Muscular InvestingStockCharts.comExpert market commentary from StockCharts.comtag:stockcharts.com,2019-07-16:blog-512024-01-22T23:25:31ZVanguard Finds a Few Equity Managers Who Soar, But There's a CatchBrian Livingstontag:stockcharts.com,2019-08-14:post-178152020-01-06T07:01:39Z2019-08-14T09:00:02Z<blockquote><strong>In a study, the Vanguard Group discovered a tiny minority of mutual-fund money managers who outperformed their benchmarks over a recent 15-year period. Unfortunately for investors, following one of those managers would have meant an agonizing wait.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/08/1d6a7c41-0cfd-4a72-976b-77d3a8b84a2c.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> Vanguard executives, including founder Jack Bogle (center), at a building dedication. Undated photo by Vanguard History Center.</p><p class="subnote" style="color:black; background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• WEST COAST — Brian Livingston will give two seminars in California on Sept. 14 and 15, 2019. See the </em></strong><a href="https://bri.li/190814a" target="_blank"><strong><em>event page</em></strong></a><strong><em> for details. Seminars on the East Coast will be announced soon.</em></strong></p><p class="subnote">• Part 2 of a series. Part 1 appeared on Aug. <a href="https://bri.li/190814b" target="_blank">13</a>, 2019. •</p><p>In Part 1 of this series, we saw that great investors like Warren Buffett <strong>significantly underperform</strong> the S&P 500 during bull markets. The best investing strategies only generate market-beating returns by keeping their <strong>losses small during bear markets.</strong> The result is outperformance over <strong>complete bear-bull market cycles</strong> (often called the <em>primary cycle</em>). That kind of superior strategy is exactly what long-term investors want, as explained in my <a href="https://bri.li/190814c" target="_blank">one-page summary</a> elsewhere at StockCharts.</p><p>Hey, wait, that's counter-intuitive! Don't the winning strategies outperform <strong>all the time?</strong></p><p>Not at all! We learned in the previous installment about a 34-year analysis by Mark Hulbert, founder of the Hulbert Financial Digest. His study proved that <strong>all</strong> of the very few investment newsletters that beat the S&P 500 from 1980 through 2014 "lagged behind the S&P 500 in more than <strong>half</strong> of the five-year periods since 1980."</p><p>That's pretty convincing evidence that a market-beating strategy <strong>must</strong> deviate a great deal from the S&P 500. That translates as <strong>underperforming</strong> the benchmark for years at a time before <strong>surpassing</strong> the index at the end of each primary cycle.</p><p>However, Hulbert's study (by necessity) included only three dozen investment newsletters — the ones that actually had a 34-year track record. Fortunately, the study was replicated when the Vanguard Group, the giant fund provider, analyzed a <strong>much larger base</strong> of investment managers.</p><p>Vanguard's researchers examined all <strong>1,540 actively managed US equity mutual funds</strong> that were active on Jan. 1, 1998. The study scrutinized the fund managers' performances for the following 15 years (through the end of 2012).</p><p>You've probably heard that very few active traders surpass the S&P 500, but Vanguard's specific findings drive that fact home:</p><ul><li>Out of the 1,540 active equity funds, <strong>the vast majority (1,265 or more than 82%) underperformed their benchmarks.</strong> The funds' performances were compared against each manager's own chosen benchmark, such as large-cap growth, small-cap value, and so forth.</li><li>More than 45% of the 1,540 managers performed so badly that <strong>their funds were shut down</strong> before the end of the study period.</li><li>Only 275 (fewer than 18%) of the managers both <strong>kept their funds afloat</strong> and <strong>outperformed their benchmarks.</strong></li></ul><p>As if all of the above weren't bad enough, the horrible truth about that mere 18% of successful equity funds is shown below in Figure 2.</p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/08/4a9dfe76-db73-4823-b012-98c43a3f7270.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> Of the very few equity funds (18%) that outperformed their benchmark over a period of 15 years, 97% of them underperformed for at least 5 of the 15 years. The vast majority of the outperforming funds actually lagged for 6 or more of the 15 years. Source: Vanguard calculations using data from Morningstar.</p><p>Outperforming a benchmark came with a headache big enough to extinguish most individual investors' patience. Virtually every outperforming manager actually underperformed his or her benchmark in at least 5 of the 15 years that Vanguard studied. Even worse, 90% of the successful managers underperformed for 6 or more years.</p><p>Of the exceedingly few successful funds that <strong>didn't</strong> lag for 5 or more years, almost all underperformed for 4 of the 15 years. There <strong>wasn't a single fund</strong> that lagged its benchmark for just one or two years.</p><p>Most investors won't stick with a strategy for more than a few years if it underperforms its benchmark. You may think individual investors are too skittish. But 100% of highly compensated pension professionals display the same behavior. They dump outside money managers who underperform for a mere 1, 2, or 3 years, as I showed in a series of StockCharts articles beginning on <a href="https://bri.li/190814d" target="_blank">April 9, 2019</a>.</p><p>As a result of this focus on irrelevant, short-term performance statistics, investors jump from one strategy that frustrates them to another strategy that frustrates them, again and again. I call this behavior "investors' remorse."</p><p>In essence, any new strategy that you start following with serious money will disappoint you for the first two years or so. Why? Because you selected the strategy due to its good performance in the last few years! A strategy's hot streaks alternate with its cold streaks.</p><p><strong>There's no investing strategy for mere mortals</strong> that reliably gains 10% more than the S&P 500 in the up months <strong>and</strong> loses 10% less then the S&P 500 in the down months. That's a fantasy. Anyone who may have stumbled upon such a miraculous method is surely keeping it to themselves.</p><p>If you want better long-term performance than the S&P 500, you must accept that <strong>every</strong> strategy delivering long-term success will lag the benchmark for years at a time.</p><p>How do we prevent ourselves from the performance-wrecking behavior of leaping from one strategy to another, based on short-term results of less than 15 years?</p><p>I really like so-called Muscular Portfolios for this very reason. Each of the Muscular Portfolios that I've found in my research <strong>underperforms</strong> the S&P 500 during <strong>every bull market.</strong> Paradoxically, this realization frees you from the worry that your portfolio is "not working."</p><p>Exactly like Warren Buffett's wildly outperforming Berkshire Hathaway portfolio, a Muscular Portfolio gently shadows the S&P 500, gaining about two-thirds as much as the index during bull markets. Your portfolio gets even with a vengeance during every bear market. This produces better results for you, because your life savings don't crash 30%, 40%, or 50% like the popular index.</p><p>Since a Muscular Portfolio always rotates into the strongest assets when equities go south, your funds can even <strong>go up</strong> when the stock market is <strong>going down.</strong> I demonstrated this with actual money in my StockCharts column on <a href="https://bri.li/190814e" target="_blank">Aug. 8, 2019</a>.</p><p>To repeat something I've said many times, if you have a day-trading strategy that works perfectly, go nuts! But if you want market-beating returns — and you have enough patience to measure your gains only over complete primary cycles, as Buffett does — simple asset-rotation strategies have strong performance, suffer only small losses, and are highly recommended.</p><p>The Vanguard study of 1,540 active equity funds is titled "The Bumpy Road to Outperformance" and is an 8-page <a href="https://bri.li/190814f" target="_blank">PDF download</a>.</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>NOTICE: As of today, this column is beginning a temporary hiatus. To continue receiving my articles, subscribe now to the free </em></strong><a href="https://bri.li190814g" target="_blank"><strong><em>Muscular Portfolios Newsletter</em></strong></a><strong><em>.</em></strong></p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>In a study, the Vanguard Group discovered a tiny minority of mutual-fund money managers who outperformed their benchmarks over a recent 15-year period. Unfortunately for investors, following one of those managers would have meant an agonizing wait.Figure 1. Vanguard executives, including founder Jack Bogle (center), at a building dedication. Undated photo by Vanguard History Center.• WEST COAST — Brian Livingston will give two seminars in California on Sept. 14 and 15, 2019. See the event page for details. Seminars on the East Coast will be announced soon.• Part 2 of a series. Part 1...The Best Strategies Lag the S&P 500 for 5+ YearsBrian Livingstontag:stockcharts.com,2019-08-13:post-178102020-01-06T07:01:39Z2019-08-13T09:00:02Z<blockquote><strong>As investors, we constantly hear, "Beat the market! Beat the market!" But trying to beat the market every month or year is not the way to win the race. • The most successful investment strategies actually TRAIL the S&P 500 for five years or longer.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/08/0dde87ce-28f2-4924-96e0-764c5c88a6bd.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> It isn't the runner who dashes ahead at the beginning of a track meet who is necessarily the winner in the last lap. Similarly, lagging the S&P 500 for long periods during bull markets is a trait of the best investing formulas. Photo: 2017 Youth Indoor Championships, Istanbul, Turkey, by Evren Kalinbacak/Shutterstock.</p><p class="subnote" style="color:black; background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• WEST COAST — Brian Livingston will give two seminars in California on Sept. 14 and 15, 2019. See the </em></strong><a href="https://bri.li/190813a" target="_blank"><strong><em>event page</em></strong></a><strong><em> for details. Seminars on the East Coast will be announced soon. •</em></strong></p><p>As regular readers of this column know, I'm an advocate of long-term investing. If you have a day trading strategy that works for you in the short-term, great! But tens of millions of account holders of 401(k) plans and other tax-deferred savings programs can change their positions no more than once or twice a month, as described in my <a href="https://bri.li/190813mm" target="_blank">one-page summary</a> of <em>Muscular Portfolios.</em></p><p>For these and many other investors, finding a strategy that requires few changes — while still providing great returns over the long term — is of paramount importance.</p><p>It's just a reality that any long-term investing strategy is going to underperform the S&P 500 for certain periods. What many investors don't realize is that this lagging behavior is <strong>not a weakness.</strong> In fact, it's a <strong>strength</strong> of the best investing strategies experts have been able to find, going back decades.</p><p>A good example is Warren Buffett. The shares of his Berkshire Hathaway portfolio have put the S&P 500 to shame.</p><p>Figure 2 shows the 15¼ years that began on Mar. 24, 2000. This period includes two bear markets — the dot-com crash and the global financial crisis — and the two bull markets that followed.</p><p>Over these two bear-bull market cycles, Berkshire Hathaway (symbols: BRK.A and BRK.B) gained <strong>169%</strong> while the S&P 500 gained only <strong>28%.</strong> That translates as a <strong>6.7%</strong> real annualized rate of growth for BRK.A vs. <strong>1.6%</strong> for VFINX, Vanguard's low-cost index fund that tracks the S&P 500. (These numbers are adjusted for dividends, inflation, and the minuscule fees of holding VFINX. BRK charges no fees.)</p><p>Buffett has truly earned his recognition as one of the best investors of our time. What most people don't know, unfortunately, is that even the great Warren Buffett underperforms the S&P 500 <strong>for longer periods than he outperforms it!</strong></p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/08/f1876155-1a0f-4796-a76f-421d878d0391.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> Buffett gained only 56% in the 2002–2007 bull market and 150% in the seven years after the global financial crisis. The S&P 500 beat him, gaining 90% and 208%, respectively. Buffett's enormous outperformance over the long term was due entirely to his portfolio's losses being much smaller than the S&P 500's in the two bear markets. Source: <em>Muscular Portfolios.</em></p><p>Figure 2 shows that Buffett's portfolio has seriously lagged the S&P 500 during <strong>both</strong> of the two most recent bull markets. Buffett (the blue line) gained only <strong>56%</strong> and <strong>150%,</strong> while the S&P 500 in the same periods gained <strong>90%</strong> and <strong>208%.</strong></p><p>What accounts for Buffett's huge win in the long run, then? After all, his BRK portfolio delivered more than <strong>four times the annualized gain</strong> of the S&P 500 (<strong>6.7%</strong> vs. <strong>1.6%</strong>) in the 15¼-year period shown in Figure 2.</p><p>The entire outperformance came from Buffett's losses being smaller than the S&P 500's during bear markets. In the global financial crisis, the S&P 500 lost <strong>56%,</strong> but Buffett lost only <strong>41%.</strong> Even better, in the dot-com crash, while the S&P 500 lost <strong>50%,</strong> Buffett's portfolio actually eked out a gain of <strong>17%.</strong> (These numbers are adjusted for dividends, inflation, and the expense ratio of VFINX.)</p><p>No, Buffett's crushing of the S&P 500 over the entire period was <strong>not</strong> due to his small gain during the dot-com crash. His total portfolio rise of 169% <strong>also</strong> required his restrained loss in the global financial crisis, <strong>plus</strong> respectable gains during the two subsequent bull markets.</p><p>While those periods were, in fact, healthy growth for Buffett, his portfolio rose only about <strong>two-thirds as fast</strong> as the S&P 500 during those two bull markets. Investors who were brainwashed into thinking they must "beat the S&P 500 every month and every year" would have been likely to sell BRK, just before they could have benefitted from its superior performance during bear markets.</p><p>Lagging the benchmark for years is a trait of all the best investing newsletters, according to Mark Hulbert. He was the founder of the Hulbert Financial Digest, which ranked investment strategies from 1980 through 2016.</p><p>Hulbert reported in 2014 that he had tracked 36 newsletters since the beginning of his monitoring in 1980. Two-thirds of the services ceased publication along the way, mainly because of poor performance. Of the survivors, only three strategies outperformed the S&P 500, including dividends.</p><p>Did they beat the S&P 500 every month or even every year? No, far from it!</p><p>Dividing his 34-year study period into every possible five-year stretch, Hulbert reported that "each of the three winners lagged behind the S&P 500 in <strong>more than half of the five-year periods</strong> since 1980." [emphasis added]</p><p>It's "the rare investor," Hulbert <a href="https://bri.li/190813b" target="_blank">wrote</a>, "who is willing to stick with a strategy after five years of market-lagging performance." Even when great strategies are proven over the long term, people abandon them because they don't track the S&P 500. But to beat the benchmark, you have to <strong>do something different</strong> than the benchmark. That translates as underperformance much of the time.</p><p>The Vanguard Group conducted a study similar to Hulbert's, but covering a much larger set of strategies. It analyzed the performances of more than 1,500 funds. The results — and how we investors can profit from these findings — will be in the second and final part of this series.</p><p class="subnote">• Part 2 appears on Aug. <a href="https://bri.li/190813c" target="_blank">14</a>, 2019.</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus on Aug. 16, 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190718k" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>As investors, we constantly hear, "Beat the market! Beat the market!" But trying to beat the market every month or year is not the way to win the race. • The most successful investment strategies actually TRAIL the S&P 500 for five years or longer.Figure 1. It isn't the runner who dashes ahead at the beginning of a track meet who is necessarily the winner in the last lap. Similarly, lagging the S&P 500 for long periods during bull markets is a trait of the best investing formulas. Photo: 2017 Youth Indoor Championships, Istanbul, Turkey, by Evren Kalinbacak/Shutterstock.• WEST...Asset Rotation Protects You Against Losses, Easily and SimplyBrian Livingstontag:stockcharts.com,2019-08-08:post-177862020-01-06T07:01:37Z2019-08-08T10:20:02Z<blockquote><strong>During periods of market shocks, your money should be in something other than equities. But exactly what, without using your emotions or market timing? • With 21st-century tools, we can now use low-cost index funds to make a safe port in any storm.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/08/f2345e50-da35-4cf3-8cef-52c419955b36.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> A simple rule to allocate your money in any market conditions can be a lifesaver for your life savings. Photo by Eric Baker/Shutterstock.</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus on Aug. 16, 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190808a" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p><p class="subnote">• Part 3 of a series. Parts 1 and 2 appeared on Aug. <a href="https://bri.li/190808b" target="_blank">1</a> and <a href="https://bri.li/190808c" target="_blank">6</a>, 2019. •</p><p>In Parts 1 and 2 of this series, we saw that "wild" days — times when the S&P 500 either rose or fell more than 3% in a single session — usually indicate that equities are in a correction or a bear market, or will be relatively soon. Erratic moves greater than 3% up or down almost never occur during long bull-market rallies.</p><p>The good news is that individual investors don't need to worry about whether a wild day signifies that you should hold on tight, panic, or something in between. You don't have to make a seat-of-the-pants decision or attempt market timing. Today's low-cost exchange-traded funds make it simple for investors to gradually tilt their portfolios <strong>into</strong> asset classes that are going up and <strong>out of</strong> assets that are going sideways or down.</p><p>This simple allocation method is known as <strong>asset rotation.</strong> Inexpensive index funds and brokerage firms with tiny trading commissions (or even commission-free ETFs) have taken over. This finally makes it cost-effective for investors to change their positions once in a while as market conditions dictate. (It's hard to remember now, but back in the 1970s and 1980s, mutual funds commonly charged a "front-end load" of 5% or more. Selling one stock and buying another typically cost you as much as 2% of your capital. Almost any transaction, therefore, subjected you to a severe haircut. By comparison, we're enjoying today an investing paradise with ultralow trading expenses.)</p><p>What's wrong with market timing? Nothing, if you have an ironclad formula that guarantees you'll switch out of equities on the right date and switch back in on the perfect date in the future. (Market timing means switching between 100% equities and 100% cash, based on an indicator.)</p><p>Unfortunately, it's difficult if not impossible to prove that such a system will protect your wealth when you need a safe harbor, even if it worked in the past. Mark Hulbert, founder of the Hulbert Financial Digest, studied the record of 81 market timers from 2000 through 2014. Of the 11 gurus who did the best in the 2000–2002 dot-com bear market, Hulbert <a href="about:blank" target="_blank">said</a>, "These market timers have lost so much since then that, on average, they are in the red over the entire period since March 2000, having chalked up a 0.8% annualized loss." In the same period, the Wilshire 5000, which indexes the entire US market, gained 4.2% annualized. (All numbers include dividends.)</p><p>Asset rotation doesn't require market timing. Instead, the strategy gradually fine-tunes your portfolio. An objective, mechanical, asset-rotation formula occasionally instructs you to sell one ETF that's no longer a top performer and buy a different ETF that is demonstrating greater relative strength (also known as <em>momentum</em>).</p><p>In Parts <a href="https://bri.li/190808b" target="_blank">1</a> and <a href="https://bri.li/190808c" target="_blank">2</a> of this series, we saw graphs correlating the US market's performance in the years 1997 through 2014 with that period's wild days. Since then, from 2015 through the present day, we've enjoyed one of the longest, sustained bull markets in history. These years have seen relatively few wild days — but investors now have good reason to be fearful once again.