How Much DRS is Enough? - Bitly

May 11, 2017 - Swan Global Investments | 970-382-8901 | swanglobalinvestments.com. How much is enough? Once one understands and accepts the ...
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How Much DRS is Enough? Blog Series - Where the DRS Fits, Part 1 of 4

Marc Odo, CFA®, CAIA®, CIPM®, CFP® | May 11, 2017 | Swan Blog

Page 2 of 5

How much is enough? Once one understands and accepts the Defined Risk Strategy, the next questions that are frequently asked are, “How much DRS should I add to my portfolio? How much is enough? How much is too much?” There is no blanket, one-size-fits-all answer to that question. Like most things in life, the answer will be “It depends.” What will it depend on? • • • •

What are the goals and objectives of the investor? What other investments exist in the portfolio currently? Does the investor have a particular view of the market’s direction? What is the risk tolerance of the investor?

These are just some of the factors that one should consider before investing in anything. Still, to help guide the discussion, it is worth exploring what impact adding the DRS has to an existing portfolio. We will start out by adding the DRS to a basic, plain vanilla portfolio that is 60% S&P 500 and 40% Barclays US Aggregate bond index. The 60/40 ratio is kept constant, and we will add 10% increments of the DRS. July 1997 – Dec 2016

Ann. Return

Cuml. Return

Std Dev

Beta

Sharpe Ratio

Max DD

Pain Index

Pain Ratio

60% S&P 500/40% Barclays Agg

6.54%

243.99%

9.16%

0.59

0.48

-32.54%

4.46%

0.99

60/40 Portfolio w/ 10% Swan DRS

6.78%

259.53%

8.74%

0.56

0.53

-30.12%

3.88%

1.20

60/40 Portfolio w/ 20% Swan DRS

7.01%

275.09%

8.42%

0.53

0.58

-27.62%

3.37%

1.45

60/40 Portfolio w/ 30% Swan DRS

7.24%

290.62%

8.19%

0.51

0.62

-25.05%

2.94%

1.75

60/40 Portfolio w/ 40% Swan DRS

7.45%

306.05%

8.08%

0.48

0.66

-22.97%

2.61%

2.04

60/40 Portfolio w/ 50% Swan DRS

7.65%

321.33%

8.07%

0.45

0.69

-21.16%

2.35%

2.36

60/40 Portfolio w/ 60% Swan DRS

7.85%

336.40%

8.18%

0.42

0.70

-19.31%

2.14%

2.68

60/40 Portfolio w/ 70% Swan DRS

8.03%

351.21%

8.40%

0.39

0.70

-17.42%

2.08%

2.85

60/40 Portfolio w/ 80% Swan DRS

8.21%

365.69%

8.73%

0.36

0.70

-16.59%

2.11%

2.90

60/40 Portfolio w/ 90% Swan DRS

8.37%

379.79%

9.14%

0.33

0.68

-17.58%

2.18%

2.87

Swan Defined Risk Strategy (net)

8.53%

393.44%

9.63%

0.30

0.67

-18.56%

2.32%

2.77

S&P 500

6.85%

264.27%

15.24%

1.00

0.31

-50.95%

12.03%

0.39

Source: Zephyr StyleADVISOR

The historical return of the DRS is higher than that of the 60/40 portfolio and the S&P 500, so obviously, any increase in DRS exposure will increase the overall return. The focus of this exercise is on risk reduction or maximizing the returnrisk trade-off. Risk, whe