Ben Felix Model Portfolio (Rational Reminder, ETFs, Performance, Returns Analysis)

The Ben Felix Model Portfolio, developed by Ben Felix and Cameron Passmore of PWL Capital, is a globally diversified investment strategy that utilizes index funds and tilts towards specific factors, such as Size, Value, and Profitability, for added potential returns.

Ben (Benjamin) Felix is a portfolio manager at PWL Capital in Canada, who is well-known for his YouTube channel, Common Sense Investing, and his podcast, Rational Reminder. He is widely recognized for his expertise in the field of investing and financial management and has created a model portfolio, the Ben Felix Model Portfolio. Let’s take a look at the Ben Felix Model Portfolio. In this post, we take a look at Ben Felix Model Portfolio. We end the article with a backtest of the strategy (as a matter of fact, we make several backtests).

Overview of Ben Felix’s Model Portfolio

The Ben Felix Model Portfolio is a globally diversified investment strategy that utilizes index funds and tilts towards specific factors, such as size, value, and profitability (factor investing). It is developed by Ben Felix and Cameron Passmore of PWL Capital, a Canadian financial management firm.

The portfolio is designed to provide investors with a diversified investment strategy that is based on academic research and data analysis. It comprises several different asset classes, including domestic and international stocks, and sometimes, bonds. But it is achieved using index funds. It is diversified across different sectors, geographies, and market capitalizations.

The model portfolio employs a number of different investment strategies, including value investing, momentum investing, and factor-based investing. These strategies are based on academic research and are designed to exploit market inefficiencies and identify undervalued assets.

Ben Felix believes that there is a tradeoff between simplicity and optimization in index investing, and the portfolio is designed to balance this. By using the data from the Fama-French 5 Factor Model, the portfolio aims to improve expected returns by diversifying across not just geographic regions but also different risk factors. This approach offers a globally diversified index exposure while also making small adjustments to increase exposure to these factors.

In addition to the model portfolio, PWL Capital also provides clients with a number of other services, such as financial planning, tax planning, and estate planning, as well as educational resources, such as articles, videos, and webinars, to help investors better understand the market and make more informed investment decisions.

Benefits of Investing in Ben Felix’s Model Portfolio

Some of the benefits of investing in Ben Felix’s Model Portfolio include:

• Diversification: The model portfolio is diversified across different asset classes, sectors, geographies, and market capitalizations, which helps to reduce overall risk and provide a more stable return over time.
• Data-driven: The portfolio is based on academic research and data analysis, providing investors with a well-researched and evidence-based investment strategy. The portfolio are backtested.
• Factor-based investing: The model portfolio employs factor-based investing, which is based on the idea that certain characteristics, such as size and value, are associated with higher returns.
• Global exposure: The portfolio aims to provide investors with globally diversified index exposure, which can help to increase potential returns.
• Robustness: By using the data from the Fama-French 5 Factor Model, the portfolio aims to improve expected returns by diversifying across not just geographic regions but also different risk factors, which makes the portfolio more robust.
• Low-cost: As the portfolio is based on index funds it is cost-effective, and the costs are significantly lower than actively managed funds.
• Low-maintenance: Because the portfolio is based on index funds, it requires very little maintenance, which makes it suitable for those who prefer a hands-off approach to investing.

As with any portfolio, don’t blindly invest in the portfolio without considering your personal circumstances, investing goals, risk tolerance, and so on. Do your due diligence as always and consider consulting a financial advisor.

Key Components of Ben Felix’s Model Portfolio

Ben Felix and PWL Capital are based in Canada, so he created a model portfolio that primarily utilizes Canadian index funds. OptimizedPortfolio.com suggests that the portfolio allocation is as follows:

• 30% invested in iShares Core S&P/TSX Capped Composite ETF – XIC
• 30% invested in Vanguard US Total Market ETF – VUN
• 10% invested in Avantis U.S. Small Cap Value ETF – AVUV
• 16% invested in iShares Core MSCI EAFE IMI Index ETF – XEF
• 6% invested in Avantis International Small Cap Value ETF – AVDV
• 8% invested in iShares Core MSCI Emerging Markets IMI Index ETF – XEC

For U.S. and international investors, the portfolio can, for example, be as follows:

