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The Muscular Portfolios Newsletter — No. 15 — Feb. 28, 2019
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Target-date funds: hazardous to your wealth
 By Brian Livingston
Barron’s associate editor Randall W. Forsyth wrote in a recent column: "The standard 'glide path' of target-date funds, which start heavily weighted in stocks and reallocate to bonds in later years, doesn’t produce the desired results."
He cited exhaustive academic studies by Rob Arnott, Katrina Sherrerd, and Lillian Wu of the institutional advisory firm Research Affiliates. The statisticians found that target-date funds, on average, delivered 6.7% less gain over a 40-year working career than a much cheaper strategy with smaller losses: simply hold a balanced portfolio of 50% US stocks and 50% US bonds at all times. Careful readers will notice that this is identical to a "starter strategy" called the Baby Bear Portfolio in the book, Muscular Portfolios. (See Figure 1.)
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Figure 1. On average, a simple balanced portfolio of 50% US stocks and 50% US bonds outperforms a target-date fund. A TDF typically subjects investors to an 80% or 90% stock exposure during the first 10 or 20 years of a career, declining to 20% or 30% in a person's 70s.
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"We found on average that a 50/50 portfolio beats TDFs 69% of the time," Wu says. The simple strategy's advantage would be even greater if the researchers had subtracted fees. The average TDF's annual fee is 0.73%. By contrast, you can hold a balanced mutual fund like Vanguard's VBIAX for only 0.07%
For details — and more-profitable investment strategies than the Baby Bear — see my MarketWatch column on target-date funds.
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Pardon me, there’s a bubble in your bong
With the legalization of marijuana in Canada in October 2018, there's been a boom in New York–traded shares of mostly Canadian cannabis growers and distributors.
These weed companies have massive financial losses, so it's impossible to value them using traditional price/earnings (PE) ratios. As an alternative, I investigated a metric called price-to-gross-revenue. Public companies typically trade for 1.0 to 3.0 times revenue. What I found was a mania of people paying 100 to 250 times revenue for these cannabis high-flyers. Buyer beware!
See my MarketWatch column for better cannabis opportunities than the overpriced new companies.
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Handling tracking error makes you a better investor
How long must you wait to see whether a superior investing strategy has "stopped working"? How about seven years!
Testing a series of examples, I found that every strategy that beat the market over the past two bear-bull market cycles had periods of underperformance — one as long as 85 months (7 years and 1 month). Please see Figure 2.
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Figure 2. The Dow Jones Industrial Average has risen faster than the S&P 500 for decades. But 22 times as many people buy the exchange-traded fund SPY as buy DIA, because the Dow 30 has "hot streaks" and "cold streaks."
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I tested six financial advisory newsletters that beat the S&P 500 over the past 18½ years. Every one of them subjected investors to multiple periods of 1, 2, or 3 years of underperformance of the S&P 500. Their overall outperformance was entirely due to growth spurts, sometimes for less than half of all months.
Muscular Portfolios are examples of market-beating investment strategies that lag the market (usually during bull markets) and then pull ahead during complete bear-bull market cycles.
For ways you can use tracking error to make more gains — profusely illustrated with graphs — see my StockCharts column.
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Performance statistics are now available
I promised you in last month's newsletter that I would post the raw monthly statistics of the Muscular Portfolios that appear in the book.
I'm pleased to say that a Web page now bears the entire 46-year history. The first 43 years, as explained in the book, are estimates based on the Quant simulator, which is available with a subscription to the Idea Farm Newsletter. The most recent three years of statistics are real-money returns from actual dollar accounts at FolioInvesting.com.
To see the history from the 1st edition of the book, please visit the data page.
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 Get the book that frees you from Wall Street
Muscular Portfolios has received rave reviews from experts of all kinds:
"I know of no book for a general investment audience that is more thoroughly researched and backed up by hard data." —MARK HULBERT, founder of the Hulbert Financial Digest
To order the book, visit Amazon, Barnes & Noble, or any bookseller.
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You get the following extra articles in the paid version of today's issue:
• New gold ETFs threaten dominance of GLD and IAU
• Possible Mama Bear change: request for comments
• Mutual-fund taxable distributions huge in 2018
• Health is our greatest wealth
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