How Our “Three Generations” Portfolios Stacked Up

BY KEITH KAPLAN
CEO, TRADESMITH

There’s no one-size-fits-all wealth building plan.

Everyone has different needs depending on what stage they are in life… different goals and priorities… and an endless number of other factors that are unique to everyone.

Just consider these three scenarios:

You may be reading this as a 22-year-old who has triumphantly grabbed their diploma and have four or five figures to your name, if you’re lucky. You’re working, but you want to make sure that money grows as fast as your career (or debt) and ideally faster.
You might be 40 years old, parent to a troublemaking teenager with a big heart and even bigger ambitions. College is right around the corner, and you want to help them avoid being saddled with tens of thousands in debt… but you can’t take on too much risk, either.
Or maybe you’re well into your 60s. You’re retired, you’re on Social Security, and you have some assets… but you’re finding that you might soon have to downsize your home or your lifestyle to keep your head comfortably above water. You need a way to increase your income, and nothing risky is on the table.

I wouldn’t dare to say each of these people should invest the same way. The risk tolerance and methods each should use are completely different.

Normally, creating an investing plan for your specific needs takes a lot of time and energy. Both those things are in short supply no matter where you are in life. Not to mention the knowledge to do this effectively.

That’s why we at TradeSmith create software to help anyone take all that work and condense it into a minutes-long process.

And with my absolute favorite piece of software, Pure Quant, I can create an investment plan for any need with just a few clicks.

Pure Quant uses our proprietary algorithms to create a personalized mix of assets that you can buy with a set amount of starting capital, right down to showing how much you should buy of each.

You can weigh it toward riskier assets, lower-risk assets, dividend payers, and a whole lot more.

Dedicated readers might find this article familiar. That’s because we originally posted it on July 26, 2024.

Using the Pure Quant software, I designed a quick model portfolio for each of the scenarios above, and I explained how and why I constructed them that way.

Today, I’ll provide a quick update on how each portfolio has performed since then. As you’ll see, Pure Quant did exactly what it needed to do under each circumstance…

Three Generations of Wealth Planned With Pure Quant

Stock Portfolio for an Investor in Their 20s

When we built our portfolio for the 22-year-old, we made a few assumptions.

First, perhaps optimistically, we assumed they have $10,000 to invest. Maybe from a graduation present. That’s the first question you need to answer when you use Pure Quant – how much to invest – because our algorithm automatically distributes that cash into fractional shares of each holding.

The next is risk tolerance. That one’s easy: a 22-year-old has the most risk tolerance they’ll ever have because time is on their side. This is the period to make mistakes and shrug off a few losers.

These are also the best long-term compounding years of life. Consistently buying a group of great stocks at this time almost always pays off massively down the line.

Now, while you should be tolerant of some risk at this stage, you also don’t want to lose EVERYTHING if the market turns on you. You shouldn’t be all-in on risk. You want a mix of high-growth assets and some more stable, dividend-paying assets you can rely on, so compounding can work its magic.

So, with our guidelines in place, let’s go over to TradeSmith. I used Pure Quant to create this model stock portfolio for our 22-year-old:

This is a mix of stocks in the S&P 500 and Nasdaq 100. This mix gives you a good chunk of exposure to high-growth tech that’s balanced with stocks in the energy, industrial, and consumer discretionary sectors.

All of the stocks recently entered the Green Zone – our proprietary measure of positive momentum. This is a key thing. You want to buy stocks with a recent breakout from a downtrend, as it’s a powerful omen for continued upside.

Now, a bit of nitty gritty:

Very importantly, all the stocks above and in the following lists have at least 5 million in daily trading volume worth at least $10,000,000, making them liquid enough to trade should you want to. If you screen for stocks with smaller volume than this, you’ll occasionally start to see some unknown and thinly traded names pop up.
The Average Volatility Quotient (AVQ) of all these names is between 30% and 70% – a decent middle ground. There’s enough volatility that the stocks have a better chance of beating the market… but aren’t so volatile that they’re likely to turn on a dime at any given moment.