• 30% invested in the U.S. stock market (VTI)
• 45% invested in developed international markets (VEA)
• 10% US small cap value (VIOV/DLS)
• 5% International small-cap (FNDC/ISCV)
• 10% Emerging markets (EEM)

It’s important to note that this is a 100/0 (100% stocks, 0% bonds) version of the portfolio. For investors who desire more bond exposure, the stock holdings can be scaled back accordingly. For example, here’s how an 80/20 allocation would look like for an US or international investor:

• 25% invested in the U.S. stock market (VTI)
• 35% invested in developed international markets (VEA)
• 8% US small cap value (VIOV/ISCV)
• 4% International small-cap (FNDC/DLS)
• 8% Emerging markets (EEM)
• 20% bonds (IEI/TLT, for example)

The goal of this portfolio is to provide investors with globally diversified exposure to the market while also taking into account the factor-based investing approach with the aim of boosting expected returns.

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Model Portfolio

Ben Felix’s model portfolio utilizes a combination of index investing and factor-based investing strategies. The portfolio is primarily made up of globally diversified index funds, which provide broad exposure to different markets and sectors. This diversification helps to minimize risk by spreading investments across a variety of assets.

In addition to index investing, the portfolio also incorporates factor tilts, particularly for size, value, and profitability. This approach involves investing in companies that exhibit certain characteristics, such as being undervalued or having strong profitability, in the belief that these companies will perform better than the market as a whole. By tilting the portfolio towards these factors, the portfolio aims to slightly boost expected returns.

Another strategy used in this portfolio is the use of low-cost ETFs, which allows the portfolio to be managed efficiently, with low expenses and high liquidity. This is why the portfolio is focused on index ETFs.

Finally, the portfolio is regularly rebalanced to ensure that it stays aligned with the desired asset allocation. This helps to ensure that the portfolio remains diversified and that any changes in market conditions do not cause the portfolio to become overly exposed to a particular market or sector.

Overall, Ben Felix’s model portfolio aims to provide investors with diversified and globally diversified exposure to the market while also taking into account the factor-based investing approach with the aim of boosting expected returns. It is a simple yet effective way of investing, with the goal of providing long-term growth and stability.

Review of Ben Felix’s Model Portfolio Performance

Ben Felix’s model portfolio has demonstrated strong performance over time, providing investors with globally diversified exposure to the market while also taking into account the factor-based investing approach with the aim of boosting expected returns.

The portfolio has performed better than the S&P 500 Index, in terms of asset growth and CAGR, according to OptimizedPortfolio.com. A $10,000 invested in the portfolio grew to over $48,800 compared to the $41,900 achieved by the S&P 500 during from year 2000. The portfolio’s CAGR was 8.18% compared to 7.37% of the S&P 500 Index. It has slightly better Sharpe and Sortino ratios. However, it also has a bigger maximum drawdown — 53.43% compared to the 50.97% of the S&P 500.

Overall, Ben Feliex’s Model Portfolio is a simple yet effective way of investing, with the goal of providing long-term growth and stability based on historical returns and allocations. But note that past performance is not an indicator of future performance, so it’s always important to do your own research before making any investment decisions.

Diversification Strategies Employed in Ben Felix’s Model Portfolio

The portfolio is based on the principles of index investing and factor-based investing, and it utilizes a combination of low-cost index funds and ETFs to provide broad exposure to different markets and sectors. Here are the diversification strategies employed in the portfolio:

• Global diversification: The portfolio is diversified across different geographies, providing exposure to different markets and sectors. This helps to minimize risk by spreading investments across different global markets, thereby helping the portfolio weather market downturns and volatility.
• Asset class diversification: The portfolio is diversified across different asset classes, such as stocks and bonds. This helps to minimize risk by spreading investments across a variety of assets and helps the portfolio to weather market downturns and volatility.
• Factor diversification: The portfolio incorporates factor tilts, particularly for size, value, and profitability, which help to identify companies that exhibit certain characteristics, such as being undervalued or having strong profitability, in the belief that these companies will perform better than the market as a whole.
• Regular rebalancing: The portfolio is regularly rebalanced to keep the portfolio aligned with the desired asset allocation over time, this helps to adjust the portfolio to the current market conditions.