</p><p>There were only three wild days in 2015, just one in 2016, and none at all in 2017. However, there have been <strong>six wild days in just the past 10 months.</strong> Five of them were giant up or down moves during the interest-rate-hike tantrum/correction of October and December 2018 and the relief rally that finally took hold in January 2019. But the greatest concern for investors today is the most recent wildness. Just three days ago, as I write this, the S&P 500 plunged 3% on Aug. 5, 2019.</p><p>How can we protect our life savings against the painful correction or agonizing bear market that's likely to come?</p><p>As you may know, I've been working on a career project I call "Goldilocks investing." This is an effort to identify investing strategies that are not too risky, not too tame, but have great gains. Specifically, these strategies must have <strong>market-like returns</strong> over complete bear-bull market cycles but <strong>never lose more than 20% or 25%</strong> when measured between any two month-ends, even when the S&P 500 is crashing 40%, 50%, or more.</p><p>Two such Goldilocks-type strategies, as I describe in my <a href="https://bri.li/190808mm" target="_blank">one-page summary</a> of Muscular Portfolios, are called the Mama Bear Portfolio and the Papa Bear Portfolio. You might ask, "How are these two portfolios handling the market's craziness in the past few months, battered as we are by the current US-China trade war, economic slowdown fears, and an earnings recession?"</p><p>Remarkably, these two muscular-investing strategies actually <strong>went up</strong> when the S&P 500 <strong>collapsed 6%</strong> in just six market days, from the July 26 close to the Aug. 5 close. </p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/08/e3ec979c-7fbd-4c40-9086-3751a7013b24.jpg" style="width: 642px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> Typical of successful long-term investing strategies, the Mama Bear Portfolio <em>underperforms</em> the S&P 500 when the market is up, but <em>outperforms</em> it when the market is down or sideways. This combination leads to market-beating returns over complete bear-bull market cycles. For example, the Mama Bear is <strong>up</strong> in the past three months, whereas the S&P 500 is <strong>down.</strong> Source: FolioInvesting.com.</p><p>Figure 2 shows the real-money performance of the Mama Bear Portfolio during the past three months of gut-wrenching market action. The S&P 500, including dividends, is <strong>down 1.65%,</strong> while the Mama Bear is <strong>up 3.53%.</strong></p><p>The numbers and the graph are provided by FolioInvesting.com. I maintain real-money trading accounts at Folio in order to provide a track record of each strategy's performance. The Papa Bear Portfolio achieved almost the same results, being up 1.01% during the period, compared with 3.53% by the Mama Bear. (I publish monthly gains and losses for the strategies, updated in January each year, on the Muscular Portfolios <a href="https://bri.li/190808e" target="_blank">data page</a>.)</p><p>Muscular Portfolios display some of the same behaviors as the Berkshire Hathaway portfolio that's managed by world-famous investor Warren Buffett (as I've <a href="https://bri.li/190808f" target="_blank">documented</a>). Namely:</p><ul><li>Both kinds of portfolios, whether muscular or Buffett, <strong>underperform</strong> the S&P 500 during bull markets, when the index is often one of the strongest asset classes out there.</li><li>Both kinds of portfolios <strong>keep their losses small</strong> during corrections and bear markets.</li><li>The resulting effect is that <strong>the portfolios surpass the S&P 500</strong> over complete bear-bull market cycles — in other words, in the long-term, which might better be described as "the rest of your life."</li></ul><p>How can a portfolio go up when the S&P is collapsing, while not betting its owner's wealth on all-or-nothing market timing?</p><p>The answer is provided in the colorful Asset Allocation bars at the bottom of Figure 2. For users of Muscular Portfolios who checked the website and were making any recommended changes on the last trading day of the month, the following tune-ups occurred:</p><ul><li><strong>Beginning at the close on Apr. 30,</strong> users of the Mama Bear Portfolio were two-thirds invested in equities (equally divided between US large-cap stocks and emerging-market stocks) and one-third invested in US REITs (real-estate investment trusts).</li><li><strong>On May 31,</strong> users sold their emerging-market ETF. They deployed the cash into VGLT (long-term Treasury bonds). Two months prior to the July 26–Aug. 5 slaughter, therefore, the Mama Bear was already two-thirds out of equities and into more-stable real estate and bonds.</li><li><strong>On July 31,</strong> followers sold their remaining one-third position in US equities, and used the cash to purchase a physical-gold ETF (IAU). That meant 100% of the portfolio was in hard assets (also known as <em>alternatives</em>) and fixed-income securities — nothing in equities.</li></ul><p>Think back. On July 26, when the S&P 500 hit a new all-time high, who was telling you to get out of equities and move into safer assets that would continue going up when the index plummeted? Almost no one. That's the beauty of a mechanical formula. It doesn't care how euphoric most people might be about the market. The strategy simply tells you when other asset classes around the world are doing better.</p><p>Notice that the Mama Bear required only <strong>two position changes</strong> during a period of three months. This kind of gradual shifting from weaker ETFs to stronger ETFs is a feature of the best asset-rotation strategies. For one thing, monthly check-ups fit within the restrictions that face millions of owners of 401(k) plans and other tax-deferred accounts. These investors are usually prohibited from making trades more than once or twice a month — and even then, they may be able to purchase only index funds within the plans, not individual stocks.</p><p>If you choose to follow an asset-rotation strategy, no one requires you to reallocate it on the last trading day of the month. You can choose any day of the month you like — perhaps your payday, your birthday, or any recurring interval that you'll easily remember.</p><p>The only caveat is that the financial expert who first documented what Goldilocks investing calls the Mama Bear — Steve LeCompte of the CXO Advisory Group — studied the results of executing the tune-up on each different day of the month over a 12-year period. The gains were slightly higher and drawdowns smaller if the changes were made in the first two or the last seven trading days of each month. (The differences might be influenced by chance, however — the most important rule is simply that you remember to make the changes every 30 days, whatever day of the month you select as your reminder.)</p><p>Anyone can see the rankings of which ETFs are currently the strongest — with a fully disclosed formula that's absolutely free of charge — on the <a href="https://bri.li/190808g" target="_blank">Mama Bear</a> and <a href="https://bri.li/190808h" target="_blank">Papa Bear</a> pages. </p><p>Of course, the rankings don't change only on the last trading day of each month. The website recalculates the rankings every 10 minutes during market hours. Just to be clear here, be aware that the rankings sometimes don't change for weeks at a time. (This is long-term investing, not day trading.) Even so, a small calendar widget at the bottom of the rankings table allows you to see how each ETF ranked at the close of every market day going back about three months.</p><p>For instance, The Mama Bear sold emerging-market equities and began recommending long-term Treasurys as early as May 2, not May 31. Similarly, the rankings dropped US large-caps and recommended gold as early as July 17, not July 31.</p><p>The exact dates of the changes don't matter at all. Both of these portfolio tune-ups occurred far enough in advance that the Mama Bear Portfolio actually rose from June 30 through Aug. 6 — not cave in, as the S&P 500 did. (The Papa Bear also rose during that period.)</p><p>Don't trade more often than once a month, even though the rankings are constantly updated. Trading once a day or once a week, for example, would negate the effect of long-term momentum and eat up your savings through commisions and trading frictions, such as <a href="https://bri.li/190808i" target="_blank">bid-ask spreads</a>.</p><p>Fortunately for us, the advantages of long-term asset-rotation investing strategies are not likely to be eliminated due to overuse by an eager public. Most people are simply not patient enough to lag the S&P 500 during a long bull market, as Buffett does, even though their portfolios would pull ahead of the index by the end of the subsequent bear market. Human nature doesn't permit most investors to exhibit that kind of fortitude.</p><p>Therefore, most people will never adopt asset rotation — they'll jump instead from one disappointing strategy to another every couple of years — but that means <strong>you can use asset rotation for as long as you like.</strong></p><p>Good investing!</p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>During periods of market shocks, your money should be in something other than equities. But exactly what, without using your emotions or market timing? • With 21st-century tools, we can now use low-cost index funds to make a safe port in any storm.Figure 1. A simple rule to allocate your money in any market conditions can be a lifesaver for your life savings. Photo by Eric Baker/Shutterstock.• NOTICE: This column will begin a temporary hiatus on Aug. 16, 2019. To continue receiving my articles, subscribe now to the free Muscular Portfolios Newsletter.• Part 3 of a series. Parts 1 and 2...How Volatility Clustering Exposes Bull and Bear MarketsBrian Livingstontag:stockcharts.com,2019-08-06:post-177672020-01-06T07:01:36Z2019-08-06T09:00:03Z<blockquote><strong>When the market has ‘wild days' — ups and downs of more than 3% in a single session — it isn't good. Wild days are associated with market downtrends. • Obsolete financial formulas assumed investments carried risks that were stable from year to year. Two Nobel laureates proved that risk changes over time. ‘Volatility clusters' give us an insight into corrections and bear markets.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/08/35bf45ae-c839-49e9-aced-bc65db52b49a.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> Robert Engel III (left) and Clive Granger won the Nobel Prize in Economics in 2003 for their formulas that predict when market volatility will be followed by more volatility. Photo by Hans Mehlin. Copyright by the Nobel Foundation.</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus on Aug. 16, 2019. To continue receiving my articles, subscribe now to the free </em></strong><a href="https://bri.li/190806a" target="_blank"><strong><em>Muscular Portfolios Newsletter</em></strong></a><strong><em>.</em></strong></p><p class="subnote">• Part 2 of a series. Part 1 appeared on Aug. <a href="https://bri.li/190806b" target="_blank">1</a>, 2019. •</p><p>In Part 1 of this series, we saw that a French-speaking genius named Benoit Mandelbrot discovered fractal mathematics and demonstrated that stock-market volatility tends to "cluster" in predictable waves.</p><p>Mandelbrot passed away in 2010. He never won the Nobel Prize in Economics, which is not granted posthumously (a policy some consider to be a failing).</p><p>The Nobel laureates who <em>were</em> honored for predicting volatility clusters were Robert Engel III, an American statistician at New York University, and Clive Granger, a British econometrician who taught at the University of California, San Diego, among other institutions.</p><p>Engel and Granger's insight was that stock prices have periods of low volatility that can change unexpectedly to high volatility. Previously, economists had assumed that market volatility was fairly constant.</p><p>The two researchers developed formulas to project when high volatility would lead to additional high volatility. This trait of markets is modeled in software called ARCH (<em>autoregressive conditional heteroskedasticity</em>). A later extension is known as GARCH (Generalized ARCH).</p><p>Why is this important enough to win a Nobel Prize? Because periods of high volatility — for example, when the S&P 500 goes up or down more than 3% in a single day — are not neutral indicators. These "wild days" tend to mark corrections and bear markets. Solid bull markets, when no correction is near, tend not to have any wild days at all.</p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/08/89c949dd-cd12-4f6e-97e3-42af44a25976.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> "Wild" days tend to occur only during corrections and bear markets, or shortly before or after. They are not neutral — a wild day does not "take the pressure off the market." Quite the opposite. Wild days tend to signal that more wild days are yet to come, making a bear market even worse, as in 2007–2009.</p><p>In <a href="https://bri.li/190806b" target="_blank">Part 1</a> of this series, we examined a graph of the S&P 500 (represented by the SPY exchange-traded fund) from 1997 through 2005, a nine-year period. In Figure 2 today, we analyze 2006 through 2015. At the scale of this Web page, trying to cram both periods into a single graph would make the wild days too small to see clearly.</p><p>Figure 2 reinforces the message that 3% up days are not "buy" signals, and 3% down days are not "sell" signals. Any wild day is a warning sign that a correction or a bear market is coming or may already have begun. </p><p>Look at late 2007 and early 2008 in Figure 2. Before it was clear that the world was entering a severe bear market — the global financial crisis — the S&P 500 experienced five separate 3% up days. (These days are represented by green squares in Figure 2.) Treating these up days as a cause for joy would have been a mistake. Periods of high volatility, whether the moves are up or down, are correlated with downtrending markets. The price of SPY fell more than 56% by Mar. 9, 2009.</p><p>This observation is good enough to win a Nobel Prize but, fortunately, individual investors don't need to worry about wild days, periods of high volatility, or any of that. With the index ETFs we can choose from today, it's easy to construct a portfolio that tilts <strong>into</strong> assets that are in uptrends and <strong>out of</strong> assets that are in downtrends. So-called Muscular Portfolios are examples of such "asset rotation" strategies, as described at more length in my <a href="https://bri.li/190806c" target="_blank">one-page summary</a>.</p><p>In the third and final part of this series, we'll examine the recent years 2015 through 2019 and — more importantly — how we can easily navigate around these corrections and bear markets without being rocket scientists.</p><p class="subnote">• Part 3 appears on Aug. <a href="https://bri.li/190806d" target="_blank">8</a>, 2019.</p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>When the market has ‘wild days' — ups and downs of more than 3% in a single session — it isn't good. Wild days are associated with market downtrends. • Obsolete financial formulas assumed investments carried risks that were stable from year to year. Two Nobel laureates proved that risk changes over time. ‘Volatility clusters' give us an insight into corrections and bear markets.Figure 1. Robert Engel III (left) and Clive Granger won the Nobel Prize in Economics in 2003 for their formulas that predict when market volatility will be followed by more volatility. Photo by Hans Mehlin...Benoit Mandelbrot, Father of Fractals, Explains Why Volatility is Not Your FriendBrian Livingstontag:stockcharts.com,2019-08-01:post-177322020-01-06T07:01:34Z2019-08-01T09:00:02Z<blockquote><strong>Many investors think big up and down moves in the market are good for profits. Actually, crazy days are indicators of corrections and bear markets. • Benoit Mandelbrot made the world aware of "fractals": repeating patterns that occur in nature as well as in a surprising number of financial returns. Seeing the big picture, Mandelbrot taught, helps us understand the daily moves the market makes.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/07/13ac78dd-22fc-4181-867e-2e425415d6e0.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> Mandelbrot not only demonstrated the visual impact of fractals, as shown on the screen behind him, but also the way these repeating patterns help to predict stock-market movements. Photo by Steve Jurvetson/Creative Commons.</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free </em></strong><a href="https://bri.li/190801a" target="_blank"><strong><em>Muscular Portfolios Newsletter</em></strong></a><strong><em>.</em></strong></p><p>It's often said that "security prices fully reflect all available information," therefore no one can reliably take profits from a stock market that is so efficient. This theory — the Efficient Market Hypothesis — was promoted in a 1970 <a href="https://bri.li/190801d" target="_blank">white paper</a> published by a University of Chicago finance professor named Eugene Fama.</p><p>It didn't take long for other economists to prove that stock markets aren't that efficient. It's certainly true that security prices quickly react to news. But a 1981 <a href="https://bri.li/190801e" target="_blank">paper</a> by Yale University economics professor Robert Shiller showed that the volatility of stock prices was "five to thirteen times too high" to be explained by logic alone, because human beings overreact to unexpected revelations.</p><p>Only a few years later, two other professors showed how much the market lurches. In a series of <a href="https://bri.li/190801f" target="_blank">papers</a> beginning in 1985, Werner De Bondt of the University of Wisconsin and Richard Thaler of Cornell quantified these overreactions. Prices can take three to five years to return to a "rational" level, they explained.</p><p>Fama and his frequent co-author, Kenneth French of Dartmouth, gradually came around to this realization. In a 2007 <a href="https://bri.li/190801g" target="_blank">study</a>, for example, they re-confirmed the existence of several market factors, finding that small-cap companies, "value" companies, and assets with upward price momentum (also called relative strength) tend to outperform other investments in the long term. "The premier anomaly is momentum," they wrote.</p><p>Proof that behavioral biases have an enormous effect on security prices has revolutionized our understanding of free markets. Shiller and Fama both won the Nobel Prize in Economics in 2013 — Shiller for proving that markets are not perfectly efficient, and Fama for identifying several anomalous factors. Thaler (currently at the University of Chicago) won in 2017 for his pioneering work demonstrating <em>behavioral economics:</em> the fact that people are often ruled by subconscious impulses rather than purely logical choices. Several other experts — including Daniel Kahneman, author of <em>Thinking, Fast and Slow</em> — have also been named Nobel laureates in recent years because of their application of behavioral economics to finance.</p><p>Another genius who expanded our understanding of human behavior was Benoit Mandelbrot. A French-speaking math professor, he was the first researcher to reveal the infinitely scaling phenomenon called <em>fractals.</em> These patterns not only make beautiful, wriggly visual diagrams, they also hold serious information about the movements of stock markets.</p><p>In his 2004 book, <em>The (Mis)behavior of Markets,</em> Mandelbrot <a href="https://bri.li/190801h" target="_blank">explained</a> the relevance of fractals to the trading of stocks:</p><p><em>"Without the identifying legends, one cannot tell if a price chart covers eighteen minutes, eighteen months, or eighteen years. This will be expressed by saying that markets scale. Even the financial press scales: There are annual reviews, quarterly bulletins, monthly newsletters, weekly magazines, daily newspapers, and tick-by-tick electronic newswires and Internet services."</em></p><p>How does this helps us make money? Mandelbrot never won a Nobel Prize — he passed away in 2010, and Nobels are not awarded posthumously — but he made a major contribution to our understanding of market risk:</p><p><em>"Markets are turbulent, deceptive, prone to bubbles, infested by false trends. It may well be that you cannot forecast prices. But evaluating risk is another matter entirely."</em></p><p>Mandelbrot was a leader in demonstrating "volatility clustering." This is the discovery that tame market days — those with price changes less than 3% — tend to be followed by other tame days. By contrast, "wild" days tend to be followed by other wild days.</p><p>This is shown graphically in Figure 2, which covers 1997 through 2005. (The years since 2005 will be shown later in this series of articles.)</p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/07/ab811639-7300-4f23-8965-8ec22927cfb4.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> "Wild" days, when the price change in the S&P 500 (not including dividends) is greater than 3% up or down in a single day, tend to occur during or close to a correction or a full-blown bear market. On the other side of the coin, if you've experienced no wild days lately, you're very likely to be in a bull market.