It's been almost a year since I last reviewed the performance of the alternative risk versions of my £50k portfolio. A number of 80-20 Investor members recently asked whether I could update the performance for each portfolio. So I thought it an opportune time to review them both.
Quick recap on the alternative portfolios
The higher and lower risk Damien's portfolios were launched back in April 2018. 80-20 Investor was designed to provide subscribers with research to empower them to make better investment decisions. The service is not prescriptive and a key aim when I originally conceived the idea for 80-20 Investor was that it would allow people to use it in a way that suited them. They could use it to help research funds in a particular sector or they could build a portfolio in accordance with their own views or risk appetite. For example, Subscriber A might want to take more risk than Subscriber B but they both could use 80-20 Investor to build portfolios that they felt would suit them
I deliberately created a product that was not a ‘one-size-fits-all’ solution. It’s a very tricky thing to do which is why the world of finance will opt for the easier ‘one-size-fits-all’ approach. Of course, in order for me to demonstrate the value of the 80-20 Investor fund shortlists I track the performance of the BOTB selection as a whole. This is a hypothetical exercise.
However, I also wanted to demonstrate how to use the research in reality which is why I have been running my own £50,000 portfolio (which is now worth £76,260) for the last seven years. In doing so I document how I use the 80-20 Investor research and document all my portfolio changes as I make them. The results are not hypothetical but actual returns after charges. Of course the aim of my £50,000 portfolio is not to say this is the best or only way to use the 80-20 Investor research but one way. I get emails from readers who say how much they enjoy 80-20 Investor and even how they have outperformed (or indeed underperformed) my £50,000 portfolio by using the research to build their own portfolio.
However, my £50,000 portfolio is incredibly popular but it also brings its own issues. While I don't run the portfolio for subscribers to copy I have to be mindful that people will. Therefore I always try to keep my portfolio with an overall medium risk level. That does mean that I can't amplify the risk level of the portfolio, which will hinder its performance in a market rally like we had in 2017, 2019 or indeed after 23rd March 2020.
So I introduced a higher-risk version of my portfolio back in April 2018. The problem was that if I started a higher-risk Damien's portfolio in April 2018 it would have had no history. That would make a comparison with my normal £50,000 portfolio impossible. I also didn't want to launch a purely hypothetical portfolio, back-dated to March 2015, whereby I picked a portfolio from previous high-risk funds. The danger was that I could be accused of cherry-picking with the benefit of hindsight, especially when it came to allocating how much I would put into each fund. The other key aim was that I wanted the exercise to demonstrate the range of returns you could have achieved over time using 80-20 Investor's research. I wanted to demonstrate that 80-20 Investor (or indeed my £50k portfolio) is not a one-size-fits-all solution. On top of that, some of you have said that while you may follow my £50,000 portfolio it isn't risky enough for you.
Damien's higher-risk portfolio methodology
As I have the details of every transaction I've ever made to my £50k portfolio and a copy of every dataset since 80-20 Investor launched I am able to meticulously go back and recreate a higher risk version of my portfolio as if I had actually bought it. To create a higher risk version of my portfolio I apportion any money held in low-risk funds within my £50k portfolio into medium and high-risk funds, but with the same level of conviction as in my actual £50k portfolio. To explain this consider the dummy £50k portfolio below:
- £5k in a low-risk fund A
- £5k in low-risk fund B
- £5k in low-risk fund C
- £5k in a medium-risk fund D
- £2.5k in medium-risk fund E
- £10k in medium-risk fund F
- £2.5k in high-risk fund G
- £5k in high-risk fund H
- £10k in high-risk fund I
The portfolio above has £15k invested in low-risk funds, £17.5k in medium-risk funds and £17.5k in high-risk funds. To create a high-risk portfolio I remove the low-risk funds and invest the £15k into medium and high-risk funds (where I currently have £35k) to reflect my conviction in the original £50k portfolio.
So to work out how much to invest in Fund D, I carry out the following sum £5k/£35k = 14.29%. Or in other words fund D makes up 14.29% of my medium and high exposure. Therefore I add 14.29% from the £15k (that would have been in low-risk funds) into Fund D. This makes fund D now worth £7.1k
I repeat this exercise for all the funds which leaves me with a higher risk version of Damien's portfolio. Remember, all I'm doing is ditching the low risk funds and spreading the money across the medium and high-risk funds in my portfolio.
