The Desert Portfolio comes from a member of the Gyroscopic Investing forum. Here we’ll take a look at its components, performance, and the best ETFs to use in its implementation.
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What Is the Gyroscopic Investing Desert Portfolio?
Not far off from the Permanent Portfolio, the Desert Portfolio is a 3-asset portfolio comprised of stocks, treasury bonds, and gold. Its 60% intermediate bond holding is functionally similar to the Permanent Portfolio’s barbell bond approach. The Desert Portfolio looks like this:
- 30% Total US Stock Market
- 60% Intermediate Term Bonds
- 10% Gold
Compared to the Permanent Portfolio, I like the Desert Portfolio a little more due to its slightly higher equities allocation and lower gold allocation.
Gyroscopic Investing Desert Portfolio Performance Backtest
Below I’ve compared the historical performance of the Desert Portfolio to the Permanent Portfolio and the S&P 500 from 1978 through July, 2021:
As we’d probably expect, the Desert Portfolio achieved a slightly higher general return but a pretty significantly higher risk-adjusted return (Sharpe) than the Permanent Portfolio. The Desert Portfolio’s volatility was less than half that of the S&P 500, and its max drawdown was nearly 1/5.
Of course, keep in mind bonds performed extremely well over precisely this backtested time period of about 40 years. At current yields, we would not expect the same returns from bonds going forward, so the future may look very different than what you see above.
Incidentally, the Desert Portfolio is very nearly a risk parity weighting, with each asset contributing roughly the same volatility to the total portfolio.
Desert Portfolio ETF Pie for M1 Finance
M1 Finance is a great broker to implement the Desert Portfolio because it makes regular rebalancing seamless and easy, has zero transaction fees, and incorporates dynamic rebalancing for new deposits. I wrote a comprehensive review of M1 Finance here.
Utilizing mostly low-cost Vanguard funds, we can construct the Desert Portfolio pie like this:
- VTI – 30%
- VGIT – 60%
- IAU – 10%
You can add the Desert Portfolio pie to your portfolio on M1 Finance by clicking this link and then clicking “Save to my account.”
Taking the Desert Portfolio Global
We can get some international (ex-US) diversification by simply replacing Vanguard’s Total US Stock Market (VTI) with Vanguard’s Total World Stock Market (VT), resulting in this pie.
Leveraged Desert Portfolio
We can lever up the Desert Portfolio using the following ETFs:
UPRO – 30% – 3x S&P 500
TYD – 60% – 3x interm. treasuries
UGL – 10% – 2x gold (since there are no 3x gold ETFs available at this time)
Here’s how this portfolio would have performed against the “regular” unleveraged Desert Portfolio and the S&P 500 going back to 1991 through September, 2020:
Notice it achieved a risk-adjusted return (Sharpe) almost identical to that of the unleveraged Desert Portfolio, obviously with much greater volatility and larger drawdowns. Interestingly, its volatility was equal to that of the S&P 500 but it had a much smaller max drawdown.
You can add this pie to your portfolio on M1 Finance using this link.
Disclosures: I am long VTI and UPRO in my own portfolio.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.