</p><p>Mandelbrot's brilliance was in demonstrating that it didn't matter whether these "wild" days jerked the market up or down. Huge moves in either direction are a signal that you're in a correction or a bear market, or that one is near at hand.</p><p>Take a look at the 2000–2002 dot-com crash, highlighted in the bold black box in Figure 2. Just after the market's peak in early 2000, the S&P 500 delivered eight wild days in a row. All of them were big moves up.</p><p>But a big up day is not a "buy" signal, and a big down day is not a "sell" signal. Both kinds of wild days indicate that the market has become very volatile, which is a bad sign for prices. The S&P 500 eventually fell more than 49% by the end of the bear market in 2002. The index's wild moves indicated an unhealthy market, not a great opportunity for profit.</p><p>The same is true for the five corrections (declines between 10.0% and 19.9%) shown in Figure 2. Wild days appeared within or close to all of those disappointing markets. On the other hand, major long-term bull markets, such as 2003–2005, commonly experience no wild days at all.</p><p>Two economists, Robert Engle III and Clive Granger, won the Nobel Prize in 2003 for proving practical applications of Mandelbrot's work. Their models — known as ARCH (take a deep breath, it stands for <em>autoregressive conditional heteroskedasticity</em>) and GARCH (Generalized ARCH) — help predict periods of high volatility.</p><p>Fortunately, you don't need to be a Nobel laureate to take advantage of volatility clustering! In the next part of this series, we'll learn more from these discoveries, and see how high-volatility periods have related to falling prices in more-recent years.</p><p class="subnote">• Parts 2 and 3 appear on Aug. <a href="https://bri.li/190801b" target="_blank">6</a> and <a href="https://bri.li/190801c" target="_blank">8</a>, 2019.</p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>Many investors think big up and down moves in the market are good for profits. Actually, crazy days are indicators of corrections and bear markets. • Benoit Mandelbrot made the world aware of "fractals": repeating patterns that occur in nature as well as in a surprising number of financial returns. Seeing the big picture, Mandelbrot taught, helps us understand the daily moves the market makes.Figure 1. Mandelbrot not only demonstrated the visual impact of fractals, as shown on the screen behind him, but also the way these repeating patterns help to predict stock-market movements. Photo by...Traits the Best Investment Strategies Have in CommonBrian Livingstontag:stockcharts.com,2019-07-31:post-177242020-01-06T07:01:34Z2019-07-31T09:05:01Z<blockquote><strong>To gain our trust, an investing strategy needs more than one or two things going for it. It must meet the real criteria that serious investors demand. • Individual traders often don't write down all of the features they expect before adopting a trading strategy. Quantifying these traits is one way we can increase the profits from any investing system we choose to follow.</strong></blockquote><p><img src="https://d.stockcharts.com/img/articles/2019/07/e8fc1b47-08ee-44fa-96d0-2900e99833f8.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 1.</strong> It's not enough for an investing strategy to promise high returns. Informed investors also require that financial formulas demonstrate good risk control, ease of management, and other important traits. Photo by Image Flow/Shutterstock.</p><p class="subnote">• Part 2 of a series. Part 1 appeared on July <a href="https://bri.li/190731a" target="_blank">30</a>, 2019. •</p><p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free </em></strong><a href="https://bri.li/190731b" target="_blank"><strong><em>Muscular Portfolios Newsletter</em></strong></a><strong><em>.</em></strong></p><p>In <a href="https://bri.li/190731a" target="_blank">Part 1</a> of this series, we saw that committed investors require just not one or two qualities, but at least a dozen different criteria before entrusting their life savings to any new trading strategy. These traits are not always clear in our minds when we're evaluating heavily promoted financial models. In this series of articles, we previously examined the <strong>first six traits</strong> of great investing strategies — today, we'll analyze the final six.</p><p><strong>7. Free investing picks that are updated continuously.</strong> We saw in Point 6 that investors expect investing strategies to be fully disclosed. People no longer need to trust "black boxes." Plenty of winning formulas are openly documented and free to use but continue to work year after year, because they exploit a known risk factor or a human behavioral bias. Since we require any formula we adopt to be free and open, there's no reason you should have to compute it manually every time a trade is required. The method should be calculated for you at a free website, in a free email newsletter, or by some other means that the author provides — whether the picks are updated monthly, daily, or intraday.</p><p><strong>8. No registration required.</strong> When we say a strategy must be fully disclosed and free of charge, "free" means <em>truly free.</em> A formula is not fully disclosed and free to use if the author demands your email address, requires a credit-card number, or imposes any other kind of registration requirement. Of course, it's fine for an expert to offer additional features that cost money, such as specialized newsletters, books, or seminars that require optional payments. But the essential rules of the investing strategy itself should always be completely free — in every respect. With today's computer power, ranking the securities that have the best odds of success is now so inexpensive that gurus must earn their money through genuine value-added services, not merely by posting lists of ticker symbols.</p><p><strong>9. Years of use by actual people.</strong> You could conceivably adopt an investing strategy that some expert just discovered yesterday. But it's not recommended. If a strategy would stop working a mere 5 or 10 years after it was first disclosed, that's not a strategy you should entrust your life savings to. The best trading strategies continue to work even though "everyone knows about them" (no, they don't) and despite the fact that a substantial number of people have started following them. These formulas continue to work, as we saw in Point 7, because they involve more risk than conservative investors want, or they are contrary to human behavioral quirks, such as herding. Require that any strategy you adopt have a track record with years of results by an actual community of followers.</p><p><strong>10. Unlikely to become overgrazed.</strong> Many widely publicized market factors "wore out" and disappeared almost entirely within a few years after their first publication. For example, the well-known "value factor" comes into favor and then goes out of fashion for entire decades at a time. For the past 12 lo-o-ong years, growth stocks in the Russell 1000 have delivered almost double the gains of their mirror image, value stocks, as shown in a <a href="https://bri.li/190731c" target="_blank">StockCharts PerfChart</a>. Stick with rules that are truly persistent, using factors such as diversification and relative strength (aka momentum).</p><p><strong>11. Same formula at all times.</strong> It's hard enough to rank the securities that have the best odds of success in the coming period without a strategy also expecting us to time the market. The exact top and bottom of any market cycle can never be predicted with certainty. Any acceptable investing strategy employs the same formula at all times, during bull market <em>and</em> bear markets — and any sideways markets that come along in between. Obviously, a winning strategy can and should be sensitive to market conditions, "tilting" a portfolio away from declining assets and into rising ones. But making an investor call a top and a bottom is something that a strategy shouldn't require.</p><p><strong>12. No shorting or borrowing.</strong> It's tempting to think that borrowing money could make an investing strategy more profitable. But debt is more likely to make your portfolio dive faster during a crash than you can deal with. As the Wall Street saying goes, "Bulls make money. Bears make money. Pigs get slaughtered." Don't be greedy. There are plenty of investing strategies that will multiply your money over the course of your life without exposing you to the risks of leverage. </p><p>In my own writing, I attempt to reveal long-term strategies that have market-beating returns, spare you from intolerable losses, and require no more than a few minutes a month to manage. I call these strategies "Muscular Portfolios," but of course they also have many other names. My <a href="https://bri.li/190731d" target="_blank">website</a> gives away the picks of these portfolios, free of charge, updated every 10 minutes while the market is open.</p><p>I've summarized all 12 of the above traits in a table you can cut out and refer to whenever you like. I call these features "Strategy Sanity." The list is shown below in Figure 2.</p><p><br></p><p><img src="https://d.stockcharts.com/img/articles/2019/07/a4b3b070-8273-42ba-9941-a57a9669556d.jpg" style="width: 799px; display: block; margin: 0px auto;"></p><hr><p class="subnote"><strong>Figure 2.</strong> "Strategy Sanity" includes all of the features that informed investors require before they entrust their life savings to a new investing formula.</p><p>The financial-services industry is full of smooth-talking sharks who make a lot of promises but don't deliver market-beating returns or protect you from heart-stopping crashes. Fortunately, the development of ultra-low-cost index funds — and the 21st-century technology to rank them — is giving investors new ways to profit without paying fees to anyone. More information is available in my <a href="https://bri.li/190731e" target="_blank">one-page summary</a> of muscular investing and at my <a href="https://bri.li/190731d" target="_blank">website</a>.</p><p>Good investing!</p><hr><p><em>With great knowledge comes great responsibility.</em></p><p><strong>—Brian Livingston</strong></p><p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p><p class="subnote">Send story ideas to MaxGaines "at" BrianLivingston.com</p><p> </p>To gain our trust, an investing strategy needs more than one or two things going for it. It must meet the real criteria that serious investors demand. • Individual traders often don't write down all of the features they expect before adopting a trading strategy. Quantifying these traits is one way we can increase the profits from any investing system we choose to follow.Figure 1. It's not enough for an investing strategy to promise high returns. Informed investors also require that financial formulas demonstrate good risk control, ease of management, and other important traits. Photo by...How to Evaluate an Investment StrategyBrian Livingstontag:stockcharts.com,2019-07-30:post-177202020-01-06T08:04:47Z2019-07-30T17:00:00Z<blockquote>
<p>Investors have mental lists of desirable traits when looking for investing strategies they can live with. We can profit by firming up those qualities. • Some people say they simply want whatever strategy will make the most profits. But the majority of investors actually want a combination of features, including such factors as account growth, capital safety, and ease of portfolio management.</p>
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<p><img src="https://d.stockcharts.com/img/articles/2019/07/1564467893397899226695.png" style="width:799px;height:532px;" /></p>
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<p class="subnote"><strong>Figure 1.</strong> Given today’s wide availability of index funds that deliver better results than the vast majority of day traders, there’s no reason why you can’t select a reliable financial strategy that meets all the requirements individual investors demand. Photo by Andrey Popov/Shutterstock.</p>
<p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190730a" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p>
<p>There are traders who believe they should merely adopt whatever buying and selling strategy might produce the greatest profits in the near future. Unfortunately, it’s hard to predict what formula that might be. By contrast, most long-term investors are looking for a combination of good capital growth, reasonable protection against crashes, and easy portfolio management that can be handled in one’s spare time, without the need to stare at computer screens all day.</p>
<p>To be sure, there are day traders who definitely seek out buy and sell patterns that require the maximum amount of minute-by-minute activity. Regrettably, studies show that more than 85% of day traders lose money each year, and only 2% of traders show consistent profits, as described in <a href="https://bri.li/190730b" target="_blank">Point #2 of my one-page summary</a> of muscular investing principles.</p>
<p>If you’re not in the 2% of traders who are true market geniuses, you’re probably looking for long-term investment strategies that make money without frequent trading. As a matter of fact, almost all 401(k) plans and similar tax-deferred investment accounts <strong>prohibit</strong> the buying and selling of individual stocks — only index funds are available in the plans — and allow no more than one or two position changes per month.</p>
<p>For the more than 100 million investors worldwide who hold tax-deferred accounts, there <strong>are</strong> specific and well-defined investing strategies that meet the need for growth, safety, and simplicity. In my roles as a financial columnist, speaker, and former president of a regional chapter of the AAII (American Association of Individual Investors), I’ve spoken with thousands of savers. As it turns out, they have more than just two or three requirements before they feel comfortable adopting a strategy. They have a good dozen or so. You can profit from their experience by making sure any strategy you adopt has all of the following traits:</p>
<p><strong>1. Market-like returns.</strong> With today’s extensive set of exchange-traded funds (ETFs) that cover virtually every major asset class in the world, there’s no reason to pay high fees for expensive wealth managers. Index funds have proved that they deliver 99% of the return of any asset class you choose to hold. However, it’s too risky to sink all your money into a single asset, such as an S&P 500 index fund. The benchmark loses 30% or more every 10 years, on average. That’s more than many individuals can tolerate without liquidating during bear markets (at great harm to their performances). The answer to crashes is in our second requirement.</p>
<p><strong>2. No month-end losses over 25%.</strong> Given a wide selection of ETFs, combined with the findings of hundreds of the latest financial and academic studies in the 21st century, there’s no longer any reason why individual investors need to stick with a losing set of assets all the way down to the bottom of a crash. With a few simple rules, a portfolio can easily “tilt” into those asset classes that are doing well and away from those that are doing poorly. A sailor who doesn’t know how to “tack” a sailboat won’t get to the intended destination. Investors who are unaware of how to tilt a portfolio won’t achieve their desired financial goals, either.</p>
<p><strong>3. Absolutely no math.</strong> Did you know that 11 out of every 10 people hate math? Most investors are busy people and not quantitative analysts. Outside of financial professionals, the majority of individuals will never build their own spreadsheets or calculate their own statistics. Fortunately, there are many websites that will compute the numbers for you and give you a specific set of assets that have the best odds of success in the months to come.</p>
<p><strong>4. Less than 15 minutes per month.</strong> Since so many 401(k) plans restrict trading to no more than once or twice per month, there’s no need for account holders to fret over position changes every day. A good, long-term investing strategy should require no more than a few minutes each month to check on a website and make any course corrections that might be needed in a portfolio.</p>
<p><strong>5. No more than monthly changes.</strong> Since very few changes should be required in a well-thought-out strategy, any tilts toward stronger assets should be needed no more than once a month. In fact, numerous studies show that the more often people trade, the less money they make, as demonstrated in <a href="https://bri.li/190730c" target="_blank">Point #5 of my summary</a>.</p>
<p><strong>6. Fully disclosed.</strong> In this day and age — with instant Internet communications — numerous successful investing strategies are available whose specific rules are clearly spelled out in public documents. There’s no reason to entrust your life savings to “black boxes” or proprietary trading strategies that are promoted by people who won’t reveal the formula they’ll use to allocate your money. Secret formulas often fail to deliver the gains you’ve been led to expect. Fully disclosed strategies are open to everyone to see. These methods continue working over the decades, because their timeless principles take advantage of risk factors and human behavioral biases that are unlikely to change.</p>
<p>The second six requirements appear in the next part of this two-part series.</p>
<p class="subnote">• Part 2 appears on July <a href="https://bri.li/190730d" target="_blank">31</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>Investors have mental lists of desirable traits when looking for investing strategies they can live with. We can profit by firming up those qualities. • Some people say they simply want whatever strategy will make the most profits. But the majority of investors actually want a combination of features, including such factors as account growth, capital safety, and ease of portfolio management. Figure 1. Given today's wide availability of index funds that deliver better results than the vast majority of day traders, there's no reason why you can't select a reliable financial strategy that...Global ETFs for the US, Canada, or Wherever Your Money May BeBrian Livingstontag:stockcharts.com,2019-07-25:post-148212020-01-06T08:01:35Z2019-07-25T11:00:00Z<blockquote>
<p>A complete set of ETFs covering all major world markets has been available to US investors for years. But what if your money isn’t in US dollars? • In the country where you now live — or one you may move to when you retire — your savings may be denominated in Canadian dollars, UK pounds, or some other currency. You can still tailor a menu of global ETFs to meet your needs.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/156405140569566782747.png" style="width:799px;height:581px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> Investors who live in Canada, for example, may prefer to have their portfolio gains denominated in Canadian dollars to avoid the risk that the US dollar will move against them and cut into their returns. The same concern affects investors who hold other currencies. Photo illustration by Cherezoff/Shutterstock.</p>
<p class="subnote">• Part 2 of a series. Part 1 appeared on July <a href="https://bri.li/190725a" target="_blank">23</a>, 2019. •</p>
<p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190725m" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p>
<p>We saw in <a href="https://bri.li/190725a" target="_blank">Part 1</a> of this series that investors who hold currencies other than US dollars (USD) like to own securities that are denominated in their own money. This helps to minimize <strong>currency risk:</strong> the chance that the other currency will move against you, eating up your gains.</p>
<p>Even relatively stable currencies like USD and the Canadian dollar (CAD) expose investors to risk. Just in recent years, US-priced securities gave Canadian holders a haircut of about 35% in 2007–2016, solely from the foreign-exchange fluctuation. On the other side of the coin, Canadians gained an extra 74% if they held USD investments in 2002–2007.</p>
<p>It’s hard to predict currency swings, as I’ve <a href="https://bri.li/190725b" target="_blank">previously reported</a>. A good plan for investors who use currencies other than US dollars, therefore, is to buy securities denominated in their local currency that “offer to hedge” most currency risk away. This means, for example, that a Canadian’s investment in an index of US large-cap stocks would have approximately the same percentage gain as Americans themselves received, no matter how the USD-CAD exchange rate shifted.</p>
<p>One of the model strategies in my book <a href="https://bri.li/190725am" target="_blank"><em>Muscular Portfolios</em></a> involves nine low-cost exchange-traded funds (ETFs). Nine is what I consider the minimum number of asset classes to let individual investors take advantage of diversification and relative strength. The nine-asset strategy was developed by Steve LeCompte, CEO of the CXO Advisory Group. He calls the formula <a href="https://bri.li/190725i" target="_blank">SACEMS</a>. In keeping with my book’s theme of Goldilocks Investing — not too risky, not too tame, just great gains — the strategy is also called the Mama Bear Portfolio.</p>
<p>The Mama Bear employs ETFs that are priced in US dollars. To help me determine which ETFs should be used as substitutes by investors who use other currencies, I spoke with Scott Clayton, a senior analyst for the <a href="https://bri.li/190725c" target="_blank">TSI Network</a> (The Successful Investor Network), based in Toronto, Ontario.</p>
