The RPC Stability Portfolio

Akin to the Golden Butterfly or the All Seasons, this is my attempt at a super-diversified, conservative, unleveraged portfolio designed to stay close to the surface when the market dives. Not a lot of upside, though.

RPC Stability Portfolio as of November 2022
This portfolio has been changed since its debut in June of 2022. The changes are fairly simple: put AVUV in place of VIOV (Vanguard’s Small-cap 600 Value fund) based on this comparison, DFAX instead of VXUS (Vanguard’s Total International Stock fund) after this analysis, and IWY instead of VUG (Vanguard Growth Fund) based on this test.

The main purpose behind the test portfolios is to test ideas of portfolio construction and see how various approaches handle inflation-adjusted withdrawals of 4%. The recent turmoil in markets as of early summer 2022 has shown light on the fact that, while I do have two original portfolios in the RPC Income and RPC Growth, neither of those prioritize safety. Additionally, both of those involve leverage and would probably not be suited for conservative investors. What I have been missing is my own version of the All Seasons or the Golden Butterfly, something that would have volatility significantly lower than a 60/40 and something that might stay stable in a downturn like we are seeing now.  

The RPC Stability contains ten asset classes, each with a target allocation of 10%, making this a fairly simple and easy to track portfolio. It is complex, in a way, since it has ten funds, the most of any of my test portfolios. At the same time, it is very easy to track and rebalance: just take from the highest, and if you are adding funds, just add to the lowest. In my view, portfolios get complex not when you first put your money into them, but in the month-to-month management of them, and the easy rule behind this one - that all asset classes should be equal - makes this one easy to understand and maintain.

It is a well balanced portfolio, with 40% in equities, 30% in bonds (including 10% in Short-term Treasuries, very similar to cash), and 30% in alternatives,  meaning commodities, managed futures, and gold. Within that 40% to equities is PFF, a preferred shares fund that acts somewhat like a bond fund, giving this relatively little exposure to equity risk. The correlation matrix for the portfolio is quite impressive, with quite a few numbers around zero, and lots of negative figures. This suggests an ability to stay closer to the surface than unbalanced portfolios when the markets take a dive.

I fully expect this portfolio to be the most conservative test portfolio, or at least around as conservative as the All Seasons and the Golden Butterfly. At the same time, I expect this to struggle in comparison to most in good economic times, as it doesn’t have much of an allocation to equities to take advantage of those good times. It has an expected return of just 6%, placing it tenth out of eleven, and its withdrawal rates are merely decent. The Safe Withdrawal Rate is 4.9%, which ranks fifth, and its Perpetual Withdrawal Rate is 4.3%, which is sixth. The backtests on Portfolio Charts are likely slightly off, since neither managed futures nor preferred shares were available asset classes. I counted them as commodities and Large-cap value, respectively.

Correlation Matrix: Used VGTSX, DBC, WTMF, and GLD in place of funds listed above to lengthen time period for back tests. Data begins in 2011. Credit to Portfolio Visualizer.

Correlation Matrix for the RPC Stability Portfolio

Backtest Analysis: Managed Futures counted as commodities, and PFF counted as Large Cap Value. Credit to Portfolio Charts. Data since 1970.