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The Muscular Portfolios Newsletter — No. 25 — Apr. 13, 2020
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Save the date: Sat., May 16, 2020
Brian Livingston will present a live, interactive online seminar — FREE — on “How to Make Your Portfolio Muscular” at 9:00 a.m. Pacific Time on Sat., May 16, 2020.
The seminar will be packed with information on how to keep your losses low and your gains high during these troubled times. The seminar will run for up to two hours, allowing for plenty of questions and answers.
Details will be provided in the next newsletter, to be published in early May 2020.
For more information, see our seminars page.
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S&P crashes, you’re down just 8%. Success!
 By Brian Livingston
Protecting your money against crashes — while enjoying market-like returns or better in the long term — is the primary purpose of Muscular Portfolios. The sudden bear market that hit most investors during the last eight weeks has given these strategies a real stress test. Fortunately for us, Muscular Portfolios have performed exactly as we wanted, with small losses and great long-term gains.
The S&P 500 took only 18 trading days from Feb. 19 to Mar. 12 to lose more than 20%. It was the fastest collapse from an all-time high to a bear market in US history, according to a market analysis by tech investor Beth Kindig.
When the index hit minus–33.79% on Mar. 23, Muscular Portfolios proved their worth. The Papa Bear Portfolio was down less than 8% that day — it wasn’t even in a correction — and the Mama Bear was almost as resilient.
Read on to see what this means for your money.
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Avoiding big losses is how you win the game
A bear market is commonly defined as a 20% loss in a benchmark’s price level after a bull market. There’s no universal agreement on what constitutes a crash, but the book Muscular Portfolios defines it as a loss of 30% or more.
As explained in detail in the book’s Chapter 1, the S&P 500 has crashed more than 30% once every 10 years, on average, since 1892.
Bear markets are deadly for your life savings. Avoiding them — without market timing — is a skill that every individual investor would profit from learning.
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Figure 1. The S&P 500 crashed more than 33%. The Papa Bear, down less than 8%, gave you peace of mind because it wasn’t even in a correction then. Source: Real-money account at FolioInvesting.com.
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The index has recovered a little since Mar. 23. But as of the middle of last week, the S&P 500 was still in bear-market territory, down 21.24%. Meanwhile, the Papa Bear was off a tiny 1.59% — just a rounding error as we watched the benchmark go down in flames.
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The Mama Bear beat the index by 5 to 11 points
Like the Papa Bear, the Mama Bear also softened the blow and preserved a great deal of investors’ life savings.
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Figure 2. The Mama Bear had switched out of US equities by Feb. 29, beginning a solid streak of outperforming the S&P 500. Source: Real-money account at FolioInvesting.com.
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Not quite as tough as the Papa Bear, the Mama Bear was down more than 22% at one point. But the Mama Bear changed its allocation and quickly pulled itself higher. As a result, the portfolio outperformed the S&P by 5 to 11 percentage points during the last four weeks, as shown in Figure 2.
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The long-term is where you make your real money
The book Muscular Portfolios emphasizes that track records shorter than a complete bear-bull market cycle are statistically meaningless. So why am I showing you graphs in Figures 1 and 2 that cover a mere two months?
- Daily graphs — like the ones above — show how Muscular Portfolios work.
- As we’ll see below, the long-term track records show how well they work.
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Figure 3. Over the latest complete bear-bull market cycle (2007–2020), the Mama Bear beat the S&P 500 by a stunning 2.2 percentage points annualized. This outperformance was entirely due to keeping losses small during bear markets and corrections. Source: ETFScreen.com.
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The truth is illustrated by Figure 2-6 in the book: What if you lost only half as much as the S&P 500 during bear markets? This would allow you to gain only two-thirds as much during bull markets and still beat the index in the long term.
Figure 3 illustrates a major new feature of ETFScreen.com, which provides data analysis for the Muscular Portfolios website. Three new pages track the Mama, Papa, and Baby back to the beginning of 2007. That was the beginning of a new bear-bull market cycle. It was also an era when newfangled exchange-traded funds (ETFs) began to cover all major asset classes around the globe.
With ETFScreen’s new tracking, we now have an independent market authority showing how Muscular Portfolios performed using publicly traded ETFs. When the book Muscular Portfolios was being written, it relied on Mebane Faber’s Quant simulator. That software goes farther back — all the way to 1973 — but uses a database of theoretical index values rather than actual ETFs.
Figure 3 plots SPY (which tracks the S&P 500) against the weekly closes of the Mama Bear’s ETFs. Both portfolios in the graphs include dividends.
Starting on Oct. 8, 2007 — the weekly close nearest to the S&P’s Oct. 10 peak — the Mama Bear delivered a powerful double-digit return of 10.9% annualized.
By contrast, the S&P 500’s 2007–2009 bear market — and its subsequent corrections — held it back. The benchmark generated only 8.7% in the nearly 12½-year cycle.
The Mama Bear beat the index by 2.2 percentage points annualized. Compounded over the years, that’s a huge windfall for investors. But despite its superior gains, the Mama Bear subjected you to losses no greater than 20% between any two month-ends. In 2007–2009 alone, the S&P 500 lost an intolerable 54%.
