Low Vol (excerpt)
>>>> The table below lists performance figures for the equity index (SPX), the bond index, the 60/40 portfolio of stocks and bonds, low volatility stocks (LV), and an 80/20 portfolio of low volatility stocks and bonds over this long study period. Annual return data dates to 1991, the longest available period of annual returns for my chosen Low Volatility Index.
Even with stocks near all-time highs, the 60/40 portfolio (rebalanced annually in this example) has trailed the standalone S&P 500 by just 1.4% per year. This strong performance occurred with around 60% of the volatility of the S&P 500 and lower drawdowns in times of stress. With that performance, it is no wonder that 60/40 has been a standard-bearer for portfolio allocators.
The column just to the right of the 60/40 breakdown; however, shows that owning low volatility stocks (NYSEARCA: SPLV) performed even better on a risk-adjusted basis. The S&P 500 Low Volatility Index outperformed the S&P 500 on an absolute basis with under three-quarters of the variability. The incremental 2.3% annualized return of low volatility stocks versus the 60/40 mix was healthy compensation for the modest uptick in risk, as reflected in the higher Sharpe Ratio - a measure of risk-adjusted returns.
The column on the far right of the table is an 80/20 combination of the Low Volatility Index and the U.S. Aggregate Bond Index. This addition of a fixed income component, while half the level of the traditional 60/40 mix, further dampened the volatility of owning Low Volatility stocks. In fact, as you can see from the table above, the realized risk of the 80/20 portfolio was actually slightly lower than the 60/40 portfolio. The 131bp annualized positive return differential for the 80/20 strategy versus the 60/40 strategy led to a higher
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