This is the kind of portfolio I’d recommend to a younger person. It has an appetite for risk, but it’s well diversified to help mitigate those risks. It’s not so conservative that the stocks don’t move. And each position has the appropriate exposure for the inherent risk at hand.

With $10,000, a younger person can start with a portfolio like this and enjoy the best compounding years they’ll have.

Now, how did it perform? Quite well, but not without some bumps.

We tracked this same portfolio from July 26, 2024, the day we designed the portfolio, to today. That’s the green line below compared to the S&P 500 (purple line). As you can see, it had some fits and starts:

Our Pure Quant 22-year-old’s portfolio dropped in August and September of 2024, with some underperformance in the back half of the year. In the Liberation Day crash, the portfolio underperformed stocks and was at one point down 20% from the start date.

But look to today. The portfolio, powered by strong performance in eBay (EBAY), Corning (GLW), Newmont (NEM), and Nvidia (NVDA) has returned 27.6% against the S&P 500’s 18%.

Now, let’s move on to our next generation of wealth…

Stock Portfolio for an Investor in Their 40s

For this, we made a few key changes. We have more responsibilities and different goals in our middle age, so we should tolerate less risk.

We kept the volume numbers the same but changed the range for the Average VQ to between 30% and 50% (instead of 70%), giving an overall less risky mix of assets. We swapped out the volatile Nasdaq 100 stocks for the S&P 400 mid-cap index, which contains only profitable companies. And of course, you probably have a bit more money to invest in your 40s – so we allocated $50,000.

Here’s what we got:

You can see some differences between this portfolio and the above. It’s still well diversified, but we’re looking at larger-cap stocks with lower overall volatility. It’s an appropriate level of risk for someone at that age.

This portfolio wound up performing just a hair better than the 22-year-old portfolio. It’s up 27.9%, which again is the green line below:

It should be noted that U.S. Steel (X) was acquired by Nippon Steel at a price of $55 per share since this portfolio began – representing a gain of about 59%.

Finally, let’s get to the retiree…

Stock Portfolio for an Investor in Their Late 60s

Here’s where things really changed.

When we designed this portfolio we needed to do two things. We needed to be much more risk-averse and we needed to optimize for income.

So we chose dividend payers and growers with low overall volatility.

First, we took the Average VQ down to less than 40%. Then, we selected our Green Profitable Dividend Growers screener, which finds profitable companies that are growing their dividends and trading with positive momentum.

We searched for U.S. stocks in the S&P 500 and Dow Jones Industrial Average and assumed we have $100,000 to invest.

All of the companies above pay and grow their dividends over time, which is a fantastic quality to target for investments in retirement. They’ve also all recently entered the Green Zone – which makes it a good time to buy.

Here, we can’t say that the portfolio has beaten the market. It’s up about 15.8% (green line below) against the S&P 500’s 18% (purple line). But it did something important that retirement-style portfolios should do. During the Liberation Day crash in April, this portfolio lost less than the market:

The peak April drawdown was -5.7% against the S&P 500’s drop of almost -9% from our start date.

That’s significant. The portfolio largely matched market returns while being half as volatile. If you’re in retirement, you want that kind of stability.

It also collected quite a bit of dividends. The portfolio performance above reflects the average per-share return while accounting for dividends. If dividends were excluded, the average gain would be just 11.8%.

This retirement portfolio may not have beaten the market like the other two, but it did achieve a core goal of a retirement portfolio… It saw smaller drawdowns plus brought in supplemental income to increase performance. So, it shows us that tuning Pure Quant to be less risky (but still grow) was a success.

Navigating Your Financial Journey

No matter where you are in life, investing is tricky. I’ve devoted my life to making it a bit easier for people with TradeSmith and our software tools.

In a perfect world, what we create with portfolios like the Pure Quant examples I’ve shown you here today will prove to be better than an expensive financial advisor who will give the same cookie-cutter advice to anyone.

Of course, we can’t account for every situation today. But I hope what we have done gives you a guiding light for the kind of stocks you should be looking for at whatever stage in your wealth journey you happen to be in. We’ll stay in touch here at TradeSmith Daily with more insights and ideas for you along the way.

How Our “Three Generations” Portfolios Stacked Up