond Bulls and/or Global Trader and/or The 12% Solution.

Allocation Calculator

If you do end up employing a combination of strategies, by all means check out the Allocation Calculator [available to subscribers] to make your life easier on rebalancing day.

One Final Note Regarding Drawdowns

The max drawdowns cited in this article and everywhere on the website are historical points of reference. They are the maximum drawdowns the strategies have experienced over the time frames cited. They are not floors, they are not safety nets. In fact, the actual largest drawdown for each and every one of the strategies is lurking out there in the future.

Keep that in mind when planning.

Best of luck,
David