The diversification strategies employed in this portfolio are crucial to minimize risk and optimize returns over time. The goal is to provide a well-balanced and diversified portfolio that can withstand market fluctuations and provide long-term growth opportunities.

Risk Management Techniques in Ben Felix’s Model Portfolio

Ben Felix’s model portfolio employs several risk management techniques to help minimize the impact of market fluctuations and to optimize returns over time. Some of these techniques include:

• Diversification: By spreading investments across different geographies, sectors, and asset classes, the portfolio is better able to weather market downturns and volatility. This strategy helps to minimize risk by not putting all the eggs in one basket.
• Rebalancing: The portfolio is regularly rebalanced to keep it aligned with the desired asset allocation over time. This helps to adjust the portfolio to the current market conditions and to ensure that it remains diversified.
• Factor tilts: The portfolio incorporates factor tilts, particularly for size, value, and profitability, which helps to identify companies that exhibit certain characteristics, such as being undervalued or having strong profitability. By incorporating these tilts, the portfolio is able to identify and invest in companies that have the potential to provide higher returns, while also managing the risk by diversifying the portfolio.
• Low-cost index funds and ETFs: By utilizing low-cost index funds and ETFs, the portfolio is able to provide broad exposure to different markets and sectors at a low cost, which helps to minimize the impact of market fluctuations on returns.

Tax Planning Strategies in Ben Felix’s Model Portfolio

Ben Felix’s model portfolio includes various tax planning strategies in order to minimize the tax impact on the portfolio’s returns. Some of these strategies include:

• Tax-loss harvesting: This strategy involves selling losing investments to offset any capital gains that may have been generated in the portfolio. By doing so, the portfolio can reduce its tax bill and increase its after-tax returns.
• Asset location: This strategy involves placing assets with high tax rates in tax-deferred or tax-free accounts and assets with low tax rates in taxable accounts. By doing so, the portfolio can reduce its overall tax liability.
• Rebalancing: Rebalancing the portfolio periodically can trigger capital gains or losses, which can be managed to minimize the tax impact.
• Holding period: The portfolio may hold investments for a certain period of time in order to qualify for long-term capital gains rates, which are generally lower than short-term capital gains rates.
• Charitable giving: The portfolio may donate appreciated assets to charitable organizations, which not only helps the portfolio reduce its tax bill but also supports a cause close to the investor’s heart.

Backtesting Results of Ben Felix’s Model Portfolio

Ben Felix’s model portfolio has been backtested using historical data to determine its performance in the past. From the table and chart we showed above, you could see that the portfolio was profitable and marginally outperformed the S&P 500 Index.

Here are some of the key results from the backtesting:

1. High returns: The portfolio has generated high returns over the historical period, outpacing the broader market indices such as the S&P 500.
2. Low volatility: The portfolio has also exhibited low volatility, very close to that of the S&P 500.
3. Consistency: The portfolio has shown consistent performance over the historical period, which suggests that it is able to generate returns in different market conditions.
4. Robustness: The backtesting results show that the portfolio’s performance remains robust even in different market environments, such as bull markets and bear markets.
5. Factor tilts: Adding factor tilts to the portfolio has helped to enhance the portfolio’s overall performance.

While backtesting results are not a guarantee of future performance, it does provide an indication of how the portfolio has performed in the past, which can be useful information for investors when deciding whether to invest in the portfolio or not.

Advantages of Investing in Ben Felix’s Model Portfolio

Ben Felix’s Model Portfolio has several advantages:

1. Diversification: The portfolio is diversified across geographies and risk factors, which helps to reduce the overall risk of the portfolio.
2. High returns: By incorporating factor tilts, the portfolio aims to identify companies that exhibit certain characteristics, such as being undervalued or having strong profitability. This helps it to achieve higher returns.
3. Low-cost: The portfolio is based on index funds, which typically have lower expense ratios compared to actively managed funds.
4. Simplicity: The portfolio is easy to understand and implement, making it accessible to investors of all experience levels.

