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 6.88% in Q2-25, the portfolio increased by 7.10% in Q3-25:

Since Inception, including a backtest period

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).

Q3

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

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

Here is the Q3 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.

Diversification taketh away and diversification giveth. Looks like this quarter we were running on all cylinders 🙂

It is good to see our diversifiers working: COM, in particular, has been volatile since January, bouncing around like a caffeinated squirrel. I don’t spend much time watching the daily market ticker, but it’s hard to ignore what’s happening: we’re back in “everything goes up” mode. When the tide rises, all boats float, even the ones with (potential?) holes in them.

Is the model portfolio working? Yes.

It’s beating the classic 60/40 on every metric that matters, and it’s doing so with just four holdings instead of two. And as we mentioned in the past, the fourth ETF is probably unnecessary.

But here’s the uncomfortable part: both COM and DBMF haven’t hit new highs in nearly four years. Are they broken?

Think of these assets like painkillers sitting in your medicine cabinet.

You buy a bottle when you have a splitting headache. You take two pills, feel better, and toss the rest in the drawer. Four years later, you’re cleaning out the cabinet and find them: expired.

Was that wasted money?

Of course not. They did exactly what you needed when you needed it. And you don’t suddenly decide painkillers are “broken” just because you haven’t had a headache in four years.

COM and DBMF didn’t experience new all-time highs, but didn’t go lower either. If you see them as insurance, in the last 4 years they have been an insurance with a premium set at zero (they covered their “cost”, as the cost of leverage included in the portfolio).

The fact that they’re sitting there, quietly doing nothing, doesn’t mean they’ve stopped working. It means the market hasn’t given them a reason to shine. These diversifiers should have positive expected returns over a full market cycle…assuming we visit all four quadrants (economic growth and inflation, up and down). It is not about the path we took but all the journeys we could have potentially embarked on.

We can never be 100% certain. Just like we can never be completely sure the equity risk premium will persist forever, even though we’ve been conditioned to believe it will after nearly two decades of uninterrupted stock market gains.

How long does it take to declare a strategy with a Sharpe ratio of 0.3 or 0.4 “broken”? A Decade. Maybe longer.

Consider what’s happening with large-cap stocks right now. They’re running at a Sharpe ratio of 0.7, double their historical average of 0.35-ish. Is this a new paradigm? Or are we just in an unusually risk-on period that will eventually revert?

We don’t know. And that’s exactly the point.

If these questions were easy to answer, there wouldn’t be a risk premium in the first place. The premium exists because of the uncertainty, not in spite of it. You get paid to sit with the discomfort of not knowing whether your diversifiers will work this time, or whether stocks will keep defying gravity forever.

The moment everyone becomes certain about an investment strategy is usually the moment right before it stops working.

A friend texted me this morning with a great question: “It’s 2025. Why are we still talking about stocks and bonds like they’re the only two options for retirement?”

It’s a great question because it gets at something deeper.

I’m not naive, I know backtests are messy and nothing in finance is black and white. How do you objectively backtest a strategy like trend following? Can you ever really be sure you’re not fooling yourself?

Think about DBMF. How can a strategy that was designed with a goal, beat the index it is designed to replicate, and delivers on that goal out of sample, can be something that…”just worked in the past”? I do not have a crystal ball for the future, but at least we should all agree that DBMF delivered on its objective. At least so far.

Was it out of luck?

Is the underlying index they are beating just a product of survivorship bias?

The uncomfortable truth is that expanding beyond stocks and bonds requires us to sit with more uncertainty, not less. And even this might not be true if we just go back to the equity risk premium puzzle.

Most people aren’t willing to do that, and I get the reason.

As I get the reason why there’s a good amount of lads who get triggered when you mention gold 😉

They missed the run-up. And now they’re trapped in this mental prison where they can’t buy because the moment they buy will be the exact moment it crashes. So they wake up every morning secretly hoping today’s the day gold finally collapses.

But it doesn’t. It just keeps going up. And with every new high, the frustration compounds.

I know this feeling intimately because I lived it with crypto. After a long dismissal, I sat on the sidelines convinced I’d look like an idiot if I bought in. The solution? I bought a tiny position, just enough to kill the emotional noise. Suddenly, I could think clearly again. I wasn’t rooting for it to fail or succeed. I just owned a little, and that freed me to see things as they actually were instead of through the lens of regret.

Sometimes you do not need that much to get the monkey off your back.

Lastly, a quick look at the Europoor Model Portfolio (63% NTSG, 37% DBMF):

What I am reading now:

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