<p>“iShares ETFs trade on the Toronto Stock Exchange,” Clayton notes. “XUS is the iShares Core S&P 500 Index ETF. XSP is the same thing, but is actually hedged.” The currency hedging prevents swings in the USD-CAD exchange rate from affecting the returns of Canadian investors. In Canada, Clayton continues, “Vanguard has VFV for the S&P 500, and VSP for the S&P 500 hedged.”</p>
<p>ETFs that protect against currency nightmares may legitimately have annual fees that are a small fraction of a percentage point higher than their USD equivalents due to the insurance cost, Clayton says. For example, take VOO, Vanguard’s US-based index fund that tracks the S&P 500. “VOO charges 0.03%. VFV and VSP charge 0.08%.” I believe small differences such as this are worth it for the peace of mind.</p>
<p>Using index ETFs offered by <a href="https://bri.li/190725d" target="_blank">Vanguard Canada</a>, <a href="https://bri.li/190725e" target="_blank">BlackRock Canada</a> (the parent of iShares), and <a href="https://bri.li/190725f" target="_blank">Purpose Investments</a>, I put together the table in Figure 2. It shows the CAD-denominated ETFs that should come the closest to matching the USD-priced ones in the Mama Bear “investing universe” (menu).</p>
<p>It’s impossible for me to specify the index funds that investors in <strong>every</strong> country of the world should use. In today’s column, I name funds that are priced in CAD as examples. But you can repeat the process for any country or currency and get similar results — although, if you use different ETFs, you can’t expect the returns to be identical.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15640514741741335940876.png" style="width:704px;height:460px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> Investors who use currencies other than the US dollar can usually find index funds for sale in their countries that will approximate the USD performance without taking on the currency risk. Source: MuscularPortfolios.com.</p>
<p>If you simply held in your portfolio an equal weight of the nine ETFs, you’d have what’s known as a Lazy Portfolio. However, as we’ve seen in my <a href="https://bri.li/190725g" target="_blank">previous column</a>, <em>every</em> Lazy Portfolio performs much better in the long term if you add a single Momentum Rule. With this single tweak, you’re also subjected to smaller losses during bear markets. The strategy rules for the Mama Bear Portfolio are as follows:</p>
<ul>
<li><strong>Select a specific day each month</strong> to tune up your portfolio. LeCompte produced a study showing that the best days to make course corrections were the first two trading days of the month and the last seven trading days, although the difference might not be significant.</li>
<li><strong>On your chosen day,</strong> rank the nine ETFs by their gain, including dividends, over the past 105 trading days (about five calendar months).</li>
<li><strong>Sell any ETF</strong> that is <em>not</em> in the top three, and <strong>purchase any ETFs</strong> you don’t already own that <em>are</em> in the top three.</li>
<li><strong>Rebalance only if any ETF</strong> is more than 20% off its ideal dollar weight in the portfolio. Exact percentages are not important.</li>
</ul>
<p>The five-month gains of the nine US-dollar ETFs are available free of charge on the <a href="https://bri.li/190725j" target="_blank">Mama Bear page</a> of Muscular Portfolios website. The page’s numbers are recalculated every 10 minutes while the New York markets are open. The gains of the Canadian-dollar ETFs should be very similar to those of the equivalent USD index funds.</p>
<h3>What the non-US index ETFs actually index</h3>
<p>The following is a short explanation of the CAD-denominated symbols in Figure 2. The annual fee for each ETF — which in Canada is called the “management expense ratio” or MER — is shown in parentheses. All ETFs in the list below that hold non-Canadian assets are CAD-hedged, except where noted.</p>
<p><strong>EQUITIES</strong></p>
<ul>
<li><strong>XUH</strong> — The iShares S&P US Total Market Index ETF holds all US stocks, delivering mostly the gains of American large-caps. The Total Market Index has better historical performance than the S&P 500. (MER: 0.07%.)</li>
<li><strong>XSU</strong> — The iShares US Small-Cap Index ETF tracks the Russell 2000 index of smaller American stocks. (0.36%.)</li>
<li><strong>VEF</strong> — The Vanguard Developed All-Cap ex-US Index ETF tracks stocks in all developed countries <em>except</em> the US, thereby including all Canadian stocks. (0.22%.)</li>
<li><strong>VEE</strong> — The Vanguard Emerging Markets All-Cap Index ETF tracks stocks in developing countries. (0.24%.) This fund is not CAD-hedged. At this writing, there don’t appear to be any hedged emerging-market ETFs. Hopefully, Vanguard, iShares, or another provider will develop one.</li>
</ul>
<p>What if you want to hold more Canadian equities than the percentage in VEF? Make three changes:</p>
<ol>
<li>Add Vanguard’s <strong>VCE</strong> for exposure to Canadian large-cap stocks. (0.06%.)</li>
<li>Add iShares’ <strong>XCS</strong> for Canadian small-caps. (0.55%.)</li>
<li>Replace VEF with Vanguard’s <strong>VI.</strong> (0.23%.) This ETF tracks all developed-country stocks <em>except</em> those in the US and Canada. Holding VI instead of VEF avoids duplicating the American and Canadian equities that are indexed in XUH, XSU, VCE, and XCS.</li>
</ol>
<p><strong>HARD ASSETS</strong></p>
<ul>
<li><strong>VRE </strong>— The Vanguard Canadian Capped REIT Index ETF includes real-estate investment trusts and other publicly traded real-estate securities in Canada. (0.39%.)</li>
<li><strong>PDBC</strong> — The PowerShares Deutsche Bank Commodity Index ETF tracks a basket of commodities, which are mostly energy and agricultural products. (0.59%.) This is a US-based ETF and is not CAD-hedged.</li>
<li><strong>KILO</strong> — The Purpose Gold Bullion Fund mirrors the spot price of physical gold. (0.20%.)</li>
</ul>
<p>Like the situation with emerging-market stocks, there may not be at this writing a commodities ETF that’s hedged for other currencies. Most commodities are priced in US dollars in world markets, so investors who use other currencies do take on some foreign exchange risk.</p>
<p>KILO is a relatively new gold-bullion ETF that launched in October 2018. According to a <a href="https://bri.li/190725k" target="_blank">review</a> in Wealth Professional Canada, KILO’s 0.20% annual fee is one-half to one-third as much as other physical-gold ETFs that are priced in Canadian dollars. The sponsor of KILO allows withdrawals in units of one kilogram (2.2 pounds). The reviewer says this is only “a tenth the redemption requirements seen at other [Canadian] physical gold bullion funds.”</p>
<p>Withdrawing one kilo of gold at a time would cost approximately 50,000 USD at today’s spot price. Canadians who don’t want to tie up that much capital in gold could always buy IAU, a US-dollar-denominated ETF. That physical-gold fund currently costs only about 13.70 USD per share. You’d simply accept the currency risk.</p>
<p><strong>FIXED-INCOME</strong></p>
<ul>
<li><strong>VLB</strong> — The Vanguard Canadian Long-Term Bond Index yields whatever a basket of Canadian government and corporate bonds with maturities of 10+ years may be paying. (0.19%.)</li>
<li><strong>CMR</strong> — The iShares Premium Money Market ETF plays the role of “cash” in the portfolio, like T-bills. But CMR holds CAD debt obligations from Canadian governments and corporations with a very short — and ultrasafe — weighted maturity of about 36 days. (0.28%.)</li>
</ul>
<p>Unfortunately, I can’t estimate the returns that the above CAD-denominated ETFs would have generated over the past four or five decades, as I can for Muscular Portfolios that use USD index funds. The historical data that’s available for the asset classes in US dollars might not match the same assets that were priced in other currencies.</p>
<p>The best we can do is look at the track record for the Mama Bear and other portfolios in my column of <a href="https://bri.li/190725l" target="_blank">July 16, 2019</a>. You can decide for yourself whether the substantial boost in returns — and the sizeable reduction in losses — is worth the 15 minutes it takes to tune up such a portfolio each month.</p>
<p>I think it’s worth it, no matter what currency you may use — <em>if</em> you hedge your risk.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>A complete set of ETFs covering all major world markets has been available to US investors for years. But what if your money isn't in US dollars? • In the country where you now live — or one you may move to when you retire — your savings may be denominated in Canadian dollars, UK pounds, or some other currency. You can still tailor a menu of global ETFs to meet your needs. Figure 1. Investors who live in Canada, for example, may prefer to have their portfolio gains denominated in Canadian dollars to avoid the risk that the US dollar will move against them and cut into their returns. The...Americans and Canadians, Sittin' in a Tree, T,R,A,D,I,N,GBrian Livingstontag:stockcharts.com,2019-07-23:post-148222020-01-06T08:01:35Z2019-07-23T09:00:00Z<blockquote>
<p>Pioneers of the index investing revolution, such as Vanguard, started their movement in the United States. But what if your interests go beyond the US? • There are many reasons why an individual investor should take a global view of asset allocation. This process can reveal to us a lot about how to construct the ideal portfolio, no matter where in the world our assets may reside.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15638680361751994001720.png" style="width:799px;height:449px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The TSX 60 is a broad equity-market index of companies listed on the Toronto Stock Exchange, similiar to the composition of the S&P 500 but priced in Canadian dollars. Photo by Pavel Ignatov/ Shutterstock.</p>
<p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190723a" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p>
<p>All long-term investing comes down to three basic points, which I call Core Principles:</p>
<ol>
<li><strong>Compounding.</strong> By not removing your gains until you absolutely need to, your portfolio will eventually pay you more than you can earn by working at any job.</li>
<li><strong>Diversification.</strong> Remaining 100% invested in at least three different asset classes from an expert-designed menu gives you greater gains with smaller declines than a portfolio with only one asset class or a static asset allocation.</li>
<li><strong>Momentum.</strong> Holding the asset classes with the best performance over the past 3 to 12 months tends to improve a portfolio’s gains and reduce its drawdowns.</li>
</ol>
<p>At my <a href="https://bri.li/190723b" target="_blank">Muscular Portfolios website</a>, I give away, free of charge, two menus of ultra-low-cost global index ETFs that were originally designed by Mebane Faber, co-author of <em>The Ivy Portfolio,</em> and Steve LeCompte, CEO of the CXO Advisory Group. In addition, the ETFs are ranked by their relative strength. The rankings are updated every 10 minutes while the market is open. An example of the CXO menu is shown below in Figure 2.</p>
<p>A reader of this column, Peter D., asked: “Most of my investments are in Canadian dollars. Is there a way to use the same portfolio system?”</p>
<p>That’s a question that applies to us all, whether you are American, Canadian, or any other nationality:</p>
<ul>
<li>Although StockCharts is an American company, the Web is global, and the server stats tell me 30% of my readers are outside the US. Almost half of those folks view my column from Canada.</li>
<li>If you work for a big organization, it might someday send you to Europe, Japan, or any number of other places to work, each of which has its own currency and unique marketplace of available financial products.</li>
<li>It’s very common for retirees to relocate to a country with a lower cost of living, such as Mexico, Costa Rica, or Kazakhstan — again, with their own distinct currencies and index funds. (Don’t laugh, I actually have 20 readers in Kazakhstan!)</li>
</ul>
<p>In this article, we’ll see how to construct an “investing universe” (menu) of low-cost index funds that’s tailored to the currency and the financial products that are available in whatever country you might find yourself.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/1563868117906602543727.png" style="width:797px;height:394px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The CXO selection of US-based index funds — also called the Mama Bear Portfolio — includes nine different asset classes, which I consider the minimum number necessary to take advantage of diversification and momentum. Source: Muscular Portfolios website.</p>
<p>Since many of my readers are based in Canada, I’ll use that country’s financial products as an example. The same principles also apply to many other nations.</p>
<p>Investors everywhere tend to buy assets that are denominated in their own currency. For Canadians, that means Canadian dollars (CAD). Buying index funds that are priced in US dollars (USD), such as the ETFs in Figure 2, could expose investors in other countries to <strong>currency risk.</strong></p>
<p>For example, due to currency fluctuations, assets priced in US dollars lost about 35% of their value in Canadian dollars in the nine-year period from Nov. 6, 2007, to Jan. 21, 2016. On the other hand, a Canadian investor holding USD assets enjoyed a 74% boost in value during the previous six years: Feb. 26, 2002, to Nov. 6, 2007. That’s currency risk, whether it turns out to be working for you or against you (<a href="https://bri.li/190723c" target="_blank">see graph</a>).</p>
<p>You can’t easily predict fluctuations in foreign exchange. As I reported in a previous column on <a href="https://bri.li/190723d" target="_blank">currency speculation</a>, 70% of currency traders lose money. For your own peace of mind, you may wish to eliminate currency moves as a source of profit/loss in your portfolio — and therefore sleep well at night.</p>
<p>Which ETFs priced in Canadian dollars would roughly replicate a portfolio of ETFs priced in USD? One effort to answer this question was published by Dan Bortolotti. He writes a column called the Canadian Couch Potato for MoneySense.ca.</p>
<p>In his <a href="https://bri.li/190723e" target="_blank">USD-to-CAD column</a>, he uses the so-called <strong>Coffeehouse Portfolio</strong> as an illustration. That’s a static asset allocation strategy published in 2001 by Bill Schultheis, a financial adviser and co-founder of <a href="https://bri.li/190723f" target="_blank">Soundmark Wealth Management</a>. I analyzed Schultheis’s portfolio in my <a href="https://bri.li/190723g" target="_blank">June 25, 2019, column</a>.</p>
<p>Bortolotti recommends the following substitutions for the Coffeehouse menu of assets:</p>
<ul>
<li>Instead of Vanguard ETFs that track the S&P 500, use Canadian funds that track Canada’s own TSX 60 benchmark. (These funds are denominated in CAD.)</li>
<li>Instead of Vanguard’s All-World Ex-US ETF, which would duplicate the TSX 60, use Vanguard’s Europe-Pacific and Emerging Markets ETFs (which are denominated in USD).</li>
<li>Instead of Vanguard’s US real-estate investment trust ETF, use one of two Canadian REIT index funds (denominated in CAD) and possibly an international REIT fund for global exposure.</li>
<li>Instead of Vanguard’s US bond market ETF, use a Canadian total bond market ETF, priced in CAD.</li>
</ul>
<p>For specific fund names and symbols, see Bortolotti’s <a href="https://bri.li/190723e" target="_blank">column</a>.</p>
<p>Asked for comment, Bortolotti suggested that I contact Benjamin Felix, a portfolio manager for <a href="https://bri.li/190723h" target="_blank">PWL Capital</a> in Ottawa, Ontario.</p>
<p>In a email, Felix said, “I do not think that there is any need to worry too much” about foreign exchange fluctuations. “Long-term, currency returns are expected to be zero.”</p>
<p>Felix published a <a href="https://bri.li/190723i" target="_blank">PDF white paper</a> on the subject, which provides a specific list of six ETFs he recommends for Canadian investors. Some of the funds are denominated in CAD, while others are US-based ETFs priced in USD. He’s also posted a <a href="https://bri.li/190723j" target="_blank">YouTube video</a> on whether you should protect a portfolio from currency fluctuations.</p>
<p>In my view, both Bortolotti’s and Felix’s approaches qualify as Lazy Portfolios. As I showed in a <a href="https://bri.li/190723k" target="_blank">previous article on Lazy Portfolios</a>, these static asset allocation strategies do not change the percentages you hold in each asset as market conditions change. In addition, actual individual investors might not want to wait 5 to 10 years to see whether exchange rates were going to wipe out a large portion of their gains.</p>
<p>To illustrate the enhancements that are easily possible, adding a single Momentum Rule improved the Coffeehouse Portfolio’s annualized return to 15.1% from 10.5%, resulting in five times more ending value over a 43-year period, as described in my <a href="https://bri.li/190723g" target="_blank">earlier column</a> on Coffeehouse.</p>
<p>In the second part of this series, we’ll see a global investing menu that:</p>
<ul>
<li>Truly protects against currency risk;</li>
<li>Takes advantage of the latest findings on the momentum factor to safely boost our gains; and</li>
<li>Tilts our portfolio away from equity-market crashes.</li>
</ul>
<p>If you have suggestions on non-USD portfolios, send me an email at the address below by 5 p.m. PT on July 23, 2019.</p>
<p class="subnote">• Part 2 appears on July <a href="https://bri.li/190723l" target="_blank">25</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>Pioneers of the index investing revolution, such as Vanguard, started their movement in the United States. But what if your interests go beyond the US? • There are many reasons why an individual investor should take a global view of asset allocation. This process can reveal to us a lot about how to construct the ideal portfolio, no matter where in the world our assets may reside. Figure 1. The TSX 60 is a broad equity-market index of companies listed on the Toronto Stock Exchange, similiar to the composition of the S&P 500 but priced in Canadian dollars. Photo by Pavel Ignatov/...Adding a Single Rule to a Lazy Portfolio Isn't Good EnoughBrian Livingstontag:stockcharts.com,2019-07-18:post-148232020-01-06T08:01:35Z2019-07-18T09:00:00Z<blockquote>
<p>Bolting just one step onto Lazy Portfolios lifts their gains. But that isn’t all investors want. Let’s build a superior strategy that’s still simple. • The noted academics Fama & French have demonstrated that ‘factors’ exhibit predictive power. It’s about time portfolios for individual investors accept these findings and update themselves to the 21st century.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/1563433721840448376531.png" style="width:799px;height:476px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> Eugene Fama (left) of the University of Chicago and Kenneth French of Dartmouth College published in 1992 their “three-factor model,” which evolved in 1997 into the “four-factor model.” The fourth factor, of course, is momentum.</p>
<p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190718k" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p>
<p class="subnote">• This article is Part 2 of the conclusion to my <a href="https://bri.li/190718a" target="_blank">analysis</a> of Lazy Portfolios. If you missed the first half of the conclusion, jump back to <a href="https://bri.li/190718b" target="_blank">Part 1</a>. •</p>
<p>As we saw previously, the 10 major Lazy Portfolios allocate your money into half a dozen to a dozen index funds. But Lazy Portfolios never change the percentages of the assets in response to market conditions. Adding a simple Momentum Rule — i.e., hold each month only the three index funds with the greatest relative strength over the past few months — improves <strong>every</strong> Lazy Portfolio by 3.9 to 6.6 percentage points annualized, a huge boost.</p>
<p>Incorporating momentum is a simple change that costs you almost nothing, other than 15 minutes of time each month to check the rankings and occasionally swap one index fund for another. But we can do much better than the “impoved” Lazy Portfolios. We can lessen our portfolios’ worst drawdowns in bear markets and tap into support from other investors who’ve followed the newer methods for years.</p>
<p>Ironically, all Lazy Portfolios follow a theory that even its proponents have left behind. That theory is the “three-factor model.” It was first published in a <a href="https://bri.li/190718c" target="_blank">1992 academic paper</a> by economic professors Eugene Fama and Kenneth French. The paper showed that equities performed better if they had one or more of the following features:</p>
<ol>
<li><strong>Exposure to the market.</strong> Securities that reflect the so-called equity risk premium were said to rise more than securities that are less equity-like.</li>
<li><strong>Small companies.</strong> The smallest 5% to 10% of stocks by market capitalization were thought to perform better than large-cap stocks.</li>
<li><strong>Value.</strong> Stocks with the lowest ratio of share price divided by a company’s book value per share were said to perform better than those with higher ratios. (Note: Measures other than price-to-book have been suggested since the first publication.)</li>
