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Portfolio Insulated From a Bumpy Ride

In January I outlined a portfolio that could help insulate against a bumpy U.S. stock market -- and it seems to have held up fairly well so far.

The goal was just to build a diversified portfolio out of a few holdings with the hope it would have less volatility in both directions.

The portfolio includes:

  • PowerShares BuyWrite Portfolio (PBP) 30%
  • WisdomTree Asia Pacific Ex-Japan High Yielding Equity Fund (DNH) 20%
  • iShares S&P Global Infrastructure Index Fund (IGF) 5%
  • iPath DJ AIG Agriculture Total Return Sub Index ETN (JJA) 5%
  • Nakoma Absolute Return Fund (NARFX) 10%
  • Rydex Managed Futures Fund (RYMFX) 5%
  • iShares Lehman TIPS Fund (TIP) 15%
  • SPDR Lehman International Treasury Bond (BWX) 10%
  • Since that last article, the U.S. stock market has endured a lot of news and big moves in both directions, providing a good test for the concept. Many people want low maintenance without a lot of volatility, but the risk of that sort of portfolio is that it caters too far in the direction of low volatility and ends up lagging a bull cycle by a large amount.

    From January 22, the portfolio's inception, to last Thursday, the S&P 500 was down 3.66% while the portfolio was up 0.71% (neither result included dividends). From inception to May 19, when the S&P 500's bear-market rally peaked with an 8.8% gain, the portfolio was up 7.2%. From that May 19 peak, the S&P 500 is down 11.50%, while the portfolio has dropped 6.05%.

    The holding that turned out to be the biggest disappointment was the Nakoma Absolute Return Fund. From mid-February to early May it dropped by 7.57%, which although not awful, clearly was a drag on the portfolio.

    While it's difficult to know for sure, based on how the holdings are reported, I suspect the velocity of the energy shorts going against them exceeded their expectations. Since bottoming in May, the fund has retraced almost half of that decline.

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