- £7.1k in a medium-risk fund D
- £3.6k in medium-risk fund E
- £14.3k in medium-risk fund F
- £3.6k in high-risk fund G
- £7.1k in high-risk fund H
- £14.3k in high-risk fund I
I repeated the process for the entire seven years I've been running my portfolio ensuring that all fund switches are reflected accurately in pounds and pence. I even reflect on the occasions where a fund in my portfolio changed risk categories.
Damien's lower risk portfolio
I repeated the exercise to build a lower risk Damien's portfolio whereby I reallocated money (in the same manner) out of the high-risk funds into low and medium risk funds. All the performance figures are up to and including my last review of my £50k portfolio on 9th May 2022.
How have the alternative portfolios fared?
The chart below (click to enlarge) shows the performance of Damien's higher risk portfolio (in green) and the lower risk portfolio (in red) against my standard £50k portfolio (in blue).
The result is a fan chart showing a range of results from low risk to high risk (31.89% to 63.73%), with my £50k portfolio in between (55.52%).
The range of performance between the higher risk and lower risk portfolios has barely altered since I last reviewed their performance back in June 2021. In fact the chart below shows how the portfolios fared during a turbulent year and in the case of the lower risk portfolio actually made a profit over the last 12 months. The results are very pleasing, and I look at the performance of each portfolio more closely in the next section.
Damien's higher risk portfolio
The higher risk portfolio typically has somewhere between 75% and 95% in equities which makes it higher risk. At the moment it's equity content is approximately 80-85% equity. The chart below shows the performance of the portfolio against two key sectors of professionally managed funds, one of which has a maximum exposure to equities of 85% and one where there is no upper equity limit.
The green line is the performance of the higher risk portfolio while the red and brown lines show the average return achieved by professional fund managers from the aforementioned sectors. The blue line shows the extra performance added by just the asset mix of my portfolio (where I was invested i.e European equities etc) over picking a typical multi-asset fund (the red and brown lines). While the green line (which is the higher risk profile's actual performance) shows the impact of being in the right funds at the right time, as identified by the 80-20 Investor algorithm. Again Damien's higher risk portfolio is outperforming all of its benchmarks and is in fact extending its lead from last time as shown below.
Damien's Lower risk portfolio methodology
The lower risk portfolio typically has between 20% and 40% in equities. Currently, it has approximately 44% invested in equities. So slightly higher than normal.
The chart below shows the performance of the portfolio against two key sectors, one of which has a maximum exposure to equities of 30% and the other where the maximum limit is 60%. The latter sector gives a steer of how well the lower risk portfolio is doing while taking much less risk.
The green line is the performance of the lower risk portfolio while the red and brown lines show the average return achieved by professional fund managers from the aforementioned sectors. The blue line shows the extra performance added (or not added) by just the asset mix of my portfolio (where I was invested i.e European equities etc) over picking a typical multi-asset fund with a similar equity mix (the red line). While the green line (which is the lower risk portfolio's actual performance) shows the impact of being in the right funds at the right time, as identified by the 80-20 Investor algorithm.
You can see the outperformance of the lower risk portfolio over the full time period. However, if you look at the chart below (which shows the performance over the last 12 months) you can see how the portfolio has extended its outperformance significantly. This is largely due to the portfolio's current low exposure to bonds, which have struggled in 2022. Of course, if bonds were to have a turnaround in fortunes the lower risk portfolio would underperform its benchmarks.
Hopefully, this analysis once again helps to demonstrate the range of returns I would have achieved had I decided to vary the risk level of my portfolio. At the same time I hope it inspires subscribers who are thinking of ways to vary the risk levels in their own portfolios. 80-20 Investor is a tool to help you make your own informed investment decisions, it is not dictatorial.
Market timing
Last year when I updated the performance numbers for these portfolios I also looked at whether using the indicator highlighted in my article "Navigating market tops and bottoms", could boost each portfolio's performance. At the time I found that the indicator impaired performance the more investment risk you took. Think of it like an insurance policy, the greater the risk of a claim the greater the cost. Unfortunately, we are in the midst of another period of volatility so we can't draw conclusions about the positive or negative impact of the indicator until we know the full picture with the benefit of hindsight. Perhaps something to come back to later in the year.
