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 30%

WisdomTree Asia Pacific Ex-Japan High Yielding Equity Fund 20%

iShares S&P Global Infrastructure Index Fund 5%

iPath DJ AIG Agriculture Total Return Sub Index ETN 5%

Nakoma Absolute Return Fund 10%

Rydex Managed Futures Fund 5%

iShares Lehman TIPS Fund 15%

SPDR Lehman International Treasury Bond 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.

PBP has pretty much behaved as hoped for. It's up a little, while the S&P 500 has gone down a little. DNH is meant to be a substitute for iShares


(EFA) - Get Report

, and although DNH has done about the same as EFA since the portfolio's inception, I still think DNH is the better hold because it has zero exposure to Japan compared to almost 20% for EFA. Also, DNH's very heavy (87%) exposure to Australia provides for a better zig zag effect with its 0.678 correlation to the S&P 500 vs. 0.825 for EFA.

The idea behind IGF is that no matter what is going on with the stock-market cycle, money must be spent on infrastructure. The flow of capital creates a tailwind that could allow for price appreciation even in a down market. While IGF has done better than the S&P 500, it has not done much better -- it's down a little.

JJA has delivered, not only with a 16% return, but also with a 0.02 correlation (according to (The chart looks like a negative correlation to me.)

RYMFX, which is an absolute-return vehicle, has had a similar effect as JJA, with a lower return, 6%, and a negative correlation to SPX.

BWX has been up a little and TIP has been down a little, but each one has had a negative correlation over the period studied. Each is about where one would expect.

Going forward, I think this portfolio would continue to work. Agricultural commodities have generally been hot, but are slightly off their highs from early March. Greater awareness of food inflation may mean it's a fad, but a 5% weighting minimizes the consequences of poor timing.

The portfolio clearly has gaps (no emerging markets to speak of, no small-caps and no REITs, to name a few), but this can serve as a base upon which to build.

This portfolio was designed to be less volatile than the market. That hopefully continues to mean that it would go down less if the market keeps heading lower -- but will also mean it will go up less the next time the market is up a lot.

At the time of publication, Nusbaum was long PBP, DNH, IGF, NARFX, RYMFX, BWX and TIP on behalf of clients and/or himself, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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