Model Portfolio Quarterly Update

In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:

• 60% stocks (via NTSX)
• 40% bonds (via NTSX)
• 20% trend (via DBMF)
• 10% commodities trend (via COM)
• 4% Tail risk (via TAIL)
• -34% cash

The idea behind the portfolio is stolen from here. The link offers the best explanation of what I think is the most common question related to it, i.e. why the portfolio uses leverage (and why, in this context, leverage decreases risk).

It represents a simplified version of the portfolio I have been building since I moved to Switzerland: here you can find details about the “enhancements” to this model.

Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Testfol.io, the app I use to track the portfolio, does not allow me to change the reference currency.

Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio. There are various solutions an investor can employ if they do not have the USD as their base currency and want to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP (if you want a deeper dive into FX risk, I wrote this).

After increasing 2.96% in Q4-25, the portfolio was basically flat in Q1-26 (+0.07%):

Since inception plus backtest (May, 2019).VBAIX is the 60/40.

The blue line represents the Model Portfolio, while the other two are functional references (I cannot really call them benchmarks): the 60/40 portfolio (yellow line) and the S&P500 (red line).

Since inception plus backtest (May, 2019).VBAIX is the 60/40.

Q1

Below you can find details of each ETF performance, including dividends, in the quarter:

Here is the Q1 price graph for each component of the portfolio:

How to read the portfolio performance

I have to admit I fell for the single-line item performance fallacy. NTSX is the ETF with embedded leverage that allows the addition of “free diversifiers” to the portfolio. I, wrongly!, judged the merits (or otherwise) of leverage within NTSX, thinking, for example, about the implications of an inverted yield curve (NTSX borrows at the short-term rate and invests in bonds that pay the long-term rate…not great when the curve is inverted).

Leverage belongs to the portfolio.

Not only that. COM and DBMF use futures; a small fraction of the sum invested in those ETFs is posted as margin while all the balance erns the T-Bills returns. In other words, if the Bills rate is 5% and DBMF returns 3%, it means DBMF alpha, the real yield of the strategy, was -2% for that year.

It feels like 2022 all over again

Since early March stocks and bonds have been falling in tandem, the same ugly correlation we saw three years ago, driven by the same culprit: inflation fear. And just like then, the diversifiers are earning their keep.

DBMF had already put up a strong quarter at the end of 2025, and the trend hasn’t faded. This quarter’s standout was COM, carried almost entirely by energy commodities doing what energy commodities do when macro uncertainty spikes.

It’s sad to have to hope for bad markets to make the case for diversification. But the data doesn’t care about my feelings, and neither does the market.

Four years. That’s how long I’ve been running this Model Portfolio to demonstrate one simple idea: that diversification, done with capital efficiency, actually works. And for most of that stretch, stocks were generous. Above historical-average returns. Smooth sailing. It’s hard to tell a 100%-equity investor to worry about drawdowns when they’ve been living in a 0.7 Sharpe environment for the better part of 16 years. The lived experience doesn’t match the historical warning label.

But here we are

What I keep coming back to, and the whole point of building the Model Portfolio this way, is this: you don’t need to blow up your equity exposure to do better than a traditional 60/40. You just need to make a few simple changes. The data makes that case better than I ever could.

The leverage carry cost headwind, which ate all the diversifiers’ performance for a bit, is over. We’re back to crushing the 60/40.

A quick note on the chart: the period where the two lines converge doesn’t mean the Model Portfolio lost its edge. It means both portfolios were generating roughly the same returns during that window. Think of it as a floor. At its absolute worst, this approach gives you back the 60/40. That’s the downside.

Now for the part that genuinely baffles me.

Over the last month or so, I’ve started seeing financial advisors float “creative solutions” for a 60/40 that’s once again failing to protect investors. The proposals, roughly:

• Slash bond duration. (Run that backtest through 2000 and 2008 and get back to me.)
• Use market timing to dynamically manage bond duration. (Sure. The multi-manager hedge funds are definitely waiting on your résumé.)
• Use market timing to tilt sector allocation on the equity side. (Those same hedge funds will also hire you if you can actually generate that alpha.)

Nobody, and I mean nobody (in Europe), is talking about adding two ETFs to pick up 140 basis points of annual outperformance at the same volatility and lower drawdowns.

I could almost understand the oversight if this were just my take, a blogger in an obscure corner of personal finance. But Portable Alpha isn’t obscure. It’s basically everywhere in the US. Written about, taught, implemented by institutions.

I genuinely don’t know how a financial advisor squares those recommendations with their fiduciary duty. The only charitable read is that clients can still reach their “goals”: just with a little less return, a little more risk, and a little less money in their pockets.

Oh, Ray

On a sadder note (for me), the Model Portfolio is lagging ALLW 🙁 I think the USD underperformance (they use global stocks and bonds) might be, at least partially, the reason. I guess me declaring victory over a multi-billion hedge fund would have to wait 😉

What I am reading now:

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