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The Papa Bear surpasses a long, long bull market
A Muscular Portfolio is designed to underperform the S&P 500 during every bull market and outperform the index only during bear markets and corrections. So a big concern is whether a Muscular Portfolio’s market-beating formula can succeed if a bull market goes on and on and on.
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Figure 4. Over the nearly 12½-year bear-bull market cycle (indicated by circles), the Papa Bear Portfolio managed to stay ahead of the S&P 500’s roaring bull market. Source: ETFScreen.com.
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Now that the bull market of 2009–2020 has ended, we can see the answer.
Despite one of the longest bulls in history — almost 11 years — the S&P 500 could never quite catch up with the Papa Bear. Figure 4 shows that the Papa Bear generated 8.8% annualized, while the S&P was still behind more than a decade after the global financial crisis. The benchmark delivered only an 8.7% return, according to ETFScreen.
The difference between 8.8% and 8.7% is not huge. But the Papa Bear succeeded in giving investors market-like returns with much less risk.
Both the Papa Bear and the Mama Bear were slightly up during the 2007–2009 market crash. They turn their turtle-like performance during bull markets into outperformance over the long term by keeping their losses small. Best of all, the smoother ride helps you avoid the heart attacks that the S&P 500 routinely gives investors.
Every market day, ETFScreen updates the Mama Bear and Papa Bear’s ETF picks as well as the portfolios’ monthly performances back to Dec. 29, 2006. Anyone can view, free of charge, the two strategies’ results — as well as the lesser returns of the Baby Bear, which is a “starter portfolio,” not a Muscular Portfolio — at:
Mama Bear picks | performance
Papa Bear picks | performance
Baby Bear picks | performance
In addition to ETFScreen’s new performance-tracking pages, I’ve updated the Muscular Portfolios data page with monthly closes for each strategy through Mar. 31, 2020, and going back 46 years.
To get the most out of ETFScreen:
Publica Press and its affiliates — including yours truly — have no financial relationship with ETFScreen and receive nothing if you register for a free account or sign up for Premium Access.
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Hey, wait — isn’t the bear market already over?
At this writing, the S&P 500 has rallied off its Mar. 23 lows. But don’t let yourself believe that the damage is over. It would be the first time ever that a collapse of the magnitude we’ve seen was cured so quickly.
Tobias Carlisle, founder of the Acquirers Fund, calculated for the Greenbackd blog the length of all US bear markets since 1872.
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Figure 5. Since 1872, the median bear market has run for two years (24 mo.); the average collapse lasted more than three-and-a-half years (43 mo.). The longest bear in this history muddled on for 12¾ years (153 mo.). Source: Tobias Carlisle.
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Which bear was shortest depends on how you measure. By Carlisle’s reckoning, it was the Crash of 1987, which drove stocks down for only five months. However, that gut-wrenching shocker saw the Dow Jones Industrial Average dive-bombing 22% in a single day. That isn’t the kind of sharp, short bear market you want to wish for.
The most recent bear — the 2007–2009 financial crisis — was more typical. It ran for a year and a half and plunged more than 50%. That isn’t good, either.
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Don’t get caught by a sucker’s rally
Every bear market in history has exhibited one or more quick, exciting rallies. These upticks fool some investors into believing that the bear market has run its course. Nothing could be further from the truth.
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Figure 6. In 2008 alone, the global financial crisis lured investors into its long bear market with not one but SIX different rallies of 9% to 19%. These exciting illusions lasted only one to six trading days. Source: Goldman Sachs.
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An analysis by David Kostin of Goldman Sachs shows that there were six of these “bear traps” — also known as “sucker’s rallies” — in just one year of the global financial crisis. (See Figure 6.)
These fast bounces encourage investors to pour money back into stocks. But the exhilaration lasts for only a week or so. Don’t try to guess whether a bear market is over yet.
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Muscular Portfolios TELL YOU when the bear’s over
In the paid version of this newsletter, I’ll show you:
- How to tell when this bear market has ended and a new bull has begun.
- How to use today’s volatility to predict future volatility in the stock market.
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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:
• How to tell when the bear is over and a new bull has begun
• How to use today’s volatility to predict future volatility
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About the author: Brian Livingston is a successful dot-com entrepreneur, an award-winning business journalist, a contributor to MarketWatch and StockCharts, and the author of Muscular Portfolios (2018, BenBella Books). He is also the author or co-author of 11 books in the Windows Secrets series (1991–2007, John Wiley & Sons), with over 2.5 million copies sold. From 1986 to 1991, he worked in New York City as the assistant IT manager of UBS Securities; as a consultant for Morgan Guaranty Trust (now JPMorgan Chase); and as technology adviser for Lazard Ltd. He was the weekly Windows columnist for InfoWorld magazine from 1991 to 2003. During portions of that period, he was also a contributing editor of CNET, PC World, eWeek, PC/Computing, Datamation, and Windows magazine. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold the business in 2010. He is president emeritus of the Seattle regional chapter of the American Association of Individual Investors (AAII). Stipple illustration by The Wall Street Journal.