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The Muscular Portfolios Newsletter — No. 17 — Apr. 30, 2019
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The market hit a new high — now what?
 By Brian Livingston
The S&P 500 hit an all-time record of 2,945.83 on Apr. 30. Now the question is whether the market can push to new highs or the record-breaking day was actually the end of the 10-year bull market.
As of Apr. 30, the Mama Bear Portfolio, for one, was equally divided between emerging-market stocks, US large-cap stocks, and real-estate investment trusts (REITs). Holding three asset classes provides diversification, no matter the direction of the S&P 500, which contains only US large caps.
Both the Mama Bear and the Papa Bear have underperformed the S&P 500 this year, exactly as they're designed to do. Both Muscular Portfolios use diversification to lag the benchmark during bull markets and beat it during bear markets. That formula helps us outperform over complete bear-bull market cycles. Our use of two tools — diversification and momentum — eliminates the risk of crashes in your portfolio (every investor's worst fear).
With the market at nosebleed prices, a CNBC article made a fascinating point. From Jan. 1 through Apr. 30, the Dow Jones Industrial Average price change was 14%. The last time the market zoomed up so much in the first four months of the year, the DJIA suffered a 36% crash within the following six months.
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Figure 1. The last time the DJIA rose more than 14% in the first four months was 1987 — the year of the Black Monday crash, when a bear market took the index down a total of 36.1%, including dividends. Data source: Yahoo Finance.
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The Dow's most recent price move of more than 14% from Jan. 1 through Apr. 30 was in 1987. People may remember Black Monday — Oct. 19 — when the index collapsed more than 22% in a single day. But they often forget that this one day was just part of a grinding bear market that lasted almost two months. That period is short, by bear standards, but it still subjected investors to a cumulative loss of 36.1%, including dividends.
Figure 1 graphs the Dow of 2019 against the same index in 1987. Notice that the rally from Jan. 1 through Apr. 30 did not end the 1987 bull market. There was one more leg up. The subsequent spike in May through August rose almost as fast as it did in the first four months of the year.
This is typical of the last phase of a bull market. It's sometimes called a "melt-up," "blow-off," or "climax top." The good times seem like they will never end. A soaring economy with low unemployment inspires euphoria, and the investing public goes "all in." The end result is a correction, which changes without warning into a full-blown crash.
Is this certain to happen in 2019? Not at all. CNBC points out that the previous three times there was this much gain in January through April were 1983, 1975, and 1967. In the following six months of those years, the market wound up rising or falling only 1% or so.
But a cautionary note comes from Jeremy Grantham, co-founder of the GMO wealth-management firm. He told CNBC, "In the last 100 years, we're used to delivering perhaps 6%" plus inflation. But he expects the US market to generate real returns of only 2% to 3% annualized over the next 20 years, due to high valuations, according to a MarketWatch article.
There's no way to predict the market's moves in a period as short as a few months. Since we can't divine the coming direction, we hedge our bets with Muscular Portfolios. When the market takes a turn for the worse, equities lose their momentum. When that happens, Muscular Portfolios tilt away from stocks and toward other asset classes that are going up, such as bonds, REITs, and commodities. That's exactly what the strategies did to preserve our life savings in the 2008 financial crisis.
Don't try to guess — let the formula do the work.
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No change in the Mama Bear formula
In Issue #16 of this newsletter, I described a website that proposes to use four months of performance rather than five to rank the ETFs in the Mama Bear Portfolio.
After receiving emails from many readers who wanted to help, it's clear that we should not switch away from the Mama Bear's traditional five-month ranking formula.
One theme ran through several of the comments I received: Twenty years from now, we'll know that a lookback period of three months or seven months or whatever would have been the best. But today, we have to go with the formula that we know has the best odds of success.
From 1973 through 2018, the five-month lookback prevented the Mama Bear from ever losing more than 18% between any two brokerage statements. The four-month lookback, by contrast, caused a larger 20.5% loss in one case and a hard-to-tolerate 27.1% loss in another.
Muscular Portfolios are designed by experts to never lose more than 25%, thus safeguarding your savings. The four-month lookback causes losses that are worse than many investors want their life savings to be subjected to.
The Papa Bear Portfolio has experienced losses as large as 25%, but in return, that strategy has demonstrated a higher long-term performance than the Mama Bear. We'll keep the Mama Bear formula as-is for those readers who want the smallest drawdowns that are consistent with market-like returns.
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News from the leading edge of investing
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Buying a new fund? Don’t even THINK about it.
When the market calls, what do we hear? Usualy a wrong number! Individual investors tend to sell funds that will outperform in the next three years and buy funds that will underperform. You can avoid this all-too-human trait. (Photo by Pathdoc/Shutterstock.) StockCharts
Advisers can vaporize your money with no way to pay you back
If an adviser wipes out your money in risky investments you didn't approve, large registered investment advisory firms (RIAs) usually have errors-and-omissions insurance to cover you. But investors have lost hundreds of thousands of dollars due to uninsured small RIAs that gambled client money on wildly inappropriate choices. MarketWatch
What’s normal about the stock market? Not much.
It's often said that monkeys throwing darts at a financial page would beat the market 50% of the time. But that's not true at all! The chances are much, much worse. Find out how to stack the odds in your favor. StockCharts
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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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Free stuff you might enjoy
If you've read this far, you deserve a reward. I was interviewed May 8 on MarketWatchers Live, a streaming TV program on investing. Here's a link to a free, 35-minute video in which I explain current affairs, complete with illustrations:
Free MarketWatchers video at YouTube
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Figure 6. The first segment in the MarketWatchers Live video covers the fact that people with certain brain impairments make about twice as much gain as normal people in investment games. Photo by Sunny Studio/Shutterstock.
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If you have comments to contribute, 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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