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The Muscular Portfolios Newsletter — No. 14 — Jan. 28, 2019
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Which way will the S&P 500 move?
 By Brian Livingston
Traders have tried for centuries to find a formula that will predict the direction of the market.
The truth is that there are too many unknowns to reliably determine what any free market will do in the next one year.
Despite that, it's surprisingly easy to predict where the S&P 500 will be in the long term — i.e., 7 to 15 years from now. The best-known methods predict the index's 10-year real rate of return (in other words, the annualized return excluding inflation). Despite the fact that academic journals have fully disclosed these formulas, they continue to work rather well.
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Figure 1. My column on the future level of the S&P 500 became the top story on MarketWatch.com's home page.
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MarketWatch.com hired me this month as a biweekly columnist. My second-ever column — "How low will the S&P 500 go? Buffett and Shiller know" — became the top story on the MarketWatch home page on Jan. 23. (See Figure 1.) In fact, the piece was the No. 2, 3, or 4 most-popular page on the entire site for an unbelievable 48 hours after publication. Up against thousands of other stories, it was viewed by more than 130,000 visitors on Day 1 alone.
In an exclusive analysis, my column revealed a new study of the formulas used by experts — top investor Warren Buffett, Nobel laureate Robert Shiller, and others — to predict the S&P 500's 10-year return. The formulas have roughly forecast the market's direction starting in 1964 and now continuing through 2028.
The forecasts today aren't cheerful. Due to high valuations, the US stock market is expected to deliver much less than the average 6% real return it's given investors over the past 55 years. In fact, the median projection of the different formulas is for the market to produce a slightly negative return, not counting inflation. A 100% equity portfolio is likely to be crushed, compared with a diversified portfolio.
The whole story is in MarketWatch's Jan. 23 column.
My first MW column — exposing high trading expenses — was posted on Jan. 9.
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Detailed portfolio stats are on the way
I'm working to get historical monthly returns of each of the Muscular Portfolios posted on a public spreadsheet site by the end of the month. The links will be reported in the February issue of this newsletter.
In the meantime, we have some good numbers on the performances since Dec. 31, 2015, when the graphs in the Muscular Portfolios book end. For example, Figure 2 shows that the Mama Bear Portfolio is handily beating the S&P 500 total return in the current bear-bull market cycle (Oct. 31, 2007, through Dec. 31, 2018).
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Figure 2. In the current bear-bull market cycle, the Mama Bear Portfolio is returning 7.67% annualized. That's well over 1 percentage point more than the S&P 500's total return of 6.58%.
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If the bull market that began in 2009 actually ended at the high in September 2018, I'll recalculate these performance numbers to use that date. However, the S&P 500 price level (not including dividends) never closed more than 20% down in the fourth quarter of 2018. Therefore, we can't say the nearly 10-year-long bull market is actually over, so Figure 2 runs through Dec. 31, 2018.
The final three years of Figure 2 — Jan. 1, 2016, through Dec. 31, 2018 — are returns from real-money accounts at FolioInvesting.com. These actual dollar gains have been grafted (so to speak) onto the estimates by The Idea Farm's Quant simulator that were published in the book. The three years of real-money returns are shown between the circular markers.
Over the 46 years shown in Figure 2, the Mama Bear returned 13.7% annualized. The S&P 500 total return was only 9.9%. The difference is entirely due to the diversified portfolio keeping its losses — even in the worst market crashes — below 20%. That's a level most investors can tolerate, whereas crashes of more than 30% are not. Muscular Portfolios are designed to lag the index during bull markets but make it all up during the inevitable bear markets, resulting in good performance over complete market cycles.
Until the raw data points are posted on the Web, you can read performance reviews of the three model portfolios — the Mama Bear, Baby Bear, and Papa Bear — at StockCharts.com, in a series of graphs beginning on Jan. 3, 2019.
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Bogle leaves us his final revelations
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 Figure 3. Jack Bogle statue at Vanguard. Photo by Blair duQuesnay/The Belle Curve.
John Calhoun Bogle, known to all as "Jack," succumbed to cancer on Jan. 16 at the age of 89. Individual investors lost a tireless advocate for simple and low-cost investing.
Just one month ago, Bogle published a new book, Stay the Course. It reveals many secrets of the Vanguard Group, which he founded.
I felt the book had received too little notice. Without knowing he would pass away, I published on Jan. 15 a four-part unveiling of his book's revelations. I hope you gain as much as I did from reading what he always promised would be his final book. See the series.
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 Get the book that that frees you from Wall Street
Muscular Portfolios has received rave reviews from experts of all kinds:
"Don't let your portfolio atrophy; read Muscular Portfolios and pump up your wealth." —MEBANE FABER, coauthor of the The Ivy Portfolio
"There's a wealth of information in this book that can help every do-it-yourself investor." —WES GRAY, Ph.D., CEO of Alpha Architect
To order, visit Amazon, Barnes & Noble, or any bookseller.