</ol>
<p>Lazy Portfolios began to be announced to the public in the 1990s. Obeying the three-factor model, the authors of all Lazy Portfolios include one or more of the following traits: (1) more equities than bonds, (2) some allocation to small-cap stocks, and (3) some allocation to value stocks.</p>
<p>Unfortunately for Lazy Portfolios, a fourth factor was almost immediately proved, which all of the authors somehow missed.</p>
<p>In 1993, Narasimhan Jegadeesh and Sheridan Titman, two UCLA professors <a href="https://bri.li/190718d" target="_blank">demonstrated mathematically</a> that equities with good performance over the past 3 to 12 months have a statistical tendency to continue to perform well in the next month or more.</p>
<p>Mark Carhart, then at the University of Southern California, integrated momentum with the older information. He <a href="https://bri.li/190718e" target="_blank">published in 1997</a> what is now known as the “Fama-French-Carhart four-factor model.”</p>
<p>Fama and French have considered many alternatives since then, including proposed theories with five or six predictive elements. But as they said in a <a href="https://bri.li/190718f" target="_blank">white paper</a> as recently as 2014: “All models that do not include a momentum factor fare poorly.”</p>
<p>Fama won the 2013 Nobel Prize in Economics for proving that factors have predictive ability.</p>
<h3>What Lazy Portfolios lack that we can easily fix</h3>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15634337663351041269619.png" style="width:799px;height:491px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> Mark Carhart helped create the four-factor model with the publication of his white paper in 1997.</p>
<p>Of course, a lot has happened since the four-factor model was announced in 1997. For one thing, the small-cap and value factors have been shown to simply disappear for decades at a time. Worse, these two traits have lost almost all of their outperformance since their publication, according to a <a href="https://bri.li/190718g" target="_blank">2016 white paper</a> by Research Affiliates (Page 15).</p>
<p>However, the same RA paper showed that the momentum factor has <strong>retained more than two-thirds of its predictive ability,</strong> despite its wide publication since 1993. Momentum goes against the grain of human nature. It relatively quickly identifies strong securities that most investors won’t buy into until the price trend has become obvious to everyone (and therefore is near its end).</p>
<p>Another huge change since the 1990s is the emergence of index funds that track specific global market segments. Index funds, especially exchange-traded funds, are cheaper to buy and sell than most equities. Broad-based ETFs also avoid the riskiness of individual stocks. “The stocks generating the largest momentum returns are the smallest, less liquid ones having the highest trading costs,” <a href="https://bri.li/190718h" target="_blank">writes</a> portfolio manager Gary Antonacci. “Transaction costs negate much of the momentum profits of individual stocks.” You can avoid the trading friction that erodes the profit of buying individual small-cap stocks, for example, by buying small-cap ETFs instead.</p>
<p>It’s obvious that Lazy Portfolios don’t use the four-factor model. Therefore, they don’t take advantage of momentum. But what other qualities are Lazy Portfolios missing that we can easily correct?</p>
<ol>
<li><strong>Unpredictable losses in bear markets.</strong> As we saw in my analysis of the 10 major Lazy Portfolios, some of them subjected investors to <strong>worse drawdowns</strong> with a Momentum Rule than without. A given Lazy Portfolio may not have the right mix of assets to keep losses small during equity bear markets.</li>
<li><strong>No support from authors.</strong> At this writing, none of the Lazy Portfolio designers have announced a momentum version of their asset-allocation plans. Before investors commit serious money, they expect to see some kind of website, newsletter, or discussion group that provides ongoing advice and support for an adaptive portfolio.</li>
<li><strong>No long-term experience by actual people.</strong> Without direction from a Lazy Portfolio’s author, there is no community of investors who’ve learned in real time the best ways to implement an improved strategy. This also means there’s no real-money track record we can observe over a period of several years.</li>
<li><strong>No utilization of commodity and precious-metal funds.</strong> With the introduction of new ETFs in the last few years, we can now buy and sell indexes of commodities, gold, and other “hard assets,” as easily as we buy any other ETF. These “alternative” asset classes often go up when the equity market is crashing, providing safe harbors for investors.</li>
</ol>
<p>The Muscular Portfolios that were shown in <a href="https://bri.li/190718b" target="_blank">Part 1</a> of this conclusion resolve the missing aspects of Lazy Portfolios: (1) A Muscular Portfolio is designed to never lose more than 20% or 25% between statements, even during the worst market crashes. (2) The strategies were designed by Mebane Faber, co-author of <em>The Ivy Portfolio,</em> and Steve LeCompte, CEO of the CXO Advisory Group — both of whom have extensive websites and blogs for investors. (3) These communities have followed momentum-based systems for years, providing track records. (4) Muscular Portfolios exhibit sophisticated use of commodity and precious-metal ETFs, buying them only when those asset classes show strong momentum and are therefore likely to keep going up when equities are falling.</p>
<p>A website I own, MuscularPortfolios.com, <a href="https://bri.li/190718i" target="_blank">computes the rankings of ETFs</a> every 10 minutes while the New York markets are open. This provides the data investors need to support their monthly tune-ups.</p>
<p>There may be investing strategies that are more elaborate, but there are none I’ve found that are as simple, easy-to-follow, and profitable over the long term.</p>
<h3>A beginning strategy for novices</h3>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15634337925601134149681.png" style="width:799px;height:736px;" /></p>
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<p class="subnote"><strong>Figure 3.</strong> The Baby Bear Portfolio, based on a super-simple strategy of 50% US stocks and 50% US bonds — developed by the late Jack Bogle, founder of the Vanguard Group — provides market-like returns over the long term with only bond-like volatility when the S&P 500 is crashing. Source: Quant simulator.</p>
<p>Reader James H. requested that I publish a performance graph of the Baby Bear Portfolio for the same 43-year period as the two Muscular Portfolios in <a href="https://bri.li/190718b" target="_blank">Part 1</a>. The result is shown in Figure 3.</p>
<p>The Baby Bear is a starter portfolio for people with less than $10,000 to invest. Its 50/50 strategy was promoted for decades by the late Jack Bogle, founder of the Vanguard Group. It keeps trading costs to an absolute minimum by trading only once a year, solely to rebalance the holdings back to 50% US stocks and 50% US bonds. It isn’t a Muscular Portfolio, because it doesn’t include enough asset classes to utilize momentum. Also, the Baby Bear has lost more than 25% during S&P 500 crashes, unlike the two Muscular Portfolios.</p>
<p>Why do I include the Baby Bear Portfolio in my Goldilocks Investing research project? Because the 50/50 strategy illustrates the fact that simple, diversified portfolios can work better than complex, high-effort strategies. The brilliance of Bogle is that he recognized how an ultrabasic strategy can be easier to follow but returns just as much as a high-risk 100% S&P 500 portfolio. Many people assume a portfolio comprised 50% of bonds would have <strong>half</strong> the performance of the S&P 500, but that isn’t true at all. Since it loses less during bear markets, the Baby Bear actually outperformed most US college endowment funds in a recent 15-year period — a fact Bogle happily crowed about in a <a href="https://bri.li/190718j" target="_blank">speech to endowment managers</a>.</p>
<p>Look carefully at the graph from 1973 through 2015. A brokerage account that followed the Baby Bear strategy was ahead of the S&P 500, including dividends, in two-thirds of the months, according to the Quant simulator. The Baby Bear, like the two Muscular Portfolios, <strong>always lags the S&P 500 during bull markets,</strong> but more than compensates by <strong>greatly outperforming during bear markets.</strong> If you just stop comparing your portfolio to the S&P 500 except over complete bear-bull market cycles, you can get the growth you want without the agony of crashes.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>Bolting just one step onto Lazy Portfolios lifts their gains. But that isn't all investors want. Let's build a superior strategy that's still simple. • The noted academics Fama & French have demonstrated that ‘factors' exhibit predictive power. It's about time portfolios for individual investors accept these findings and update themselves to the 21st century. Figure 1. Eugene Fama (left) of the University of Chicago and Kenneth French of Dartmouth College published in 1992 their "three-factor model," which evolved in 1997 into the "four-factor model." The fourth factor, of course, is...How to Make Your Portfolio MuscularBrian Livingstontag:stockcharts.com,2019-07-16:post-148242020-01-06T08:01:35Z2019-07-16T10:30:00Z<blockquote>
<p>Adding a single rule improves every so-called Lazy Portfolio. But just that one change doesn’t improve them enough to make them right for investors. • The 21st century offers an index investing revolution. We now enjoy superb tracking, near-zero commissions, and tiny fund fees. We can take advantage of these advancements to construct portfolios that are truly muscular and profitable.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/1563272559705940778926.png" style="width:799px;height:599px;" /></p>
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<p class="subnote"><strong>Figure 1.</strong> We can exploit many new investing developments — not just one single change — to create the most muscular financial strategies possible. Illustration by Talaj/Shutterstock.</p>
<p class="subnote" style="background-color:#FFFFDD; padding: 15px; border-top: 1px solid #006699; border-bottom: 3px solid #006699; border-left: 1px solid #006699; border-right: 3px solid #006699;"><strong><em>• NOTICE: This column will begin a temporary hiatus in August 2019. To continue receiving my articles, subscribe now to the free <a href="https://bri.li/190716a" target="_blank">Muscular Portfolios Newsletter</a>.</em></strong></p>
<p>This article is the conclusion of a 10-part series in which we analyzed nine so-called Lazy Portfolios. These “lazy” strategies allocate your money to various index funds, in percentages that never change regardless of market conditions. If you missed that series, jump now to <a href="https://bri.li/190711a" target="_blank">Part 1</a>. (A tenth Lazy Portfolio, the Bucket Strategy developed by Morningstar, was analyzed with similar results in a <a href="https://bri.li/190716c" target="_blank">previous column</a>.)</p>
<p>In this series, we’ve discovered several facts by scrutinizing the most popular Lazy Portfolios:</p>
<ul>
<li>The annualized return of <strong>every</strong> Lazy Portfolio, measured over the past 43 years, improved with the addition of a single Momentum Rule, according to the Quant simulator. (The rule and the simulator are described below.)</li>
<li>The smallest improvement in a Lazy Portfolio was <strong>3.9</strong> percentage points annualized. Using a Momentum Rule, the Coward’s Portfolio returned <strong>14.8%</strong> instead of <strong>10.9%.</strong></li>
<li>The greatest improvement was <strong>6.6</strong> percentage points. Using a Momentum Rule, the Ultimate Buy & Hold Portfolio returned <strong>16.6%</strong> instead of <strong>10.0%.</strong></li>
</ul>
<p>However, simply adding a Momentum Rule was <strong>not a perfect fix</strong> for these old-line, “static asset allocation” strategies.</p>
<p>Even improved with momentum, the majority of Lazy Portfolios still suffered drawdowns worse than 25% during bear markets. Most long-term investors find such huge collapses intolerable, as we’ll see below.</p>
<p>When a Momentum Rule was added, three of the nine Lazy Portfolios actually suffered crashes that were <strong>worse than</strong> or showed <strong>no improvement over</strong> the static version. Those portfolios’ asset mixes were not diversified enough to take maximum advantage of the rule during bear markets.</p>
<p>In this conclusion, we’ll see a few other simple changes — in addition to a Momentum Rule — that are necessary to construct the most profitable and easy-to-use portfolios that are possible today.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15632713194471729019040.png" style="width:799px;height:738px;" /></p>
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<p class="subnote"><strong>Figure 2.</strong> The Papa Bear Portfolio and the Mama Bear Portfolio have the right mix of 9 to 13 asset classes to take advantage of both momentum <em>and</em> diversification. Source: The Idea Farm’s Quant simulator.</p>
<p>Figure 2 shows the 43-year returns from two investment strategies that are called the Papa Bear Portfolio and the Mama Bear Portfolio. The returns are for 1973 through 2015, according to the Quant simulator. This simulation software is a free download for <a href="https://bri.li/190716d" target="_blank">subscribers</a> to Mebane Faber’s Idea Farm Newsletter.</p>
<p>I’ve been an equity investor since 1986. But I began in 2012 to search in earnest for portfolios with several essential traits. This research project is called Goldilocks Investing. Its purpose is to discover strategies that are not too risky, not too tame, but still have great gains. To work with all kinds of 401(k) plans and other tax-deferred savings accounts, the formulas must also use widely available index funds and require no more than one position change per month.</p>
<p>The outcome of my investigation is the two portfolios named above, plus a Baby Bear Portfolio. (The Baby Bear is an ultrasimple starter strategy for beginners who have less than $10,000 to invest.) All of these strategies are described in detail in my 2018 book <em><a href="https://bri.li/190716am" target="_blank">Muscular Portfolios</a>.</em></p>
<p>We’ve seen in the book’s <a href="https://bri.li/190716mm" target="_blank">one-page summary</a> that individual investors tend to underperform the S&P 500 by at least 2 percentage points a year. In the summary, one financial expert shows that underperformance this serious is probably caused by people (A) liquidating their assets at the end of any year in which the S&P 500 declined more than 20%, and then (B) staying out of equities for the following 12 months, missing the strong upward recovery that typically occurs in the beginning of the subsequent bull market.</p>
<p>A “behavioral pain point” after a loss of more than 25% compels many individuals to throw in the towel, seriously harming their long-term performance.</p>
<p>All of the Lazy Portfolios we analyzed in this series — and the Papa Bear Portfolio shown in Figure 2 — were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total gain of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190716e" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>Unlike the Papa Bear, the Mama Bear uses a simpler Momentum Rule: You rank the total gain of each asset class over the past <strong>five months.</strong> This difference gives the Mama Bear a smaller long-term return than the Papa Bear. In exchange, the Mama Bear’s drawdowns are smaller, never exceeding 18% between any two month-ends. The Papa Bear has lost as much as 25% — just below the behavioral pain point — but it delivers a higher long-term return than the Mama Bear.</p>
<p>The Papa Bear and Mama Bear theoretically improve on the performance of the S&P 500, including dividends, by <strong>4 to 6 percentage points annualized,</strong> as shown in Figure 2. The two strategies achieved this long-term growth entirely by keeping their losses <strong>below 25%</strong> during bear markets. That’s superb outperformance, especially when the S&P 500 was crashing more than <strong>40% and 50%</strong> in 2002 and 2009.</p>
<p>The two strategies accomplish their much lower risk of loss by combining momentum with the proper diversification. The Mama Bear selects from a menu of 9 different index ETFs. The Papa Bear utilizes a larger palette of 13 ETFs. To see the specific index funds, and which ones should be held in any given month, visit my <a href="https://bri.li/190716f" target="_blank">Mama Bear page</a> and <a href="https://bri.li/190716g" target="_blank">Papa Bear page</a> on the Web.</p>
<p>In real-time tracking by MarketWatch, every Lazy Portfolio underperformed the S&P 500 in a recent 15-year period by as much as 2.5 percentage points annualized, as we saw in <a href="https://bri.li/190716b" target="_blank">Part 1</a> of this series. Even worse, the Lazy Portfolios all lost one-third to one-half of their investors’ money during the 2007–2009 financial crisis.</p>
<p>Investors don’t need to put up with smaller gains than the S&P 500 while also suffering crashes that are almost as severe as the index’s.</p>
<p>The book makes no claim that the Papa Bear and Mama Bear will produce <strong>16.2%</strong> and <strong>14.3%</strong> returns in the future. The period from 1973 through 2015 was a unique time. That exact sequence of returns will never be repeated.</p>
<p>However, <em>so what</em> if Muscular Portfolios slightly fade? What if they return only the <strong>same gains</strong> as the S&P 500 in the coming years? If so, you will have achieved market-like performance while suffering only <strong>half</strong> of the benchmark’s heart-stopping losses. That’s precisely what investors are looking for: healthy gains with less risk.</p>
<p>In my simulations, most of the Lazy Portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio requires. (The 7Twelve Lazy Portfolio was charged a slightly higher cost of 0.15% per year, reflecting the higher expense ratios of the ETFs it uses.)</p>
<p>In Figure 2, the Papa Bear was charged 0.16% and the Mama Bear 0.20%, due to the higher annual fees of the commodity and precious-metal ETFs they include. The inclusion of “alternative” asset classes such as these is a key strength of Muscular Portfolios over static strategies.</p>
<p>The momentum versions of each Lazy Portfolio — as well as the Mama Bear and Papa Bear themselves — were also charged 0.10% round-trip every time the formula required one ETF to be sold and a replacement purchased. This adjusts for today’s cost of buying and selling low-cost index funds.</p>
<p>In the second part of this conclusion, we’ll see exactly how the Muscular Portfolios do what Lazy Portfolios cannot — improving their performance while keeping losses down to very tolerable levels.</p>
<p class="subnote">• Part 2 appears on July <a href="https://bri.li/190716h" target="_blank">18</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>Adding a single rule improves every so-called Lazy Portfolio. But just that one change doesn't improve them enough to make them right for investors. • The 21st century offers an index investing revolution. We now enjoy superb tracking, near-zero commissions, and tiny fund fees. We can take advantage of these advancements to construct portfolios that are truly muscular and profitable. Figure 1. We can exploit many new investing developments — not just one single change — to create the most muscular financial strategies possible. Illustration by Talaj/Shutterstock. • NOTICE: This column will...The Unconventional Success Portfolio Irons Out the KinksBrian Livingstontag:stockcharts.com,2019-07-11:post-57382020-01-06T07:49:35Z2019-07-11T09:00:00Z<blockquote>
<p>Unconventional Success is a portfolio with a pedigree. It was designed by David Swensen, chief investment officer of Yale University. • His investing record is the best in the Ivy League. Swensen’s strategy for individuals, however, is not the same as his university’s endowment fund. Instead, he prescribes a super-simple Lazy Portfolio, ironing out complexity by holding only six index funds.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15628275093371399368171.png" style="width:799px;height:670px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Unconventional Success Portfolio is actually a fairly conventional example of strategies called Lazy Portfolios. Photo by Everett Collection/Shutterstock.</p>
<p class="subnote">• Part 10 of a series. Parts 1 through 9 appeared on June <a href="https://bri.li/190711a" target="_blank">11</a>, <a href="https://bri.li/190711b" target="_blank">13</a>, <a href="https://bri.li/190711c" target="_blank">18</a>, <a href="https://bri.li/190711d" target="_blank">20</a>, <a href="https://bri.li/190711e" target="_blank">25</a>, <a href="https://bri.li/190711f" target="_blank">27</a>, <a href="https://bri.li/190711g" target="_blank">29</a>, <a href="https://bri.li/190711h" target="_blank">30</a>, and July <a href="https://bri.li/190711i" target="_blank">9</a>, 2019. •</p>
