Most investors seek investment methods that have an apparent tendency to yield good, long-term results while at the same time minimizing risks to an absolute minimum. Unfortunately, most traditional methods of investments do not always ensure good returns, and sometimes, they bring disappointing returns, especially when the market tumbles. The trouble is that finding an equal mix portfolio when the economy goes against a trend, as it still should help the investor regain consistent growth.

In 2009, authors Meb Faber and Eric W. Richardson designed an investment strategy in their book, “The Ivy Portfolio.” It’s designed to track the successful asset allocation of influential Ivy League endowements that, historically, make far more money than the overall market. Highly diversified portfolios with several asset classes contribute to solid returns while mitigating risk.

Set up your own Ivy Portfolio using five handpicked ETFs on this article-and we’re going to take a closer look into its performance and really dive deep into the backtesting results. All these will help us further expound on how this strategy can be used as a solid investment solution for those who are looking to secure reliable returns in the long run.

What is the Ivy Portfolio Concept?

The concept of the Ivy Portfolio is based on the fact that other classes of diversification provide above-average returns over time. To some extent, it has been Ivy League endowments, such as Yale and Harvard, that have succeeded due to long-term investment horizons and asset diversification.

The Nuts and Bolts of the Ivy Portfolio

1. Equities: Generally, equities account for about 60% of the portfolio and are comprised of an amalgamation of domestic and international equities.
2. Bonds: Invest 20% in intermediate bonds for stability and income generation
3. Commodities: Then invest the remaining 20% in commodities-the inflation protector or another diversifier

This way, you will balance growth with stability since the return will help to at least keep pace, and sometimes beat, the inflation rate over time.

Building Your Own Ivy Portfolio with ETFs

In constructing an Ivy portfolio, the same investment choices and allocation levels that made this strategy so successful are utilized with ETFs. The goal is to minimize the risks of the stock market while generating long-term returns that keep up with the inflation rate and grow above it, assuming this trend continues.

Five exchange-traded funds are recommended to create an Ivy Portfolio, which will be comparable to the asset allocation of top endowments. Each of the exchange-traded funds will constitute 20% of the portfolio, hence leading to a diversified investment policy.

ETF for the Ivy Portfolio

1. Total Stock Market ETF (e.g., VTI): This refers to the aggregate proxy of the US equity market where all covered stocks in large, mid- and small-cap are included.
2. International Stock ETF (e.g., VXUS): Opportunity to diversify outside the United States captures international growth.
3. Intermediate Bond ETF (e.g., BND): Achieves stability and income through investing in a diversified mix of U.S. government and corporate bonds.
4. Commodity ETF (e.g., DBC): Invests in a diversified basket of commodities, such as energy, metals, and agricultural products.
5. Real Estate ETF (e.g., VNQ): This is an investment in real estate trusts, which is a source of growth, income, and more.

Asset Allocation

The ETFS shall be distributed evenly at 20% each. The portfolio shall be diversified following the model of the endowments of the Ivy League.

Review of the Performance of the Ivy Portfolio

We ran backtests from 2008 until today to see how this Ivy Portfolio of ETFs performed.

Historical Performance

• Yearly Return: 4.6%
• Volatility: Now at this point the standard deviation of returns for this portfolio becomes less significant compared to the S&P 500, which means it has been less volatile and there’s lesser risk.
• Drawdown: As soon as the financial crisis of 2008 began to bite, the portfolio suffered a rather sharp drawdown of around 45%.

Although the rolling 1-year average annual return of 4.6% falls short of expectation from history, what has been fascinating was the carrying effect from commodities. The commodity had been weak over the last couple of years and really dragged returns off diversification portfolios.

Inflation-Adjusted Returns

The inflation-adjusted return of the Ivy Portfolio has been more than 4% per annum every year, meaning that the portfolio can endure long-term real growth. This aligns very well with the strategy’s long-term performance goals instead of short-term returns.

Benefits of the Ivy Portfolio

The Ivy Portfolio has a few significant advantages for an investor:

1. Diversification: Investing in different asset classes reduces the risks and keeps the investment stable.
2. Long-term Focus: No-risk strategy from being a long-term investor with an investment horizon that would allow compound growth.
3. Risk Management: The balanced approach tends to minimize potential losses during any market downturn but participates in a trend upwards.

Case Study: Ivory Portfolio Compared with Traditional Portfolios

When compared to a more tradicional portfolio, the Ivy Portfolio has been proven to be an equation of lower volatility and a smoother equity curve. Explosive returns may not be seen, but stable growth and capital preservation at work are indeed acquired.

Conclusion

Of course, the Ivy Portfolio is the investment strategy that best re-creates the winning strategies of the Ivy League endowments. A well-balanced allocation of equities, bonds, and commodities with judiciously chosen ETFs helps investors fashion a diversified portfolio for long-term performance.

Key Takeaways

Sustainable Growth : The returns are not astronomical, but they are stable, which can snowball into achieving the objectives of the portfolio.
Historical Resilience The Ivy Portfolio has survived all the previous adversities and proved its ability to generate inflation-adjusted returns above 4%.
Actionable Strategy Investors can easily replicate the Ivy Portfolio by using the recommended ETFs and aligning their investments with known, best-practice strategies.

Therefore, creating an Ivy Portfolio is one of the smart steps investment seekers who want to be reliably long-term-growth may take. Adopting this diversified approach leaves room for you to have a reduced market risk towards eventually achieving long-term financial success.