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The Muscular Portfolios Newsletter — No. 19 — Aug. 16, 2019
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Seminars by Brian Livingston: West & East
Brian Livingston will lead two West Coast seminars about Muscular Portfolios on Sept. 14 and 15, 2019. Please see the event page for details.
East Coast seminars will be held on Sept. 27 and 28, 2019. The specifics will be announced in next month's newsletter.
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Stocks go down, but your money goes up
 By Brian Livingston
The past 3½ months have been horrible for the US stock market, with the S&P 500 posting big losses in May and July-August. But Muscular Portfolios, which automatically adapt to market conditions, were actually up in both of those downtrends and up in the 3½ months as a whole.
This is a great opportunity for us to look inside some well-designed asset-rotation formulas and see why they outperform the S&P 500 in the long term (just not every year).
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Figure 1. The Mama Bear Portfolio automatically rotated into asset classes that outperformed in May, July, and early August, when the S&P 500 was cratering. The Papa Bear showed similar strength. Graph source: FolioInvesting.com. Timeline: MuscularPortfolios.com.
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US equities fell sharply in May and July-August. The S&P 500 (including dividends) was down more than 6% in May. It fell 6% once again from its July 26 all-time high through the Aug. 14 close. The benchmark is down 2.96% over the entire period, as shown in Figure 1.
Muscular Portfolios, by contrast, did great. The Mama Bear was down less than 4% in May and actually rose in July and early August. Why? The portfolio rotated out of stocks and into hard assets and fixed-income ETFs that were rated to perform well. The Mama Bear was up 6.11% over the entire period. (The Papa Bear performed very similarly: up 3.62%, a random difference.) These are numbers from actual-money accounts maintained at FolioInvesting.com, including expenses.
How did these two portfolios "know" to tilt away from equities and into other asset classes? They simply followed the strategy rules that are posted at the website. Assuming you tuned up your portfolio at the end of each month, the position changes are shown in Figure 1's Asset Allocation timeline:
- On Apr. 30, the Mama Bear was holding two-thirds of its money in US and emerging-market stocks, with the other one-third in REITs.
- At the end of May, the Mama Bear sold emerging-market stocks and purchased long-term Treasury bonds (VGLT). This reduced the portfolio's equity exposure to only one-third.
- No changes were made at the end of June. At the end of July, the US equities were sold and a gold ETF was purchased (IAU).
Muscular Portfolios beat the market over complete bear-bull market cycles by keeping your losses small (or even going up) during corrections and bear markets. As Figure 1 shows:
- VNQ (real estate) is up 4% since Apr. 30.
- VGLT (Treasury bond) is up 11% since May 31.
- IAU (gold) is up 7% since July 31.
Preserving your capital in tough times should be your top priority. It isn't how much you make in bull markets, it's how much you keep in bear markets that determines your lifetime gains.
Remember, short periods are not definitive. I'm showing you a graph of this 3½-month period because it's a perfect example of how asset rotation works. The strategy — fully disclosed at our website — protects your capital without you having to be a psychic reader or a math genius. But don't adopt any formula just because it performed well during a single quarter.
Don't ask for monthly or daily statistics. One month or even one year is meaningless. Only complete bear-bull market cycles are long enough to judge any portfolio. It would be prohibitively expensive to create daily graphs for the Muscular Portfolios website, which is dedicated to remaining totally free. Instead of a short-term focus, do the following:
- Study the 43-year simulations, 1973–2015, that are shown in Chapters 1, 3, 5, 6, and 7 of the book Muscular Portfolios.
- If you wish, get monthly returns for each portfolio on the site's data page. These numbers are extended with actual money 2016–2018, and are updated once a year in January. Graphs covering the 46 years through 2018 are shown in a series of StockCharts articles.
- If you wish, download monthly historical data from Yahoo Finance for the ETFs. (Be sure to use the adjusted closing prices, which include dividends.) Or read Appendix B of the book to learn how to use StockCharts or ETFScreen to make your own simulations.
The fact that downtrends and the related volatility come in "clusters" — and how asset rotation protects your capital from them — is explained in detail in an Aug. 1 column at StockCharts.
Giving away the Muscular Portfolios formulas for free is intended to disrupt Wall Street's high fees and conflicts of interest. In investing, you never get guarantees, only probabilities. But with our book and website, we stack the odds in your favor as best we can.
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A fireside chat with Mebane Faber
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Mebane Faber is well-known as the co-author of The Ivy Portfolio — an early forerunner to the Papa Bear Portfolio — and CEO of Cambria Investment Management. His advisory firm has $1 billion in assets under management, including the holdings of several exchange-traded funds Faber has brought to market. (In the above photo, he's being interviewed by CNBC in 2017.)
I was happy to fly last month to Cambria's Los Angeles headquarters to be interviewed for an hour about Muscular Portfolios on the Meb Faber Show, which was his 168th podcast. (He's been busy!)
The podcast was released on July 31, and the response was immediate. One listener, John A., wrote in a comment to Faber:
"I just listened to Episode #168 with Brian Livingston. Thank you so very much for having the guts to put him on. I think that was truly life-changing for me. No more worrying about so many things now and in my future retirement. I think I just figured out how to get my life back.
"I have been using your momentum techniques with my conscripted funds in my 401k to the best of my abilities for the last few years with the best results I’ve ever had and with so much more assurance as to what I was doing. It sounds like Brian has almost perfected momentum investing for the average Joe like me. Due to your research and education of me, I recognize the value he has presented and how it will fit my desired lifestyle. Now I just have to decide what to do with my crazy collection of other investments and their source newsletters. I wonder if I will be able to break my "next great idea" and "I could make some money on that" habits.
"The cat is out of the bag, as they say. I can’t believe he gives that information away. No need to pay some guy 1% and visit him/her once a quarter. Checking my holdings once a month instead of 5 days a week? Holy crap! What a concept."
The interview was lively, covering everything from my hatred of excessive fees to my satisfaction with the very first investment I made 33 years ago. A summary and transcript is at Faber's podcast page. Links on that page also allow you to download and listen to the program. Light entertainment for your morning commute! — Brian Livingston
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News from the leading edge of investing
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Sharpe and Sortino ratios debunked — by Sortino himself
The Sharpe ratio, widely used to measure risk-adjusted performance, was first published in 1964 by economics professor William Sharpe (above, in a 2010 photo by Blaine Ohigashi/DailyBruin.com). The formula has been rebutted by several experts, including pension authority Frank Sortino, who has abandoned his own Sortino ratio as well. MarketWatch
Make your Lazy Portfolio more muscular
Tests over several decades show that all Lazy Portfolios — strategies that never change their positions — improve their gains when a Momentum Rule is added, but we can do better than that. StockCharts
Some ETFs cost you more than 1% to trade
An exchange-traded fund can have a low annual fee but quietly ding you 1% or worse every time you buy and sell shares. MarketWatch
The best strategies lag the S&P 500 for 5+ years
Market-beating portfolios always underperform their benchmarks for periods of 5 years or more, as demonstrated by studies from the Hulbert Financial Digest and the Vanguard Group. This discourages most people from staying the course. 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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