<p>We saw in <a href="https://bri.li/190711a" target="_blank">Part 1</a> of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Unconventional Success Portfolio was developed by David Swensen, chief investment officer of Yale University’s giant endowment fund. As an institutional investor, he’s drawn praise for his realization that colleges have an unlimited life span. They can profit, therefore, from assets that take many years to pay off, such as tree farms and private-equity firms.</p>
<p>This long-term approach has served him well. According to an <a href="https://bri.li/190711j" target="_blank">article</a> in the Journal of Wealth Management, Swensen delivered the best record of any Ivy League endowment fund managing more than $1 billion in assets. In the 17 fiscal years ending June 30, 2015, the top three universities’ annualized total returns were:</p>
<p><strong>12.3%</strong> — Yale University<br />
<strong>11.8%</strong> — Princeton University<br />
<strong>11.7%</strong> — Duke University</p>
<p>By comparison, the S&P 500’s annualized total return during the same period was only <strong>5.5%.</strong></p>
<p>In addition, the three colleges lost during their worst fiscal years only such relatively tolerable amounts as <strong>24.6%, 23.5%,</strong> and <strong>24.3%,</strong> respectively. The S&P 500 lost a gut-wrenching <strong>35.9%</strong> in its worst fiscal year.</p>
<p>Swensen’s 2005 book for individual investors, <em><a href="https://bri.li/190711k" target="_blank">Unconventional Success</a>,</em> didn’t recommend that people try to duplicate Yale’s methods. Small investors can’t access high-net-worth private-equity funds or other sophisticated investment opportunities that are available to universities. Instead, his book specified a much different approach — a super-simple Lazy Portfolio that holds only six index funds in proportions that never change.</p>
<p>Unconventional is one of eight so-called Lazy Portfolios that have been tracked in real time by MarketWatch.com for the better part of two decades. In the 15 years ending Dec. 31, 2017, the strategy had the third-highest return of the eight portfolios, returning <strong>8.68%</strong> annualized, according to MarketWatch’s statistics, as shown in <a href="https://bri.li/190709a" target="_blank">Part 1</a>. However, that underperformed the S&P 500, which returned <strong>9.93%,</strong> including dividends. The benchmark did better than any of the Lazy Portfolios.</p>
<p>Swensen’s model has also been tracked in real time for several years by My Plan IQ, a financial website that rates 401(k) plans and other investment strategies. The portfolio can also be simulated over a recent 43-year period by Mebane Faber’s Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190711l" target="_blank">subscription</a> to the Idea Farm Newsletter ($399 per year).</p>
<p>Unfortunately, Unconventional was the second-worst-performing model of the nine Lazy Portfolios that are described in this series of StockCharts articles, based on Quant’s 43-year simulation. Unconventional had a long-term annualized total return of <strong>9.7%,</strong> as shown below in Figure 2. That was far less rewarding than other simple models, such as the Coward’s Portfolio that we saw in <a href="https://bri.li/190711b" target="_blank">Part 2</a>, which delivered <strong>10.9%</strong> annualized. During the same 43-year period, the S&P 500’s total return was <strong>10.0%.</strong></p>
<p>The good news is that a single additional step, called the Momentum Rule, improved Unconventional’s theoretical return to a very respectable <strong>14.3%.</strong></p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15628276393701939190985.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Unconventional Success Portfolio would have given investors 4.6 points more annualized return if followers held only the strongest three funds each month, compared with constantly holding every fund all the time. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total gain of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190711m" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>The six asset classes that Unconventional holds, and the percentages for each one, are:</p>
<ul>
<li>30% all US stocks</li>
<li>15% developed-market stocks</li>
<li>5% emerging-market stocks</li>
<li>20% US real-estate investment trusts (REITs)</li>
<li>15% long-term Treasury bonds</li>
<li>15% Treasury inflation-protected securities (TIPS)</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190711o" target="_blank">breakdown</a> at My Plan IQ.</p>
<p>Starting with $100, the Lazy Portfolio gave you only <strong>$5,468</strong> after 43 years. The momentum version ended up giving you <strong>$32,201</strong> in your account — almost six times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>Swensen did not respond to a request for comment.</p>
<p>This concludes my series of articles analyzing nine of the most popular Lazy Portfolios. In my concluding article, we’ll add up our findings. Best of all, you’ll see the best portfolios we can create using today’s complete set of asset classes, and how simple rules greatly improve these portfolio’s performances.</p>
<p class="subnote">• The conclusion appears on July <a href="https://bri.li/190711n" target="_blank">16</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>Unconventional Success is a portfolio with a pedigree. It was designed by David Swensen, chief investment officer of Yale University. • His investing record is the best in the Ivy League. Swensen's strategy for individuals, however, is not the same as his university's endowment fund. Instead, he prescribes a super-simple Lazy Portfolio, ironing out complexity by holding only six index funds. Figure 1. The Unconventional Success Portfolio is actually a fairly conventional example of strategies called Lazy Portfolios. Photo by Everett Collection/Shutterstock. • Part 10 of a series. Parts 1...Aronson Family Taxable is a Plan for Household WealthBrian Livingstontag:stockcharts.com,2019-07-09:post-56882020-01-06T07:49:31Z2019-07-09T09:00:00Z<blockquote>
<p>The Aronson Family Taxable Portfolio is for those people willing to allocate money to 11 funds. It’s performed fairly well but can be improved upon. • The strategy is reportedly one that Ted Aronson, a principal of the AJO wealth-management firm, puts his own family’s money into. With no transactions other than an annual rebalance, it’s intended to keep taxable events to a minimum.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/1562631900563860130783.png" style="width:799px;height:510px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Aronson Family Taxable Portfolio is a buy-and-hold strategy that’s intended to create transactions no more than once a year to hold taxes down. Photo by Pavel L Photo & Video/Shutterstock.</p>
<p class="subnote">• Part 9 of a series. Parts 1, 2, 3, 4, 5, 6, 7, and 8 appeared on June <a href="https://bri.li/190709a" target="_blank">11</a>, <a href="https://bri.li/190709b" target="_blank">13</a>, <a href="https://bri.li/190709c" target="_blank">18</a>, <a href="https://bri.li/190709d" target="_blank">20</a>, <a href="https://bri.li/190709e" target="_blank">25</a>, <a href="https://bri.li/190709f" target="_blank">27</a>, <a href="https://bri.li/190709g" target="_blank">29</a> , and <a href="https://bri.li/190709h" target="_blank">30</a>, 2019. •</p>
<p>We saw in Part 1 of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Aronson Family Taxable Portfolio was developed by Ted Aronson, a financial adviser and co-founder of the Aronson + Johnson + Ortiz (AJO) wealth-management firm in Philadelphia, Pennsylvania.</p>
<p>Family Taxable is one of eight so-called Lazy Portfolios that have been tracked in real time by MarketWatch.com for the better part of two decades. In the 15 years ending Dec. 31, 2017, the strategy had the second-highest return of the eight portfolios, returning <strong>8.80%</strong> annualized, according to MarketWatch’s statistics, as shown in <a href="https://bri.li/190709a" target="_blank">Part 1</a>. By comparison, the S&P 500, including dividends, returned <strong>9.93%,</strong> better than any of the Lazy Portfolios.</p>
<p>Aronson’s creation, which requires an investor to hold 11 mutual funds or exchange-traded funds (ETFs), has also been tracked in real time since mid-2001 by My Plan IQ, a financial website that rates 401(k) plans and other investment strategies. The portfolio can also be simulated over a recent 43-year period by Mebane Faber’s Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190709i" target="_blank">subscription</a> to the Idea Farm Newsletter ($399 per year).</p>
<p>According to My Plan IQ’s real-time tracking, Family Taxable suffered the largest loss of the five most-popular Lazy Portfolios during the 2007–2009 bear market. Measured between daily closes and adjusted for dividends and inflation, Family Taxable vaporized about <strong>48%</strong> of followers’ money. Measured between months-ends and adjusted for dividends (but not inflation), the drawdown was <strong>43.5%</strong> in My Plan IQ’s statistics and <strong>39.6%</strong> in Quant’s simulation.</p>
<p>The losses that Family Taxable and other Lazy Portfolios subject investors to are far beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190709a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>Family Taxable divides your money 70% into stocks and 30% into bonds. This is a more aggressive allocation to equities than most Lazy Portfolios, which usually specify a 60/40 allocation. Unlike most other static asset allocation portfolios, Family Taxable allocates no money to real-estate investment trusts (REITs), instead devoting 5% to US corporate junk bonds (high-yield bonds):</p>
<ul>
<li>5% all US stocks</li>
<li>15% US large-cap stocks</li>
<li>10% US mid-cap stocks</li>
<li>5% US small-cap growth stocks</li>
<li>5% US small-cap value stocks</li>
<li>5% European stocks</li>
<li>15% Asia-Pacific stocks</li>
<li>10% emerging-market stocks</li>
<li>10% long-term Treasury bonds</li>
<li>15% Treasury inflation-protected securities (TIPS)</li>
<li>5% US corporate high-yield bonds (junk bonds)</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190709j" target="_blank">breakdown</a> at My Plan IQ.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/07/15626319273881936203809.png" style="width:600px;height:453px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Aronson Family Taxable Portfolio would have given investors 4.1 points more annualized return if followers held only the strongest three funds each month, compared with constantly holding every fund all the time. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total gain of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190709k" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, Family Taxable’s long-term performance greatly improves with the addition of a single new rule. The annualized return of the Lazy Portfolio version over the 43 years ending 2015 was <strong>10.0%.</strong> That’s identical to the S&P 500’s return, including dividends, of <strong>10.0%</strong> in the same period. However, by adding a Momentum Rule, that one change boosted Family Taxable’s theoretical return to <strong>14.1%</strong> — an additional 4.1 percentage points.</p>
<p>Starting with $100, the Lazy Portfolio gave you only <strong>$6,084</strong> after 43 years. The momentum version ended up giving you <strong>$29,186</strong> in your account — almost five times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>Adding a Momentum Rule didn’t just improve Family Taxable in terms of gain. The momentum version of the portfolio also lost only <strong>18%</strong> between month-ends during the 2007–2009 bear market, according to the Quant simulator. That’s a huge improvement over the static asset allocation version, which as previously mentioned lost <strong>40%.</strong> Unfortunately, the momentum version of Family Taxable did not keep its losses to a tolerable 18% during the entire period — it experienced a worse loss of <strong>29%</strong> in the 1987 bear market. Adding momentum is not a panacea for Family Taxable’s mix of index funds. The strategy lacks the ability to tilt the portfolio toward REITs or commodities during stressful times for equities.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>Asked for comment, Aronson sent me a hardbound copy of his firm’s client perk, <em>The New Yorker Aronson + Johnson + Ortiz Book of Cartoons.</em> It’s a 146-page collection of jokes from the magazine, complete with a foreword by Bob Mankoff, the New Yorker’s cartoon editor. Mankoff says AJO chose the book’s 133 cartoons “extremely well,” and I have to agree. I laughed my assets off.</p>
<p>In a note that came to me inside the book, Aronson said, “AJO uses momentum in a big way in all our work.” He declined the opportunity for a telephone interview, writing in an email, “As quant institutional equity managers, we prefer to stay under the radar.”</p>
<p>In the final part of this series, we’ll see one more strategy that <strong>improves its gains</strong> and <strong>reduces its losses</strong> when a Momentum Rule is added.</p>
<p class="subnote">• Part 10 appears on July <a href="https://bri.li/190709l" target="_blank">11</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Aronson Family Taxable Portfolio is for those people willing to allocate money to 11 funds. It's performed fairly well but can be improved upon. • The strategy is reportedly one that Ted Aronson, a principal of the AJO wealth-management firm, puts his own family's money into. With no transactions other than an annual rebalance, it's intended to keep taxable events to a minimum. Figure 1. The Aronson Family Taxable Portfolio is a buy-and-hold strategy that's intended to create transactions no more than once a year to hold taxes down. Photo by Pavel L Photo & Video/Shutterstock. •...Ultimate Buy & Hold is the Most-Improved Lazy PortfolioBrian Livingstontag:stockcharts.com,2019-07-01:post-57372020-01-06T07:49:34Z2019-07-01T03:00:00Z<blockquote>
<p>The Ultimate Buy & Hold Portfolio allocates your money to 10 or 11 funds, depending on which of several published variations you decide to follow. • This strategy has the distinction that it improves more than any other Lazy Portfolio when a simple Momentum Rule is added. That doesn’t make it the best of all possible portfolios, but it does have valuable lessons for us.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1561950736212731410969.png" style="width:799px;height:532px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Ultimate Buy & Hold Portfolio is intended to make investing as easy as a walk in the park, although it has nothing to do with Ultimate Frisbee. Photo by G-Stock Studio/Shutterstock.</p>
<p class="subnote">• Part 8 of a series. Parts 1, 2, 3, 4, 5, 6, and 7 appeared on June <a href="https://bri.li/190630a" target="_blank">11</a>, <a href="https://bri.li/190630b" target="_blank">13</a>, <a href="https://bri.li/190630c" target="_blank">18</a>, <a href="https://bri.li/190630d" target="_blank">20</a>, <a href="https://bri.li/190630e" target="_blank">25</a>, <a href="https://bri.li/190630f" target="_blank">27</a>, and <a href="https://bri.li/190630g" target="_blank">29</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Ultimate Buy & Hold Portfolio was developed in the mid-1990s by Paul Merriman, a long-time financial adviser who is now retired and volunteers his time to educate investors. He’s written a handful of books — the latest is <em>Financial Fitness Forever</em> — all of which are available from his <a href="https://bri.li/190630h" target="_blank">website</a>. He also gives away three smaller books, which are easy to download as PDFs from a special <a href="https://bri.li/190630i" target="_blank">Web page</a>.</p>
<p>Ultimate gives you a fairly typical division of your funds 60% into equity-like assets and 40% into bonds. This is an allocation that most Lazy Portfolios use, which is often called the “pension model.” In Ultimate, about 60% of your money is devoted to US and international stocks, with a dollop in US real-estate investment trusts. REITs are considered “equity-like,” because they tend to rise when the stock market rises, and vice versa.</p>
<p>Merriman has published numerous variations of Ultimate over the years. In today’s article, the proportions used are those shown at My Plan IQ, a website that rates thousands of 401(k) programs and other investing strategies. The site has tracked Ultimate in real time since 2001. (The site stopped including developed-market stocks after Mar. 31, 2016. This is apparently in response to Merriman’s desire to simplify the portfolio down to only 10 assets.)</p>
<p>The proportions used in this analysis are as follows:</p>
<ul>
<li>6% US large-cap stocks</li>
<li>6% US large-cap value stocks</li>
<li>6% US small-cap stocks</li>
<li>6% US small-cap value stocks</li>
<li>12% non-US value stocks</li>
<li>12% developed-market stocks</li>
<li>6% emerging-market stocks</li>
<li>6% US real-estate investment trusts (REITs)</li>
<li>20% intermediate-term Treasurys</li>
<li>12% short-term Treasurys</li>
<li>8% Treasury inflation-protected securities (TIPS)</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190630j" target="_blank">breakdown</a> at My Plan IQ.</p>
<p>The 2007–2009 global financial crisis drove Ultimate to a loss of 37% between month-ends, according to the Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190629j" target="_blank">subscription</a> to Mebane Faber’s Idea Farm Newsletter ($399 per year).</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15619507749961345526168.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Ultimate Buy & Hold Portfolio would have given investors 6.6 points more annualized return if followers held only the strongest three funds each month, compared with constantly holding every fund all the time. That’s the biggest improvement of any Lazy Portfolio in this series of articles. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190630k" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>Ultimate is one of eight static asset allocation portfolios that MarketWatch.com has tracked in real time for more than 15 years. As you can see from the table in <a href="https://bri.li/190630a" target="_blank">Part 1</a>, Ultimate delivered the smallest return of any of the eight portfolios. In the 15 years ending Dec. 31, 2017 — the shortest period of time that a strategy’s return has any predictive power — Ultimate returned only <strong>7.37%</strong> annualized, according to MarketWatch statistics. The S&P 500, including dividends, returned <strong>9.93%.</strong></p>
<p>As you can see in Figure 2, Ulitimate’s long-term performance greatly improves with the addition of a single new rule. The annualized return of the Lazy Portfolio version over the 43 years ending 2015, was <strong>10.0%.</strong> That’s identical to the S&P 500’s return, including dividends, of <strong>10.0%</strong> in the same period. However, by adding a Momentum Rule, that one change boosted Ultimate’s theoretical return to <strong>16.6%</strong> — an additional 6.6 percentage points. That’s the largest point gain for the momentum version of any Lazy Portfolio in this series of articles.</p>
<p>Starting with $100, the Lazy Portfolio gave you only <strong>$6,102</strong> after 43 years. The momentum version ended up giving you <strong>$75,886</strong> in your account — more than 12 times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>Adding a Momentum Rule didn’t just improve Ultimate in terms of gain. The momentum version of Ultimate also lost only <strong>19%</strong> between month-ends during the 2007–2009 bear market, according to the Quant simulator. That’s a huge improvement over the static asset allocation version, which lost <strong>37%.</strong> The losses that Ultimate and other Lazy Portfolios subject investors to are beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190629a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>I’ve met with Merriman a number of times to discuss adding momentum Ultimate, most recently at the 2018 national conference of the American Association of Individual Investors (AAII). He points out that the wealth-management firm he used to run, Merriman Inc., has always offered individually tailored stock portfolios, including a market-timing strategy.</p>
<p>However, his current recommendation is that people use what he is calling the Merriman Aggressive Target-Date Fund (TDF) model. Another name for it is “2 Funds for Life.” This strategy calls for you to devote 1.5 times your age to a TDF throughout your working career. For example, when you’re 40 years of age, you’d keep 60% of your holdings in a target-date fund that’s geared to the year you plan to retire. The other portion of your funds — 40%, in this example — would go into a US small-cap value fund. Merriman believes US small-caps will have the best future performance of any asset class. Full details are at his <a href="https://bri.li/190630l" target="_blank">Ultimate TDF page</a>.</p>
<p>In the coming parts of this series, we’ll see a few strategies that both <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added, as well as how to manage your money the 21st-century way.</p>
<p class="subnote">• Part 9 appears on July <a href="https://bri.li/190630m" target="_blank">9</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Ultimate Buy & Hold Portfolio allocates your money to 10 or 11 funds, depending on which of several published variations you decide to follow. • This strategy has the distinction that it improves more than any other Lazy Portfolio when a simple Momentum Rule is added. That doesn't make it the best of all possible portfolios, but it does have valuable lessons for us. Figure 1. The Ultimate Buy & Hold Portfolio is intended to make investing as easy as a walk in the park, although it has nothing to do with Ultimate Frisbee. Photo by G-Stock Studio/Shutterstock. • Part 8 of a...Easily Improve the Gains of the Ideal Index PortfolioBrian Livingstontag:stockcharts.com,2019-06-29:post-57052020-01-06T07:49:32Z2019-06-29T09:00:00Z<blockquote>
