I get a lot of questions about how to improve passive portfolio returns. One way is to add a strategy like the TQQQ Trading Strategy to a portfolio passively invested in a diversified basket of index ETFs. Learn how adding a 10% allocation to this trading strategy can increase returns dramatically. Read more to learn how to add this strategy to a Passive Portfolio for increased growth.
Strict buy and hold advocates will tell you that any form of active investing is a fool’s errand. They say that it is impossible to beat the market over the long term.
However, I do not believe that and I know that there are many other investors who believe that as well.
Just look at the most popular thread over at the Bogleheads forum, which is the home to the anti-active investor movement and advocate for the strict buy and hold passive portfolio.
The thread called HEDGEFUNDIE’s excellent adventure has thousand’s of posts in it. The ironic thing is that this is a thread all about how to beat the market; a thread about how to beat the market on a passive portfolio forum.
I think that proves the point that investors are not content just getting the market returns, but want to actually look for ways to beat it.
If that sounds like you, then let’s look at a way you can still invest passively while adding additional growth through a systematic trading strategy that can boost portfolio returns.
The Plan to Improve Passive Portfolio Returns
The plan to improve passive portfolio returns is actually pretty simple.
It is based on the belief that investing does not need to be an all-or-nothing approach. You don’t need to be 100% passive in your portfolio, just as you do not need to be 100% active.
In fact, style diversification is a proven and effective way to diversify a portfolio. Most investors just think of diversification in terms of stocks, bonds, commodities, etc. However, diversification of investment styles is also a prudent approach to managing a portfolio.
So why not add different styles of investing into your portfolio? That can mean having the bulk of your assets in a passive portfolio, with the remaining portion utilizing a more active investing style.
Let’s look at doing that with a passive portfolio covered here at Robotic Investing and the TQQQ Trading Strategy.
We will see how adding in that active component can boost returns over time.
Pillar #1: The Passive Portfolio
The obvious first question is which type of passive portfolio to go with. I am going to go the easy route and choose the portfolio that has proven to be the best based on the tracking done here at Robotic Investing.
In the most recent passive portfolio analysis, Ray Dalio’s All-Weather Portfolio has proven to keep up with the S&P500 the best. I also like it because it truly is diversified.
It includes equities, different duration bonds, as well as gold and commodities. If we are going to really try to diversify, then it makes sense to go with that portfolio.
Pillar #2: The Active Portfolio
The next question is which active type of investment strategy to use. I am going to be a bit biased here and suggest we go with the TQQQ Trading Strategy I offer on this site.
Biases aside, I also think this is a good option because it provides a very solid risk/reward profile to improve passive portfolio returns. It has seen huge portfolio gains on its own, with a good drawdown profile. It does this in an active manner, by trading based off of trading signals.
I also want to recommend it because although it is active, the system trades in a robotic (i.e. systematic) manner. There is no judgement involved; traders buy and sell the TQQQ based off of the strategy signals. There is no emotion or discretion involved.
Because of that, we can really see how anyone combing a passive strategy with an active style will perform since there is no actual discretion involved.
Portfolio Allocation Percentage
In my TQQQ Trading Strategy eBook, I recommend that traders only allocate a maximum of 5 to 10% of their portfolio into the strategy.
This is because I want users of the strategy to be diversified.
Since the All-Weather strategy is also diversified across multiple asset types, I think a good starting point is to go with 90% of portfolio equity into the All-Weather Portfolio, with the other 10% into the TQQQ Trading Strategy.
It is important to remember that the portfolio is not just diversified across styles (passive versus active). It is also diversified by asset classes. The All-Weather portfolio includes a five different asset classes.
The combined portfolio provides us with access to a number of different asset classes to take advantage of the only true free lunch in investing: diversification.
With the allocation breakdown covered, let’s start looking at portfolio performance.
Improve Passive Portfolio Returns – the Results
Here are the parameters of the portfolio we are going to test:
- Starting portfolio equity: $100,000
- All-Weather Portfolio Starting Equity: $90,000
- TQQQ Trading Strategy Starting Equity: $10,000
- Date range of test: May 2010 to December 2019
- All-Weather Portfolio is rebalanced yearly
- TQQQ Trading Strategy is traded exactly as per eBook instructions
To test this, let’s start by looking at how the portfolios perform.
Combined Portfolio Performance
A portfolio that was 100% invested into only the All-Weather Portfolio starting in May 2010 and invested until December 31, 2019 went from $100,000 to $205,196.
Pretty strong performance for that portfolio. However, we can do better. Have a look at the table below.
Just by adding in an active strategy, with an allocation of only 10% of the starting equity, the combined portfolio grew to $245,860.
The TQQQ Trading Strategy generated an extra $40,664 of portfolio value. Directing 10% of the portfolio equity to improve passive portfolio returns worked.
What is important to note is that the equity line for the TQQQ Trading Strategy did not have wild drops or drawdowns that most people expect when trading more aggressive active strategies. The equity lines move up relatively steadily.
Summary
I am not suggesting in this post that investors should throw out passive investing. In fact, I am arguing the opposive.
I think that most investors should allocate the majority of their portfolio to a passive investing style like the All-Weather portfolio. Another option is the Coffeehouse Portfolio.
However, do not discount the power of allocating some of your portfolio to an active investment style. As shown above, a 10% allocation to a more aggressive investment style had positive results on the ending portfolio equity.
It does not need to be all or one. Diversifying your investment styles as well as your asset allocation can help with portfolio growth.
If that does interest you, then consider picking up a copy of the TQQQ Trading Strategy eBook available at Robotic Investing.