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Some ETFs aren't actually low-cost
A new study of the cost of exchange-traded funds (ETFs) reveals that some index trackers may have expenses that are a lot higher than you'd expect.
ETFScreen.com, a free backtesting site, recorded every five minutes the bid-ask spreads of the 1,000 most-actively-traded ETFs on the US market. The "spread" is the difference at any given moment between the "ask" price that someone in the market would currently charge you to buy shares and the "bid" price that you could get if you were to sell the same shares. The ask price is always higher.
Figure 4 shows that the majority of ETFs give you a reasonable "haircut" of less than 0.1% every time you sell one fund and buy another. But the most expensive ETFs can relieve you of more than 1% of your money on every round-trip.
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Figure 4. Even if an ETF is actively traded, it may have a high cost in terms of the spread to buy and sell. Source: ETFScreen.com.
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The ETF with the most expensive bid-ask spread in ETFScreen's monitoring was HSPX, a fund that delivers the gain or loss of covered-call options. Its average spread during the Dec. 10–21 period was an astonishing 1.4%. (This is represented by the green circle on the right side of the graph.) Simply buying and selling shares of ETFs like that one each month would cost you about 16% of your capital within one year. Some headwind!
How can you avoid paying large spreads like this?
- You can view the bid-ask spreads of the most popular ETFs on the Mama Bear and Papa Bear pages of MuscularPortfolios.com. The spreads on those pages are updated every 10 minutes while the market is open. (Disclosure: ETFScreen provides data analysis for the pages.)
- You can look up any fund's symbol in the ETF Search box at ETFScreen. The eighth row in each fund's stats box shows its average spread over the past month. (Perhaps the study embarrassed HSPX's market makers, because its average spread has dropped to 0.67% from 1.4% in recent days!)
- To find the bid and ask prices of any tradable stock or ETF, do a quote lookup at market-data sites such as Yahoo Finance. Caution: These sites typically show only the prices, and do not compute the spreads. Also, you should ordinarily check only during market hours. Spreads in after-hours trading are much higher and are not representative of standard trading.
Even finding the average spreads may not give you the information you need. Spreads are usually quoted on small orders, such as 100 shares. If you place a market order for a much larger number of shares, the spread to fill the order may be worse.
The CEO of ETFScreen.com, Hugh Todd, explains his study in more detail in a Jan. 9 blog post.
I reported some of the ETF data in my trading-expenses article that was mentioned at the end of the top story of this newsletter. See my Jan. 9 MarketWatch column.
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Mark Hulbert proves advisers are contrary indicators
As individual investors, we all know that we guess wrong at times. Now the results are in — financial advisers who recommend positions in stocks, bonds, and gold are wrong most of the time.
Mark Hulbert, the founder of the Hulbert Financial Digest, was its editor for more than 30 years. After selling the publication — which was discontinued a few years ago — he's lately concentrated on publishing the Hulbert Sentiment Indices. This service tracks the market-timing recommendations of more than 100 professionals who state their opinions about how much money you should invest in different assets.
The results of following the advisers' signals are terrible. Figure 5 shows how wrong the recommendations go for one of the indices that Hulbert follows: the Russell 2000 small-cap index. When the advisers are the most bearish, the index rises on average. When they're the most bullish, the index falls for the next week and month, and never catches up.
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Figure 5. When advisers are the most bearish, the index rises, and when they are the most bullish, the index falls. Source: Hulbert Sentiment Indices.
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Hulbert's publication — which comes out via email in a weekly version and a five-times-a-week version — proves the same effect regarding the Dow Industrials, bonds, and gold. You may not be able to time the markets with this information. After all, the advisers' most bullish recommendations occur only 10% of the time, and the same with their most bearish ones. That leaves 80% of the time when there is no strong signal.
But the findings are great evidence that you should never pay for advisers' stock-picking recommendations. Financial specialists are just human beings, like you and me. You can do better with simple formulas that keep your portfolio diversified and tilted toward those assets that are currently in uptrends.
Hulbert's findings are explained in my complete analysis.
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How to access past paid newsletter content
Newsletters began containing paid content with the September 2018 issue:
Paid Issue #13 — Dec. 17, 2018
Paid Issue #12 — Nov. 11, 2018
Paid Issue #11 — Oct. 9, 2018
Paid Issue #10 — Sept. 12, 2018
Within a few months, enough content will have accumulated to warrant a special paid archive on the website. Until then, the above links allow you to read the paid content in any previous newsletter.
(Past free newsletters can be accessed from the links in the lower-right corner of any page at our website.)
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Free stuff you might enjoy
If you've read this far, you deserve a reward — a free, downloadable 10-page special report that summarizes book Muscular Portfolios and the latest advances in financial technology (fintech):
Special report on Muscular Portfolios and fintech
If you missed any of our previous newsletters, links to them can be found in the lower-right corner of our home page.
If you have comments to contribute, please start a new email message to a special address that goes directly to author Brian Livingston: Contact us.
Thanks for your support!
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