<p>The Ideal Index Portfolio is intended to give you a relatively aggressive allocation to equities, evenly split between US and international stocks. • That risk-on strategy gave Ideal a slightly better four-decade performance than the S&P 500 (including dividends). But it also resulted in an estimated 43% loss during the 2007–2009 bear market, worse than many investors can or will tolerate.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15617826201571759394750.png" style="width:799px;height:533px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Ideal Index Portfolio equally balances US stocks and non-US stocks in its static asset allocation model. The positions do not change over the years as asset classes rise and fall in price. Photo by William Potter/Shutterstock.</p>
<p class="subnote">• Part 7 of a series. Parts 1, 2, 3, 4, 5, and 6 appeared on June <a href="https://bri.li/190629a" target="_blank">11</a>, <a href="https://bri.li/190629b" target="_blank">13</a>, <a href="https://bri.li/190629c" target="_blank">18</a>, <a href="https://bri.li/190629d" target="_blank">20</a>, <a href="https://bri.li/190629e" target="_blank">25</a>, and <a href="https://bri.li/190629f" target="_blank">27</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Ideal Index Portfolio was described in 2002 in the book <a href="https://bri.li/190629g" target="_blank"><em>The Informed Investor</em></a> by Frank Armstrong III. In 1993, he founded <a href="https://bri.li/190629h" target="_blank">Investor Solutions Inc</a>., a fee-only registered investment advisory firm based in Coconut Grove, Florida.</p>
<p>Ideal is designed to give you a relatively aggressive 70% allocation of your portfolio into equities and equity-like assets (including real-estate investment trusts or REITs). This 70% proportion of equity-like assets is slightly higher than the typical 60% stocks/40% bonds allocation of most Lazy Portfolios.</p>
<p>The equity portion of the portfolio has a larger commitment to international equities than many Lazy Portfolios, with 31% in global stocks and another 31% in US stocks. An 8% allocation to REITs makes up the remainder of the equity-like holdings. The other 30% of your money is devoted about two-thirds to US government debt and one-third to corporate investment-grade debt, all with short-term maturities (one to five years):</p>
<ul>
<li>6.25% US large-cap stocks</li>
<li>9.25% US large-cap value stocks</li>
<li>6.25% US small-cap growth stocks</li>
<li>9.25% US small-cap value stocks</li>
<li>31% all non-US stocks</li>
<li>8% US real-estate investment trusts (REITs)</li>
<li>30% US short-term government and corporate investment-grade bonds</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190629i" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>The 2007–2009 global financial crisis drove Ideal to a loss of 43% between month-ends, according to the Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190629j" target="_blank">subscription</a> to Mebane Faber’s Idea Farm Newsletter ($399 per year).</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1561782720740939753621.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Ideal Index Portfolio would have given investors 4.4 points more annualized return if followers held only the strongest three funds each month, compared with constantly holding all seven funds. Unfortunately, adding a Momentum Rule did not give the alternative version a maximum drawdown any smaller than the static version of the portfolio. Both versions fell 43% during the 2007–2009 bear market. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190629k" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, Ideal’s long-term performance greatly improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>10.5%.</strong> That’s slightly better than the S&P 500’s annualized total return, including dividends, of <strong>10.0%</strong> over the same period. However, by simply adding a Momentum Rule, you boost Ideal’s theoretical return to <strong>14.9%.</strong></p>
<p>Starting with $100, the Lazy Portfolio gave you only <strong>$7,294</strong> after 43 years. The momentum version ended up giving you <strong>$39,474</strong> in your account — more than five times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>Just adding a Momentum Rule, however, doesn’t improve Ideal in every way. The momentum version of Ideal would have experienced <strong>no difference</strong> in the portfolio’s losses during the 2007–2009 bear market, compared with the lazy version. This is the only Lazy Portfolio we’ll see in this series in which the addition of a Momentum Rule didn’t change a strategy’s maximum drawdown, either up or down.</p>
<p>The static asset allocation version lost <strong>43%</strong> between month-ends in the 2007–2009 bear market, according to the Quant simulator. By contrast, the momentum version lost just as much: <strong>43%.</strong> Losses of this magnitude are beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190629a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>In an interview, I asked Armstrong for his comments on the above findings. “Every academic study that looks at factors of performance believes there is a momentum factor, but they all point out that it’s extremely difficult to capture,” he said. “At this point, I wouldn’t jump into implementing it.”</p>
<p>In the coming parts of this series, we’ll see a few strategies that both <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added, as well as how to manage your money the 21st-century way.</p>
<p class="subnote">• Part 8 appears on June <a href="https://bri.li/190629l" target="_blank">30</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Ideal Index Portfolio is intended to give you a relatively aggressive allocation to equities, evenly split between US and international stocks. • That risk-on strategy gave Ideal a slightly better four-decade performance than the S&P 500 (including dividends). But it also resulted in an estimated 43% loss during the 2007–2009 bear market, worse than many investors can or will tolerate. Figure 1. The Ideal Index Portfolio equally balances US stocks and non-US stocks in its static asset allocation model. The positions do not change over the years as asset classes rise and fall in...The Gone Fishin' Portfolio Sets Its Lure with 10 Asset ClassesBrian Livingstontag:stockcharts.com,2019-06-28:post-57032020-01-06T07:49:32Z2019-06-28T03:00:00Z<blockquote>
<p>The Gone Fishin’ Portfolio, like many so-called Lazy Portfolios, is promoted as requiring no changes over the years, no matter how bad the market gets. • The larger selection of asset classes it offers than most Lazy Portfolios do — 10 mutual funds or ETFs — may be the reason Gone Fishin’ notably improves with the addition of a single relative-strength rule.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1561687491837697884144.png" style="width:799px;height:530px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Gone Fishin’ Portfolio was intended by its author to give you the time to go out and relax while your investments make money. Photo illustration by Tamik/Shutterstock.</p>
<p class="subnote">• Part 6 of a series. Parts 1, 2, 3, 4, and 5 appeared on June <a href="https://bri.li/190627a" target="_blank">11</a>, <a href="https://bri.li/190627b" target="_blank">13</a>, <a href="https://bri.li/190627c" target="_blank">18</a>, <a href="https://bri.li/190627d" target="_blank">20</a>, and <a href="https://bri.li/190627e" target="_blank">25</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>Gone Fishin’ is described in the book <a href="https://bri.li/190627f" target="_blank"><em>The Gone Fishin’ Portfolio</em></a> by Alexander Green, chief investment strategist of the Oxford Club, a financial advisory firm in Baltimore, Maryland. The group offers a 16-page <a href="https://bri.li/190627g" target="_blank">PDF</a> on the plan. Its name was chosen to suggest that you could go fishing — or whatever you like — with the time you saved by not having to check on your investments every day. The investor makes no changes over the years, just annual rebalancing back to the original recommended percentages for each asset.</p>
<p>To follow Gone Fishin’, you hold 10 specified funds. You divide 60% of your money evenly between US and non-US stocks. Another 10% of your money is divided between real-estate investment trusts (REITs) and precious metals and mining. Finally, the remaining 30% is split equally among Treasury inflation-protected securities (TIPS), corporate investment-grade bonds, and corporate high-yield (junk) bonds.</p>
<p>Gone Fishin’ has a more aggressive commitment to equity-like assets (including REITs) than most other Lazy Portfolios. Also, it’s one of only two such portfolios to allocate a slice of your money to junk bonds. The breakdown is as follows:</p>
<ul>
<li>15% all US stocks</li>
<li>15% US small-cap value stocks</li>
<li>10% European stocks</li>
<li>10% Asia-Pacific stocks</li>
<li>10% emerging-market stocks</li>
<li>5% US real-estate investment trusts (REITs)</li>
<li>5% precious metals (gold, silver, etc.)</li>
<li>10% Treasury inflation-protected securities (TIPS)</li>
<li>10% corporate short-term investment-grade bonds</li>
<li>10% corporate high-yield (junk) bonds</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="http://bri.li/190627h" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>The 2007–2009 global financial crisis drove Gone Fishin’ to a loss of <strong>39%</strong> between month-ends, according to the Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190627i" target="_blank">subscription</a> to Mebane Faber’s Idea Farm Newsletter ($399 per year).</p>
<p>Unlike some other Lazy Portfolios we’ll analyze in this series, Gone Fishin’ has not been tracked for years by MarketWatch.com. The estimates shown in Figure 2 use a 43-year simulation by Quant.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15616875283801783664128.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Gone Fishin’ Portfolio would have given investors 5.8 points more annualized return if followers held only the strongest three funds each month, instead of constantly holding all 10 funds in all market conditions. Additionally, the drawdown in 2009 improved to minus-27% from minus-39% when a Momentum Rule is added. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule, also called relative strength, is similar to a formula Faber published in a 2013 <a href="https://bri.li/190627j" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, Gone Fishin’s long-term performance greatly improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>10.2%.</strong> That was slightly better than the S&P 500’s annualized total return, including dividends, of 10.0% over the same period. However, by simply adding a Momentum Rule, you boost Gone Fishin’s return to <strong>16.0%.</strong> Starting with $100, the Lazy Portfolio gave you only <strong>$6,114</strong> after 43 years. The momentum version ended up giving you <strong>$59,150</strong> in your account — more than nine times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>The static asset allocation version lost <strong>39%</strong> between month-ends in the 2007–2009 bear market, according to the Quant simulator. By contrast, the momentum version lost only <strong>27%.</strong> There was also a steep loss in the 1987 Black Monday crash, costing investors <strong>29%</strong> between brokerage statements. Both losses are beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190627a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. (Only the 7Twelve Portfolio requires more-expensive ETFs.) In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>Green, the author of Gone Fishin’, did not respond to a request for comment. If I hear from him, I’ll add an update to the end of this article and include a note about the update in an upcoming installment.</p>
<p>In the coming parts of this series, we’ll see a few additional strategies that both <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added, as well as how to manage your money the 21st-century way.</p>
<p class="subnote">• Part 7 appears on June <a href="https://bri.li/190627k" target="_blank">29</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Gone Fishin' Portfolio, like many so-called Lazy Portfolios, is promoted as requiring no changes over the years, no matter how bad the market gets. • The larger selection of asset classes it offers than most Lazy Portfolios do — 10 mutual funds or ETFs — may be the reason Gone Fishin' notably improves with the addition of a single relative-strength rule. Figure 1. The Gone Fishin' Portfolio was intended by its author to give you the time to go out and relax while your investments make money. Photo illustration by Tamik/Shutterstock. • Part 6 of a series. Parts 1, 2, 3, 4, and 5...The Coffeehouse Portfolio Does Well with a Momentum TwistBrian Livingstontag:stockcharts.com,2019-06-26:post-56922020-01-06T07:49:31Z2019-06-26T03:00:00Z<blockquote>
<p>The Coffeehouse Portfolio is so named not because you buy Starbucks, but because the strategy is so simple you could set it up in a coffee shop. • The formula holds seven assets at all times, with 40% in US stocks, 20% in REITs and non-US stocks, and 40% in bonds. The portfolio improves its gains if you add a simple Momentum Rule, but there’s a little surprise in the results.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15615189662431087344439.png" style="width:799px;height:500px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Coffeehouse Portfolio, like most so-called Lazy Portfolios, is designed to be so simple that you could set it up while having a cup of coffee in a café. Photo by Dabchai Labchait/Shutterstock.</p>
<p class="subnote">• Part 5 of a series. Parts 1, 2, 3, and 4 appeared on June <a href="https://bri.li/190625a" target="_blank">11</a>, <a href="https://bri.li/190625b" target="_blank">13</a>, <a href="https://bri.li/190625c" target="_blank">18</a>, and <a href="https://bri.li/190625d" target="_blank">20</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Coffeehouse Portfolio was first published in 2001 in the book <a href="https://bri.li/190625e" target="_blank"><em>The Coffeehouse Investor</em></a> by Bill Schultheis, a financial adviser and co-founder of <a href="https://bri.li/190625f" target="_blank">Soundmark Wealth Management</a>. The term “coffeehouse investor” doesn’t mean you should invest in café chains. It suggests that in the time you can drink a cup of coffee, it’s easy to set up a portfolio that contains only seven different asset classes. The investor makes no changes each month, just annual rebalancing back to the original recommended percentages for each asset.</p>
<p>To follow Coffeehouse, you hold seven specified funds. You divide 60% of your money equally among six equity-like mutual funds or ETFs. The other 40% of your money is devoted to a broad index of US government and corporate investment-grade bonds. This 60/40 division is often called the “pension model”:</p>
<ul>
<li>10% US large-cap stocks</li>
<li>10% US large-cap value stocks</li>
<li>10% US small-cap stocks</li>
<li>10% US small-cap value stocks</li>
<li>10% all non-US stocks</li>
<li>10% US real-estate investment trusts (REITs)</li>
<li>40% all US government and corporate investment-grade bonds</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190625g" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>The 2007–2009 global financial crisis drove Coffeehouse to a loss of 33% between month-ends, according to the Quant simulator, as shown below in Figure 2. The Quant program is available as a free bonus with a <a href="https://bri.li/190625h" target="_blank">subscription</a> to Mebane Faber’s Idea Farm Newsletter ($399 per year). Independent statistics that are maintained in real time by My Plan IQ show that Coffeehouse lost 36% in the crash, when measured between any two daily closes. (Comparing daily closes almost always produces a worse drawdown number than if you compared only monthly closes.)</p>
<p>Whichever stat you use, Coffeehouse had the smallest loss during the 2007–2009 bear market of any of the nine Lazy Portfolios we’ll look at in this series.</p>
<p>Unlike other Lazy Portfolios we’ll analyze in this series, Coffeehouse has not been tracked for years by MarketWatch.com. The estimates shown in Figure 2 use a 43-year simulation by Quant. This program produces numbers that are very close to those generated for similar periods in real time by My Plan IQ.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1561519014815951985536.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Coffeehouse Portfolio would give investors 4.6 points more annualized return if followers held only the strongest three funds each month, compared with constantly holding all seven funds. However, there’s a twist — the maximum drawdown actually becomes <em>worse</em> when a Momentum Rule is added, increasing to 40% instead of 33%. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190625i" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, Coffeehouse’s long-term performance greatly improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>10.5%.</strong> That’s better than the S&P 500’s annualized total return, including dividends, of 10.0% over the same period. However, by simply adding a Momentum Rule, you boost Coffeehouse’s return to <strong>15.1%.</strong> Starting with $100, the Lazy Portfolio gave you only <strong>$7,296</strong> after 43 years. The momentum version ended up giving you <strong>$41,941</strong> in your account — more than five times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>Here comes that twist I mentioned earlier. The momentum version of Coffeehouse actually <strong>worsened</strong> the portfolio’s losses during bear markets, compared with the lazy version. This is one of only two Lazy Portfolios we’ll see in this series with this trait. Along with the higher gains, the Momentum Rule interacted with the limited number of asset classes in the portfolio in a way that generated sharper drawdowns during severe bear markets.</p>
<p>The static asset allocation version lost <strong>33%</strong> between month-ends in the 2007–2009 bear market, according to the Quant simulator. By contrast, the momentum version lost as much as <strong>40%.</strong> Both losses are beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190625a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>In an interview, I asked Schultheis whether he might add a Momentum Rule to Coffeehouse. He responded, “We have a handful of clients who are interested in momentum.” His reticence to publish a specific momentum-enabled version of Coffeehouse relates to the tracking error that bedevils any formula that departs from primarily indexing US equities. “The question I always ask myself is this: For some period of time — whether it’s 1 year, 5 years, or 10 years — every strategy will underperform,” he said.</p>
<p>In the coming parts of this series, we’ll see a few strategies that both <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added, as well as how to manage your money the 21st-century way.</p>
<p class="subnote">• Part 6 appears on June <a href="https://bri.li/190625j" target="_blank">27</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Coffeehouse Portfolio is so named not because you buy Starbucks, but because the strategy is so simple you could set it up in a coffee shop. • The formula holds seven assets at all times, with 40% in US stocks, 20% in REITs and non-US stocks, and 40% in bonds. The portfolio improves its gains if you add a simple Momentum Rule, but there's a little surprise in the results. Figure 1. The Coffeehouse Portfolio, like most so-called Lazy Portfolios, is designed to be so simple that you could set it up while having a cup of coffee in a café. Photo by Dabchai Labchait/Shutterstock. • Part 5...The Nano Portfolio is Basic But Has an Easy Path to ImprovementBrian Livingstontag:stockcharts.com,2019-06-20:post-57262020-01-06T07:49:34Z2019-06-20T09:00:00Z<blockquote>
<p>The Nano Portfolio includes a significant exposure to global stocks, which is a healthy reminder that we shouldn’t put all our eggs in one US basket. • The strategy is called ‘nano’ (ultrasmall) because it holds only FIVE assets — fewer than other Lazy Portfolios. That’s not much diversification, but it’s just enough that holding only the strongest THREE assets every month sharply improves your gains.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15610089206141164227634.png" style="width:799px;height:449px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> The Nano Portfolio’s allocation of one of its five positions to non-US stocks reflects the adage that you shouldn’t keep all your eggs in one basket. Photo by Ingae/Shutterstock.</p>
<p class="subnote">• Part 4 of a series. Parts 1, 2, and 3 appeared on June <a href="https://bri.li/190620a" target="_blank">11</a>, <a href="https://bri.li/190620b" target="_blank">13</a>, and <a href="https://bri.li/190620c" target="_blank">18</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios (static asset allocation portfolios) developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Nano Portfolio was created in 2006 by John Wasik, a financial journalist and author. It’s called “nano” — which means one-billionth in the metric system — not because it has anything to do with nanotechnology or other ultrasmall atomic structures. (To illustrate how little a nano-something represents, every second your fingernails grow in length by one nanometer — one-billionth of a meter!)</p>
