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Conservative vs. Aggressive Portfolios
David Alan Carter
November 1, 2020 [Updated January 12, 2025] Are you a conservative investor, or aggressive? In other words, how much risk are you willing to take in return for potentially higher returns?
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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.
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 - which can (and will) change over time. There are other risk metrics to consider as well (e.g. Sharpe ratios, volatility, etc.). But for this ranking, we'll stick with max drawdown. Also note: the strategies undergo periodic modifications. An ETF may be delisted by its provider and need to be replaced. A blend of funds may no longer provide the hedge they used to. I may see an opportunity to adjust the parameters to improve returns or lessen the risk of the strategy. The performance figures and commentary below reflect the most recent modifications. As of January 2, 2025, from lowest risk to highest...
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A Brief Note About Each Strategy |
Bond Bulls
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, or a cash equivalent. Overall, Bond Bulls comes out lowest on the scale for max drawdowns, and lowest in terms of volatility by a wide margin. 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 bet in the lineup. Bond Bulls SORTINO
Bond Bulls SORTINO is a variation of the original Bond Bulls strategy. While it pulls from the same candidate pool as the original Bond Bulls, this variation uses risk-adjusted returns to identify its monthly picks - four ETFs allocated equally across the strategy. The SORTINO may be replacing the original Bond Bulls sometime in 2025, but for now it remains a stand-alone strategy. American Muscle
American Muscle taps the best of U.S. asset classes each month, with 30% of the strategy investing in QQQ and TLT according to a risk-parity calculation, and 70% rotating among U.S. broad-market and sector ETFs. There's even a [limited] stock component. And if market sentiment turns negative, it's Treasury funds or safe-haven U.S. sector ETFs up to bat. American Muscle has delivered an impressive 20% CAGR in backtests through 2008, bested only by Zen Knuckle, White Knuckle, and Five Stocks. Lean Muscle
Lean Muscle is basically American Muscle without the individual stock component. It’s all ETFs all the time. This is a good option for those investors who would rather not add stock risk to their portfolios. Returns are a bit lower than its cousin American Muscle, but still quite superior to the S&P 500 over the longer term. Global Trader
Global Trader provides exposure to international equities and has done so with a relatively light max drawdown. Selecting three ETFs monthly, the model rotates between broad-based international and domestic ETFs, as well as global sector funds like tech, healthcare, utilities, and more. In global downturns, equities are replaced with currency or bond funds. New for 2025 - a bitcoin ETF. Zen Knuckle
Zen Knuckle is an offshoot of The White Knuckle (see below). This variation makes a change to the mix of funds in the 'Risk-Parity' portion of the strategy, swapping out a leveraged bond fund for a volatility ETF. With that simple change, risk is reduced fairly dramatically, with max drawdown cut in half from -41.5% to -21.2%. Despite that reduced risk, the strategy has still managed to deliver a 25% CAGR in testing back to 2011. Still, this cautionary note: any Knuckle - be it the original or this 'calmer, gentler' variation - was not designed to occupy more than a portion of one's total investment portfolio. Why? Because this model remains a vehicle for some of the most volatile names in the market: 3x leveraged ETFs, leveraged currency funds, and now a volatility ETF. By design, some of these funds should act as a hedge to the others, providing a degree of balance in normal times. But in the stock market, as in the world at large, things are not always normal. So, keep allocations of this model reasonable within your portfolio. Read more about this strategy in this White Paper. The 12% Solution
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 experienced its largest drawdown to date during the 2022 bear market, when bonds (Treasuries especially) fell in lockstep with equities for a protracted period of time. That said, it continues to deliver a respectable 12% CAGR in testing back through 2008, beating Bond Bulls in terms of Total Return, and significantly outperforming the S&P 500 for the same time period. The White Knuckle
The White Knuckle has achieved its historic high returns at a cost: a max drawdown of -41.5% as of January 2, 2025. The model employs some of the most volatile names in the market: 3x leveraged ETFs. A leveraged bond fund to help mitigate some of that risk, and a currency hedge inserted at strategic times further helps to calms the waters. That said, with a volatility of more than 22%, it can be a wild ride. And truth be told, it's the only model in the lineup that could - theoretically - lose it all. Let me explain. Because the other strategies (with the exception of Five Stocks) employ non-leveraged ETFs, none of these other strategies have the ability to go down to zero. That is, to lose all their value. I suppose one could argue that anything in the stock market could go to zero. But 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. It's a little more dicey 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. 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 5% - 10% - 15% or so 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. Five Stocks
Five Stocks is our stock-picking model; each month it selects five individual names from a curated portfolio of U.S. stocks that figure prominently in the Nasdaq 100, the Dow Jones Industrial Average, and the S&P 500. The strategy focuses on risk-adjusted returns, a measure of an investment’s return that takes into account the degree of risk involved in producing that return. While it's capable of some tough drawdowns (i.e. -42.9% during the Great Recession), rebounds are relatively quick, and its high reward potential give it top scores in Sharpe and Sortino ratios among all the strategies. It's an excellent way to play the cream of the crop of U.S. stocks. The strategy combines well with more conservative, ETF based strategies like The 12% Solution, Bond Bulls, and Lean Muscle. |
Combining Strategies to Achieve Your Target |
Note: Unless otherwise noted, the following examples reflect data from 2008 through 2024. They do not incorporate 2025 YTD.
