The Perfect ISA portfolio that makes money in all market conditions

By now you all realise that I spend a lot of time producing analysis and research that can stand the test of time. It is a brave thing to do to produce articles with titles such as Funds to ‘buy & forget’ in 2016. Yet that is exactly what 80-20 investor is all about and what makes it unique.

In the same vein a year ago I produced an in-depth article revealing The Perfect ISA Portfolio. To recap I am often asked 'Where should I invest my ISA allowance?' So I set out to determine the perfect combination of different types of assets that can not only make you money but reduce the chance of you making a loss.

Perfect ISA Portfolio

To find the perfect ISA portfolio I laid down a series of ground rules:

• There would be no constraint over which assets could be included or in what proportions they are held
• The portfolio must have made money every tax year since the last market peak back in 2000 and not lost money
• It had to at least beat a FTSE 100 Index tracker and
• The asset allocation had to remain constant throughout that time

So in essence I wanted to find the perfect 'buy and forget' asset allocation. One which would have achieved the above irrespective of the actual funds you'd bought. So to make sure I was only looking at the asset allocation I always used the sector average return for each asset. My analysis covered 27 sectors (see the original article for the full list).

The number of possible combinations was mind-blowing and it took me two full days to analyse it. I revealed the Perfect ISA Portfolio is split:

• 9% cash
• 71% UK Gilts
• 20% UK Equity Income

How has the Portfolio fared in 2015/16 - with markets down 6%?

2015/16 has been the worst year for investors since the financial crisis in 2008! At the time of writing the total return from the FTSE 100 since the start of the current tax year (6th April 2015) is -6%, as shown in the chart below:

 

So how has the Perfect ISA Portfolio fared so far in this tax year? Well it may come as a surprise (although perhaps it shouldn't) the Perfect ISA Portfolio is in profit, up 0.42%, as shown in the chart below by the green line (click to enlarge). Not only that but it also avoided the worst of the market sell-off because of its limited equity exposure.

 

This year's current profit follows a 10.93% return in the 2014/15 tax year! Below is a complete list of how the portfolio has fared since 2000.

Tax year	FTSE 100 % return	Perfect ISA % return
2015 (to date)	-5.96	0.42
2014	5.73	10.93
2013	11.04	0.6
2012	13.44	6.83
2011	-1.74	9.87
2010	7.95	4.78
2009	50.49	7.71
2008	-29.94	0.02
2007	-3.63	0.86
2006	9.37	2.47
2005	26.34	10.27
2004	14.46	6.38
2003	21.3	4.69
2002	-24.52	0.63
2001	-4.11	0.3
2000	-11.13	3.23

 

Double your money

So how would someone who had bought the Perfect ISA portfolio have fared if they had bought it back in 2000? Well the chart shows the Perfect ISA (green line) massively outperformed the FTSE 100 (red line) and pretty much doubled investors' money. That implies a healthy average annual return for the Perfect ISA portfolio of 4.38%.

The 80-20 Perfect Portfolio revisited

Last year I also highlighted that if you want to maximise your returns then simply buying a tracker fund that will replicate the Perfect ISA Portfolio won't achieve this.

If instead you used the 80-20 Investor algorithm to choose the UK equity income funds to invest in for the 20% part of the Perfect ISA portfolio invested in equities your returns would be hugely improved. That's despite the equity content of the portfolio making up such a small part of the Perfect ISA portfolio.

The table below shows how much money an investor would have today if at the start of each tax year they had invested their full ISA allowance into:

• the Perfect Portfolio using trackers
• the 80-20 Investor Perfect Portfolio where our algorithm chooses the UK Equity income funds (I've split the 20% across 3 funds each time).

The ISA allowance has increased from £7,000 to £15,240 over the last 15 Years. So if someone had invested their ISA allowance each year they would have invested a total of £144,320

Total Invested	£144,320
Perfect ISA portfolio	£207,107
80-20 Perfect ISA portfolio	£218,208

 

 

image by Stuart Miles (freedigitalphotos.net)

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