<p>The Nano strategy derives its name from the number of asset classes it holds, which is only five, as shown in the list below. Five is fewer index funds than most static asset allocations hold; they usually include 6 to 10 funds.</p>
<p>To follow the Nano Portfolio, you hold its specified five funds in equal weights. In other words, you allocate 20% of your money to each fund.</p>
<p>Unusual among Lazy Portfolios, the Nano allocates just as much money to non-US stocks as it does to American stocks. Most static portfolios have a US bias, weighting the S&P 500, for example, more heavily than stocks from other parts of the world.</p>
<p>The Nano assigns 60% of its total portfolio to equity-like assets, including real-estate investment trusts, and the other 40% to US bonds. This is a common ratio that’s often called the “pension model”:</p>
<ul>
<li>20% all US stocks</li>
<li>20% all global stocks excluding US</li>
<li>20% US real-estate investment trusts (REITs)</li>
<li>20% Treasury inflation-protected securities (TIPS)</li>
<li>20% US corporate investment-grade bonds</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190620d" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>The 2007–2009 global financial crisis drove the Nano Portfolio to a loss of 38% between month-ends, as shown below. That may have been a smaller loss than the celebrated manager of Yale University’s endowment fund, David Swensen, as Wasik trumpeted in an October 2010 <a href="https://bri.li/190620e" target="_blank">blog post</a>. Nevertheless, Wasik wrote, his followers should start augmenting his five original funds with two additional ones that track commodities and international bonds, allocating 14¼% to each. Since his seven-fund variation arose long after Nano had been widely publicized, it is not analyzed here or in most other articles about Nano.</p>
<p>Because the five-fund model launched in fairly recent times, Nano has not been tracked for years by MarketWatch.com like other Lazy Portfolios we’ll analyze in this series. In order to estimate Nano’s performance over a recent 43-year period, which includes four bear-bull market cycles (Jan. 1, 1973–Dec. 31, 2015), I used the Quant simulator. This program is available as a free bonus to <a href="https://bri.li/190620f" target="_blank">subscribers</a> of Mebane Faber’s Idea Farm Newsletter ($399 per year). The 43-year simulation is shown in Figure 2.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1561008976991935520363.png" style="width:600px;height:459px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The Nano Portfolio would give investors 4½ points more annualized return if followers held only the strongest three funds each month, compared with constantly holding all five funds. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190620g" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, Nano’s long-term performance greatly improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>9.5%.</strong> Adding the Momentum Rule boosted that to <strong>14.0%.</strong> Starting with $100, the lazy version gave you only <strong>$5,056</strong> after 43 years. Using the momentum version, you ended up with <strong>$28,403</strong> in your account — more than five times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>Even more importantly, from the point of view of individual investors staying the course through crashes, the momentum version of Nano reduced its losses during bear markets, compared with the lazy version. The static asset allocation version lost <strong>38%</strong> between month-ends in the 2007–2009 bear market. By contrast, the momentum version lost only <strong>26%</strong> in the 2007–2009 bear market. Unfortunately, that kind of loss is slightly beyond the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190620a" target="_blank">Part 1</a>. Drawdowns greater than 20% or 25% compel many investors to liquidate their equities, locking in their losses.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>Wasik has been a financial columnist for Reuters and Bloomberg, as well as a contributor to the New York Times, Forbes, Barron’s, and the Wall Street Journal, as described at his <a href="https://bri.li/190620h" target="_blank">website</a>. He’s the author of 17 books, including <em><a href="https://bri.li/190620i" target="_blank">Keynes’s Way to Wealth</a>,</em> which reveals how famed economist John Maynard Keynes built a multimillion-dollar nest egg through wise investments.</p>
<p>Asked in an interview whether he could add a Momentum Rule to Nano, Wasik replied, “I haven’t looked at that portfolio in many years.” He expressed admiration for economists Eugene Fama and Kenneth French, who’ve written many peer-reviewed papers that discuss momentum, but added, “I don’t have the academic chops to tell you whether that’s a factor.”</p>
<p>If you’re getting the idea that there’s something better than Lazy Portfolios to grow your money, you’re right. In the coming parts of this series, we’ll see more strategies that <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added, as well as how to manage your money the 21st-century way.</p>
<p class="subnote">• Part 5 appears on June <a href="https://bri.li/190620j" target="_blank">25</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>The Nano Portfolio includes a significant exposure to global stocks, which is a healthy reminder that we shouldn't put all our eggs in one US basket. • The strategy is called ‘nano' (ultrasmall) because it holds only FIVE assets — fewer than other Lazy Portfolios. That's not much diversification, but it's just enough that holding only the strongest THREE assets every month sharply improves your gains. Figure 1. The Nano Portfolio's allocation of one of its five positions to non-US stocks reflects the adage that you shouldn't keep all your eggs in one basket. Photo by Ingae/Shutterstock. •...The 7Twelve Portfolio Greatly Improves with a Momentum RuleBrian Livingstontag:stockcharts.com,2019-06-18:post-56852020-01-06T07:49:30Z2019-06-18T09:00:00Z<blockquote>
<p>If you own 12 ETFs in equal weights at all times, you’re probably following the 7Twelve strategy, which holds more assets than other Lazy Portfolios. • The extra asset classes give 7Twelve some exposure to commodities and natural resources, which competing portfolios lack. Best of all, the broader menu allows 7Twelve to greatly improve, with much better gains and far smaller losses, when you add a simple Momentum Rule.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15608417728431204750931.png" style="width:799px;height:416px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> Craig Israelsen’s strategy attempts to give investors exposure to seven global asset classes by holding 12 different funds at all times. Photo by PavelStock/Shutterstock.</p>
<p class="subnote">• Part 3 of a series. Parts 1 and 2 appeared on June <a href="https://bri.li/190618a" target="_blank">11</a> and <a href="https://bri.li/190618b" target="_blank">13</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The 7Twelve Portfolio was published in 2008 by Craig Israelsen, executive in residence of the personal financial planning program at Utah Valley University in Orem, Utah. Developed one or two decades later than other Lazy Portfolios, 7Twelve incorporates more asset classes — 12 — than most static asset allocation portfolios, which usually include only 6 to 10 funds.</p>
<p>The theory behind Israelsen’s name for the portfolio is that you hold at all times 12 different mutual funds or exchange-traded funds (ETFs). This menu of a dozen funds gives you exposure to seven major asset classes: US stocks, non-US stocks, real estate, natural resources (such as timber and commodities), US bonds, non-US bonds, and cash (short-term Treasurys).</p>
<p>The 12 funds are each given an equal weight. This means you must determine how many shares will allocate 8.33% of your money into each fund. The 7Twelve Portfolio is the only one of the nine Lazy Portfolios we’ll consider in this series that includes commodities and natural resources as possible choices. We’ll see later how this can optimize the strategy’s performance. The portfolio assigns 33.3% to bonds and the other 66.7% to equities and other risk assets, such as real estate and commodities:</p>
<ul>
<li>8.33% US large-cap stocks</li>
<li>8.33% US mid-cap stocks</li>
<li>8.33% US small-cap stocks</li>
<li>8.33% developed-market stocks</li>
<li>8.33% emerging-market stocks</li>
<li>8.33% US real-estate investment trusts (REITs)</li>
<li>8.33% commodities</li>
<li>8.33% natural resources</li>
<li>8.33% All US bonds (government and corporate)</li>
<li>8.33% short-term Treasurys</li>
<li>8.33% Treasury inflation-protected securities (TIPS)</li>
<li>8.33% non-US bonds</li>
</ul>
<p>For more information on these asset classes and specific funds that index them, see the <a href="https://bri.li/190618c" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>Unlike many of the other Lazy Portfolios we’ll analyze in this series, 7Twelve has not been tracked for years by MarketWatch.com. In order to estimate the portfolio’s performance over a recent 43-year period, which includes four bear-bull market cycles (Jan. 1, 1973–Dec. 31, 2015), I used the Quant simulator. This program is available as a free bonus to <a href="https://bri.li/190618h" target="_blank">subscribers</a> of Mebane Faber’s Idea Farm Newsletter ($399 per year). The answer is in Figure 2.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15608426833471685310927.png" style="width:600px;height:452px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> The 7Twelve Portfolio improves more than almost any other Lazy Portfolio when a simple Momentum Rule is added. With 6 points more annualized return, the strategy’s gain increases tenfold, and its losses during bear markets drop to tolerable levels. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190618d" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, the long-term performance of the 7Twelve Portfolio phenomenally improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>9.25%.</strong> Adding the Momentum Rule boosted that to <strong>15.4%.</strong> Starting with $100, the lazy version gave you only <strong>$4,525</strong> after 43 years. Using the momentum version, you ended up with <strong>$47,930</strong> in your account — more than 10 times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>The 7Twelve Portfolio improved its gains almost more than any of the other strategies we’ll see in this series. Even better, the momentum version of 7Twelve greatly reduced its losses during bear markets, compared with the lazy version. The static asset allocation version lost <strong>41%</strong> between month-ends in the 2007–2009 bear market. That’s far past the 25% “behavioral pain point” we discussed in <a href="https://bri.li/190618a" target="_blank">Part 1</a>. By contrast, the momentum version lost only <strong>20%</strong> in the 1987 crash and, remarkably, an even smaller <strong>15%</strong> in the 2007–2009 bear market. Most individual investors can learn to tolerate losses that mild, when the S&P 500 is down 30%, 40%, 50%, or worse.</p>
<p>In my simulations, most of the portfolios in this series were charged 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. Because of 7Twelve’s inclusion of some ETFs that have higher fees, such as the commodity asset class, the portfolio was charged slightly higher expenses of 0.15% per year. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>In an interview, Israelsen remarked, “I don’t have a methodology developed for momentum.” However, among many variations on 7Twelve that’s he’s published, one is an Active ETF Portfolio Report, which recommends 24 funds that don’t stick to conventional market-cap weighting. “Active doesn’t necessarily mean carte blanche,” Israelsen notes. His alternate selections are mostly “strategic beta” or “smart beta” funds, which follow formulas such as equal weighting (to give more exposure to small-cap stocks), value weighting (to tilt toward out-of-favor stocks), and so forth. Only a few of the alternatives are classic, active stock-picking funds.</p>
<p>Israelsen explains the theoretical model behind his strategy at the <a href="https://bri.li/190618e" target="_blank">7Twelve website</a>. He offers a free <a href="https://bri.li/190618f" target="_blank">7Twelve Report</a>, which outlines the plan and describes various resources. The document lists the Active ETF Portfolio Report, a 14-page PDF that Israelsen sells for $150.</p>
<p>In the coming parts of this series, we’ll see other portfolios that also <strong>improve their gains</strong> as well as <strong>reducing their losses</strong> when a Momentum Rule is added.</p>
<p class="subnote">• Part 4 appears on June <a href="https://bri.li/190618g" target="_blank">20</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>If you own 12 ETFs in equal weights at all times, you're probably following the 7Twelve strategy, which holds more assets than other Lazy Portfolios. • The extra asset classes give 7Twelve some exposure to commodities and natural resources, which competing portfolios lack. Best of all, the broader menu allows 7Twelve to greatly improve, with much better gains and far smaller losses, when you add a simple Momentum Rule. Figure 1. Craig Israelsen's strategy attempts to give investors exposure to seven global asset classes by holding 12 different funds at all times. Photo by...The Coward's Portfolio Is More Profitable with One Rule Added, But...Brian Livingstontag:stockcharts.com,2019-06-13:post-56932020-01-06T07:49:31Z2019-06-13T08:00:00Z<blockquote>
<p>You can boost the gains of the so-called Coward’s Portfolio (aka the Smart Money Portfolio) by adding one easy tweak, but watch out — there’s a catch. • The strategy is not really for scaredy-cats but for people who don’t like surprises in their investments. A single extra step makes a big improvement in the portfolio’s returns, although you have to live with a serious trade-off.</p>
</blockquote>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/1560407710639413898834.png" style="width:799px;height:420px;" /></p>
<hr />
<p class="subnote"><strong>Figure 1.</strong> For the nervous investor, the Coward’s Portfolio offers a broad set of assets, if that kind of thing reassures you. Photo by Spiber.de/Shutterstock.</p>
<p class="subnote">• Part 2 of a series. Part 1 appeared on June <a href="https://bri.li/190613a" target="_blank">11</a>, 2019. •</p>
<p>We saw in the first part of this series that a number of basic investment strategies called Lazy Portfolios developed around the 1990s. These simple formulas were intended to take advantage of the relatively new phenomenon of index mutual funds that tracked a wide variety of US and international asset classes.</p>
<p>The Coward’s Portfolio was <a href="https://bri.li/190613b" target="_blank">published</a> in 1996 by William Bernstein at his Efficient Frontier website. The word <em>coward</em> in the title “refers not to the investor’s risk tolerance but to the strategy of hedging one’s bets and having slices of a number of asset classes,” according to a Bogleheads <a href="https://bri.li/190613c" target="_blank">blog post</a>. The strategy is also called the Smart Money Portfolio, after a magazine of the same name that ran an article about Bernstein’s model.</p>
<p>Like all Lazy Portfolios, the Coward’s Portfolio recommends that you hold several different asset classes in a specified percentage at all times. The holdings are rebalanced to their original percentages once a year.</p>
<p>A number of variations exist, but the following allocation is the way the Coward’s Portfolio is usually explained. You’ll notice that the strategy assigns roughly 60% to equities and REITs and 40% to bonds:</p>
<ul>
<li>15% US large-cap stocks</li>
<li>10% US large-cap value stocks</li>
<li>5% US small-cap stocks</li>
<li>10% US small-cap value stocks</li>
<li>5% European stocks</li>
<li>5% Asia-Pacific stocks</li>
<li>5% Emerging-markets stocks</li>
<li>5% US real-estate investment trusts (REITs)</li>
<li>28% short-term US Treasurys</li>
<li>12% short-term US investment-grade corporate bonds</li>
</ul>
<p>For more information on these asset classes and the specific funds that index them, see the <a href="https://bri.li/190613d" target="_blank">breakdown</a> at My Plan IQ, a website that tracks thousands of 401(k) programs and other investing strategies.</p>
<p>As we saw in <a href="https://bri.li/190613a" target="_blank">Part 1</a>, MarketWatch.com tracked the performance of the Coward’s (Smart Money) Portfolio in real time for the 15 years ending Dec. 31, 2017. Its return was <strong>7.87%</strong> annualized. The S&P 500, including dividends, returned <strong>9.93%</strong> in the same period. The Coward’s Portfolio lagged the benchmark by more than 2 percentage points annualized. Sad!</p>
<p>What if we extend the tracking back 43 years, Jan. 1, 1973–Dec. 31, 2015, to examine more bear-bull market cycles? To do so, I used the Quant simulator, a program that’s available as a free bonus to subscribers of Mebane Faber’s Idea Farm Newsletter ($399 per year). The answer is in Figure 2.</p>
<p> </p>
<p><img src="https://d.stockcharts.com/img/articles/2019/06/15604080905821677585833.png" style="width: 596px; height: 456px;" /></p>
<hr />
<p class="subnote"><strong>Figure 2.</strong> Adding a Momentum Rule improved the performance of the Coward’s Portfolio almost 5 percentage points. But the variation would have subjected investors to larger losses: 49% in the 2007–2009 bear market rather than 37%. Source: The Idea Farm’s Quant simulator.</p>
<p>All of the Lazy Portfolios in this series were enhanced using exactly the same Momentum Rule, as follows:</p>
<ol>
<li>At the end of each month, you average the total return of each asset class over the past 3, 6, and 12 months.</li>
<li>In the following 30 days, you hold only the three asset classes with the strongest average return.</li>
</ol>
<p>This Momentum Rule is similar to a formula Faber published in a 2013 <a href="https://bri.li/190613f" target="_blank">white paper</a> at the Social Sciences Research Network (SSRN).</p>
<p>As you can see in Figure 2, the long-term performance of the Coward’s Portfolio phenomenally improves when you hold only the strongest three asset classes in any given month. The annualized return of the Lazy Portfolio version was <strong>10.9%.</strong> Adding the Momentum Rule boosted that to <strong>14.8%.</strong> Starting with $100, the lazy version gave you after 43 years only <strong>$8,481.</strong> Using the momentum version, you ended up with <strong>$38,363</strong> in your account — more than four times the ending value. (The proportions are the same whether you start with $1,000 or $100,000 or any other amount.)</p>
<p>All the graphs in this series subtract from each portfolio 0.11% per year, representing today’s annual fees of the ETFs each portfolio would require. In addition, the momentum portfolio was charged 0.10% round-trip each time one ETF was sold and a replacement was purchased. (The Lazy Portfolios were charged nothing for trading expenses, although annual rebalancing would have imposed a small cost.)</p>
<p>Improving your gain 5 percentage points — just by checking the rankings once a month — is great! But that improvement has a dark side. As you can see in Figure 2, the Coward’s Portfolio suffered greater losses when a Momentum Rule was applied. The lazy version lost <strong>37%</strong> between month-ends in the 2007–2009 bear market, which is far past the 25% “behavioral pain point” we discussed in Part 1. But the momentum version lost <strong>49%,</strong> which is even more intolerable.</p>
<p>This is an illustration of the fact that you can’t just bolt a Momentum Rule onto a Lazy Portfolio and get an ideal result. Of the nine Lazy Portfolios we’ll examine in this series, all of them sharply <strong>improved their gains</strong> with the addition of a Momentum Rule. But two of them experienced <strong>worse maximum drawdowns.</strong></p>
<p>William Bernstein did not respond to a request for comment on this article.</p>
<p>In the coming parts of this series, we’ll see the best ways to construct a portfolio so it does, in fact, <strong>improve its gains</strong> as well as <strong>reducing its losses</strong> when a Momentum Rule is added.</p>
<p class="subnote">• Part 3 appears on June <a href="https://bri.li/190613g" target="_blank">18</a>, 2019.</p>
<hr />
<p><em>With great knowledge comes great responsibility.</em></p>
<p><strong>—Brian Livingston</strong></p>
<p>CEO, <a href="https://bri.li/scnl" target="_blank">MuscularPortfolios.com</a></p>
<p class="subnote">Send story ideas to MaxGaines “at” BrianLivingston.com</p>
<p> </p>You can boost the gains of the so-called Coward's Portfolio (aka the Smart Money Portfolio) by adding one easy tweak, but watch out — there's a catch. • The strategy is not really for scaredy-cats but for people who don't like surprises in their investments. A single extra step makes a big improvement in the portfolio's returns, although you have to live with a serious trade-off. Figure 1. For the nervous investor, the Coward's Portfolio offers a broad set of assets, if that kind of thing reassures you. Photo by Spiber.de/Shutterstock. • Part 2 of a series. Part 1 appeared on June 11...