Ben Felix portfolio and dividends

Ben Felix has taken a lot of heat on social media for arguing against dividend investing. He’s not against dividends, but he fail to see the benefits of ONLY investing in dividend stocks. We have been arguing the same on this blog for many years. Please read our previous articles on the subject:

• Why You Shouldn’t Buy Dividend Stocks (Dividend Investing Risks)
• How To Make Money On Dividend Stocks (How To Succeed In Dividend Investing)
• Debunking Dividend Investing (Arguments Against Dividend Investing)
• Dividend Investing: The Marginal Rate Of Return/Incremental Return (Incremental Return On Investment)
• What Happens To Dividends In A Bear Market? (Bear Market Dividend Growth Investing)
• How To Start Investing In Dividend Stocks (Including A Dividend Checklist)

Ben Felix Model Portfolio Backtest – Does It Work?

Let’s backtest the Ben Felix Portfolio. The first portfolio we make is for U.S. and international investors. We made the following allocations in different ETFs:

• 30% invested in the U.S. stock market (VTI)
• 45% invested in developed international markets (VEA)
• 10% US small cap value (ISCV)
• 5% International small-cap (DLS)
• 10% Emerging markets (EEM)

This is a 100/0 stock/bond portfolio. Since August 2007 the performance of 100 000 invested and rebalanced daily looks like this (as long as you rebalance at least annually the results don’t differ much):

The portfolio has compounded at 5.2% (including reinvested dividends) which is way behind S&P 500. The underperformance is due to the international stock which have performed poorly during the period. Max drawdown of 56% happened during the financial crisis in 2008/09. That one is hard to stomach, but to be expected in the stock market if you are invested 100% in stocks.

If we change the weightings to include more US stocks it can look like this:

• 50% invested in the U.S. stock market (VTI)
• 25% invested in developed international markets (VEA)
• 10% US small cap value (ISCV)
• 5% International small-cap (DLS)
• 10% Emerging markets (EEM)

With these weightings we get the following equity curve:

The annual returns increase from 5.2 to 6.5%. However, this is using hindsight, and international stocks might outperform in the next 20 years. This is why you want a diversified portfolio!

Let’s test the second version for US and international investors. We use the follow weightings and ETFs:

• 25% invested in the U.S. stock market (VTI)
• 35% invested in developed international markets (VEA)
• 8% US small cap value (ISCV)
• 4% International small-cap (FNDC)
• 8% Emerging markets (EEM)
• 20% bonds (IEI, 3-7 years Treasury Bonds)

The end result is almost identical as the first backtest (5.2% annual returns) but the max drawdown is much lower at 46% because of the 20% weightings to IEI, which is Intermediate Treasury Bonds. We believe it makes sense to have a small bond allocation.

Let’s make the final backtest for today where we construct a portfolio for Canadian investors. We make the following weightings into five different Canadian ETFs:

• 33% invested in iShares Core S&P/TSX Capped Composite ETF – XIC.TO
• 33% invested in Vanguard U.S. Total Market Index ETF – VUN.TO
• 10% invested in iShares U.S. Small Cap Index ETF – XSU.TO
• 16% invested in iShares Core MSCI EAFE IMI Index ETF – XEF.TO
• 8% invested in iShares Core MSCI Emerging Markets IMI Index ETF – XEC.TO

We get the following equity curve (in CAD):

The annul return is 8.7% and max drawdown was 32% (during Covid in March 2020). However, due to missing data, the backtest is only from 2014 until today.

How is the Ben Felix Model Portfolio structured?

Ben Felix’s Model Portfolio is a globally diversified investment strategy developed by Ben Felix and Cameron Passmore of PWL Capital. The portfolio comprises various asset classes, including domestic and international stocks. It is diversified across different sectors, geographies, and market capitalizations, using index funds to achieve this diversification.

What are the key components of Ben Felix’s Model Portfolio?

The portfolio includes ETFs like iShares Core S&P/TSX Capped Composite, Vanguard U.S. Total Market, Avantis U.S. Small Cap Value, iShares Core MSCI EAFE IMI, Avantis International Small Cap Value, and iShares Core MSCI Emerging Markets IMI.

How does the Ben Felix Model portfolio manage risk?

Risk management techniques include diversification, regular rebalancing, factor tilts, and the use of low-cost index funds and ETFs. These strategies aim to minimize the impact of market fluctuations. Historical backtesting shows that the portfolio has generated high returns.