The RPC Growth Portfolio

This is the second original portfolio among the ten - an aggressive variation of the RPC Income which uses leverage to create space for some highly speculative assets, including digital currency. For all that, though, its risk profile is still more conservative than the 100% equities portfolio.

Composition of the RPC Growth Portfolio, as of October 2022
The RPC Growth portfolio has been changed twice since it began in July, 2021. In May of 2022, after my investigation into managed futures, I took half of what had been allocated to commodities (15%) to make room for DBMF. Then, in October, 2022, after months of being beaten over the head with falling prices for digital assets, I scaled back my allocation there. I took the 5% allocation down to 2%, with the remainder going over to commodities and managed futures. I’m leaving the original correlation matrix, backtests and explanation as is, though, as a reminder of my original thoughts and analysis. That fifth paragraph is looking pretty cringey now, for sure.

Like the RPC Income portfolio, the growth version uses leverage (in this case, 100% leveraged), but whereas the RPC Income uses the “extra” allocation provided by the use of leveraged funds to seek income providers, this one uses that space for further investment in growth-oriented assets and some experiments. This includes two very aggressive assets that appear in no other portfolios: a 3X leveraged real estate ETF (DRN) and a cryptocurrency index fund of sorts (GDLC), and then one unique asset class: managed futures (using DBMF). Even the bond choices are a bit more aggressive than elsewhere. Instead of a standard long-term treasury fund, this portfolio goes with EDV, or extended duration treasury bonds. These are like long-term bonds, even more so: higher volatility, higher payouts, and higher projected “zagging” when stocks “zig” due to even higher degrees of negative correlation. I put this portfolio together with more of an eye to how a risk parity-inspired portfolio might work for someone in the accumulation phase. I also built this one as the vehicle to see how DRN, GDLC, and DBMF would work in a realistic portfolio.

In deciding on its components, I made it conform to the same standard deviation projection as the 100% equity portfolio, so that it could be compared with that benchmark. It is also in the same ballpark as the Levered Seasons portfolio, so that one can be in the mix, too. One caveat: the cryptocurrency fund is so new that all projections for this portfolio really need to be taken with a grain of salt, or maybe a whole 50 pound bag or road salt. In order to not exaggerate the return projections for the portfolio, I excluded it from the backtesting on Portfolio Charts when comparing this portfolio to the others. Doing that, though, throws the volatility projections off, since it is not counting this highly volatile addition to the portfolio. In this write-up, I’ll show three projections: the main one with crypto excluded, a second one where crypto is treated as gold (since that’s my guess on what crypto winds up resembling, eventually), and then a third where it is like a small cap growth stock.

Returning to the main projection, the backtesting process indicates that this portfolio has a great deal of positive potential, even if cryptocurrency is a scam and goes to zero. It projects a 10.1% annual return, the same as the Levered Seasons portfolio, and 1.3% higher than the 100% equities portfolio, while projecting an equal amount of expected volatility. The withdrawal rates are both in the mid-5% range, suggesting it could quite easily survive under the 4% annual withdrawal strategy. My favorite observation about this portfolio is that it has an Ulcer Index of 9.8, which is slightly better than the Classic 60/40 portfolio. To reiterate: this levered portfolio, that would seem incredibly risky to some at first glance, has 4% higher projected returns AND more manageable drawdowns compared to the standard, low-risk, 60/40 retirement portfolio.

While the projections inspire hope that this may be a strong portfolio to actually follow, it does inspire a lot of questions, as well: 1) IS DRN a viable long-term fund? Typically the draw for REITs is the large dividend payout, but DRN pays very little, I assume because the dividends received in the fund are used to pay the costs for the use of leverage; 2) Can I stomach the volatility of this portfolio? This is the aggressive version of risk parity, and with added leverage of 100%, this one is twice the leverage of my other portfolio, the RPC Income; 3) and, of course, what’s the deal with crypto? The 5% allocation is not much, but it’s not nothing, either. Will it amplify the swings of this portfolio, or dampen them? Relatedly, when I run the projections, the portfolio seems to work way better if crypto is the new gold, not a new small cap growth stock. If that’s the case…why not just increase the allocation of gold by that amount and skip the crypto? That may indeed be logical, but somehow, it doesn’t quite seem as much fun.

Here is the Correlation Matrix (Matrix does not include DBMF, since it was a late addition. Its profile is similar to PDBC, more or less. Data begins in 2009, except for GDLC, as explained below; credit to Portfolio Visualizer):

Correlation Matrix for RPC Growth portfolio

And, the Backtest Analysis (Including the crypto fund into the backtest was problematic since the asset class is not available in Portfolio Charts, and even if it had been, there is not enough of a track record to make the numbers even a little bit trustworthy. So, to estimate the impact of crypto, I ran three scenarios: 1) Crypto goes to zero immediately, so it was not entered in the portfolio, though it was still accounted for in terms of borrowed funds; 2) Crypto is the new gold, so the 5% for crypto was allocated there; 3) Crypto is like a small-cap growth stock, so the 5% was allocated there; data from 1970; credit to Portfolio Charts):

Backtests for RPC Growth portfolio