Magic Portfolio vs S&P 500

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EfficientInvestor
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Magic Portfolio vs S&P 500

Post by EfficientInvestor »

In their latest market insight https://assets.website-files.com/5f5173 ... 012.21.pdf, Evoke Advisors compared the performance of the S&P 500 against a "Magic Portfolio" that had the same performance (9.6%/yr) over the time period (1928-2021) but had zero volatility (vs vol of ~15% SD/yr for S&P 500). 60% of the time, the S&P 500 had a better 3-year rolling average. So if you held the Magic Portfolio, which would be the Holy Grail of an investment, you would still feel like you are underperforming 60% of the time. There have even been stretches of 10+ years (1980-2000, 2009-present) where you would underperform the S&P 500. Goes to show that you should stop comparing your performance against the market and just invest based on what is best for you, your goals, and your risk tolerance. Determine a portfolio that fits your needs, document it in your Investment Policy Statement, and stay the course!

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EfficientInvestor
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Re: Magic Portfolio vs S&P 500

Post by EfficientInvestor »

Here is another way to look at it. The first graph is from 1955-2021 and shows the S&P 500 against a magic portfolio that matches the S&P500 over the time period. The second graph is the 20 year period starting in 1980. Would you be able to stay the course during 20 years of underperformance?

1955-2021
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1980-1999
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Last edited by EfficientInvestor on Fri Jan 21, 2022 3:54 pm, edited 1 time in total.
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zhiwiller
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Re: Magic Portfolio vs S&P 500

Post by zhiwiller »

How does it have a worst year of 6.09% if it is designed to return a flat 10.66%/year?
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EfficientInvestor
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Re: Magic Portfolio vs S&P 500

Post by EfficientInvestor »

zhiwiller wrote: Fri Jan 21, 2022 2:36 pm How does it have a worst year of 6.09% if it is designed to return a flat 10.66%/year?
The analysis only goes through July 2021 because I didn’t update my SPY data set to go through the end of the year. So that is the 7 months of return from 2021.

edit/add: I updated my data set and reran the backtest to go all the way through the end of 2021.
gougou
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Re: Magic Portfolio vs S&P 500

Post by gougou »

With $75K vs $263K I think the magic portfolio has been left behind with almost no chance of ever catching up the SP500.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
Thesaints
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Re: Magic Portfolio vs S&P 500

Post by Thesaints »

Not sure I understand.
The magic portfolio matches the S&P return over the chosen period, but with zero volatility. Of course, if one changes the period, it will be a different magic portfolio.
Is this just to say that the stock market is volatile ?
marcopolo
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Re: Magic Portfolio vs S&P 500

Post by marcopolo »

I am.not sure of the point you are trying to make.

The reason the magic portfolio does not exist is because if you take away the risk (volatility as shown here), then you don't get those returns either. There is no free lunch.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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vanbogle59
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Re: Magic Portfolio vs S&P 500

Post by vanbogle59 »

I'm never sold by discussions of volatility.
My only demon is loss.

If I make 5% and you make 6...Meh. There's always someone richer than me.
If I lose 5%, ouch. 10% double ouch. I take no comfort at all in realizing you lost 20%.

So, bring on the magic portfolio for me.
You can tune it all the way back to 4% real, and I will still hand you the password to my Vanguard account.
Thesaints
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Re: Magic Portfolio vs S&P 500

Post by Thesaints »

The point the OP is making, I believe, is not that magic is real, but that comparing your own performance to a single (or even a few consecutive) years of S&P is futile.
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Re: Magic Portfolio vs S&P 500

Post by EfficientInvestor »

Thesaints wrote: Fri Jan 21, 2022 4:34 pm The point the OP is making, I believe, is not that magic is real, but that comparing your own performance to a single (or even a few consecutive) years of S&P is futile.
That is correct. Perhaps another way to explain my point is this…imagine you could either choose a portfolio that has 10% expected return with 0% volatility or a portfolio that has 10% expected return with 15% volatility. Of course every reasonable investor would choose 10% return with 0% volatility. However, as shown by the data in this example, there will still be long stretches of time where the portfolio with 15% volatility will outperform you and you have to be willing to accept that fact and stay the course.
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