I will update the data below, and the representative graphics, once we have the full year 2025 behind us (sometime in January 2026). --David 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. For those with access to Excel spreadsheets, the calculator can be accessed via the blue “Download File” link on the page. Starting with the relatively low-risk model Bond Bulls, a 100% allocation from 2008 through 2024 looks like this: 
Click to enlarge.
With 100% Bond Bulls, we’ve been able to achieve an 9.2% CAGR with a max drawdown of only -7.8% over the course of 17 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 American 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: 
Click to enlarge.
Notice that we’ve increased our CAGR from 9.2% to 14.0%, although by doing so we increased our max drawdown by 4.5%. Generally speaking, with greater rewards comes greater risks.
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: 
Click to enlarge.
OK, we've taken CAGR down a bit from the previous chart to 12.9% (reduced by 1.1%) and max drawdown actually bumped up a fraction. Given that we’ve added some valuable international diversity, one could argue that we've strengthened the portfolio. Judgement call as to whether it was worth it. In any event, max drawdown continues to remain considerably less than that of SPY for the same time period (at -51.9%).
Next, let’s change things up a bit and reduce our allocation to Bond Bulls. Let's go with a 40/30/30 mix of the same three strategies. Here’s what that looks like: 
Click to enlarge.
In this example, we’ve boosted CAGR to 14.8% at a “cost” of an additional 2.3% in max drawdown.
Now, there are a near infinite number of combinations you can play with. Change the percentage allocations further. Bring the mother strategy (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 (and Zen Knuckle) to the party.
Additional sheets (tabs) allow you to see the performances of various combinations for shorter time frames. 
Click to enlarge.
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Edging Up The Aggressive |
The above examples were structured to have some appeal to conservative to moderate investors. For aggressive investors, the same concepts apply, only you might be using different strategies and proportions thereof.
Instead of 40/30/30 Bond Bulls to Global Trader to American Muscle, you might be flipping that on it's head. In fact, let's do just that: let's flip the tables and reduce Bond Bulls to 30% of our portfolio while leaving Global Trader at 30% and boosting American Muscle to 40%. With this experiment, we're gently tipping the scales toward a more aggressive portfolio. Here's what that looks like: 
Click to enlarge.
In this exercise, we’ve boosted CAGR to 15.9% but at the “cost” of a near -16% max drawdown. Yes, those returns are sweet. But at this risk level, one thing is certain: this combination of strategies would have kept your attention during past market corrections. For some investors, that level of risk might be too much. For others, no problem.
For those in the latter camp, The White Knuckle strategy will likely hold some interest. Just keep in mind my cautionary note on that strategy – no more than 5% - 10% - 15% or so of your portfolio, depending on your tolerance for risk. This goes for the Zen Knuckle, as well.
[SIDEBAR: It should go without saying, but I'll say it anyway. If employing a combination of White Knuckle and Zen Knuckle, keep the combination to 5% - 10% - 15% or so, in total.] Further regarding The White Knuckle: a combination that only incorporates American Muscle and The White Knuckle is not diversified – and extremely risky. 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 or such. Speaking of the Knuckles, let's click on the 2011-2024 tab in the lower left margin of the spreadsheet. Now we can access the Knuckles. But before we do, let's see how our 30/30/40 portfolio (Bond Bulls, Global Trader, American Muscle) would have performed during this particular time frame. Here's how that looks. 
Click to enlarge.
You'll notice CAGR is down a bit from the prior chart. We're calculating with different years, so the returns are going to be different.
Now let's bring Zen Knuckle into the mix. We'll go with 30/30/30/10 - Bond Bulls, Global Trader, American Muscle and Zen Knuckle. So we've taken 10% away from American Muscle and put that percentage on Zen. Here's how that looks... 
Click to enlarge.
In this example, and during this time frame, we've boosted our average annual return by 0.6% (to 15.2% CAGR) while increasing our max drawdown only a fraction.
Keep in mind that when employing either of the Knuckle strategies, we can only backtest through 2011, so the Great Recession of 2008 is not represented. This explains why SPY's CAGR is higher than on previous charts, and the max drawdown is "only" -33.7%, considerably less than the -51.9% when the Great Recession is factored in. _____
Finally, let's invite Five Stocks to the party. We'll stay with the 2011-2024 sheet, and go with a 15% allocation of Five Stocks, which is toward the high end and should be reserved for aggressive investors with a high risk tolerance. Let's counter that risk with relatively large allocations (40% each) to Bond Bulls and Lean Muscle. Why these two? Bond Bulls because it's all about safety. And Lean Muscle because, well, it's all ETFs all the time. Its cousin American Muscle includes a stock component, which at times might leave your portfolio doubled up on a particular stock if employing AM and Five Stocks together. This will not be a problem with Lean Muscle. Here's how that looks... 
Click to enlarge.
Notice that our 40/40/15 allocation to Bond Bulls, Lean Muscle and Five Stocks only filled up 95% of our portfolio. We're leaving 5% on the table. Or another way to look at it: we'll be holding 5% cash in our brokerage account.
Despite setting aside a bit of cash, we would have achieved a 17% average annual return on our investment during this time frame. [SIDEBAR: When experimenting with your own combinations, don't go crazy with Five Stocks. I would advise keeping an allocation to 5% or so to begin with. You can always increase that in the future once you're comfortable with the model.] |
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.
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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 |