Update to Damien’s alternative risk portfolios – June 2020

The first half of 2020 has been unforgettable. We've experienced one of the most aggressive and steepest declines into a bear market in history followed by one of the strongest rallies in decades.

Equity markets are currently trading sideways as investors try to discern whether they will break higher or lower. While we remain in limbo it is, therefore, an opportune time to take a step back and review the performance of the higher and lower risk versions of my £50k portfolio, which some of you may not realise exist. I publish these alternative portfolios at the foot of my monthly £50k portfolio reviews. The higher and lower risk Damien's portfolios were launched back in April 2018. To quickly recap...

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 £65,400) for the last five 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 and 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 since 23rd March this year.

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 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. While I may well receive emails from subscribers describing how they have achieved a higher return than my £50,000 (or indeed lower) other subscribers don't get to see these.  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 was 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 apportioned 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 would 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 carried out the following sum £5k/£35k = 14.29%. Or in other words fund D makes up 14.28% of my medium and high exposure. Therefore I added 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 repeated this exercise for all the funds which left 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 five years I've been running my portfolio ensuring that all fund switches were reflected accurately in pounds and pence. I even reflected 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.

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 (19.56% to 37.80%), with my £50k portfolio in between (31.39%).

The range of performance between the higher risk and lower risk portfolios has narrowed slightly (by 1.51%) since I last reviewed their performance back in December 2019. If you want to see the chart from last time then you can via this link. However, my £50K portfolio has actually pulled away further from the lower risk portfolio and gained ground on the higher risk portfolio, which is pleasing.

If you look at the year to date performance of all three portfolios you can see how my portfolio mirrored the performance of the lower risk portfolio. Part of that is down to the methodology in the way the lower risk portfolio is calculated but also because I reduced the risk of my portfolio in February before the slump. You can also see how my portfolio has started to outperform the lower risk version once I slightly increased my own portfolio's risk profile in June.

It's a great demonstration of how my portfolio has benefited from mirroring each portfolio (the lower and higher risk versions) at different times during 2020.

Now, let's look at the performance of each portfolio more closely.

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 70% equity, so lower 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 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. So, the blue line effectively 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 it is pleasing to see Damien's higher risk portfolio outperforming all of its benchmarks.

As you can see from the green line above, while taking a higher risk approach has its rewards it is a more volatile ride over the long term. Interestingly if you look at the performance year to date (below) the higher risk portfolio beat its benchmark but lagged the two key sectors I mentioned earlier. Interestingly they have all actually lagged my standard £50k portfolio.

This isn't surprising because the methodology of deriving the high-risk portfolio can lead to doubling down on a decreasing number of high-risk positions in my £50k portfolio. This can effectively ramp up risk heading into the market slump. As I mentioned last time it needs a strong stomach and a long term commitment to the momentum process. The benefit of this is that once the market rebounds the higher risk portfolio will benefit as a result.

As you can see once the market started to rebound from the March-low the £50K higher risk portfolio outperformed all the others

Damien's Lower risk portfolio methodology

The lower risk portfolio typically has between 20% and 40% in equities. Currently, it has approximately 43% 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. Once again I am pleased with the result.

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. So, the blue line effectively 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.

Here is the equivalent performance for the lower risk portfolio and its benchmarks since the start of 2020. While the portfolio has marginally lagged its benchmarks given the extreme market conditions I will take that. 

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.