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The Muscular Portfolios Newsletter — No. 26 — May 13, 2020
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Live video seminar on May 16 — FREE
As was announced in the Apr. 13 newsletter, Brian Livingston will give a free, in-depth video seminar on “How to Make Your Portfolio Muscular” on May 16 at 9 a.m. Pacific Time — and now it’s almost here.
The live event is sponsored by AAII Portland. You must preregister by May 13. Only the first 250 people to preregister may participate.
The interactive webcast will include questions and answers from attendees throughout the show. The event will run between one to two hours. It will disclose the secrets of portfolios that provide market-like returns without the fear of crashes.
For information or to preregister, visit our seminar page or enter the Web address bri.li/money into any browser.
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New authorities confirm our results
 By Brian Livingston
Now that we’ve experienced a complete bear-bull market cycle, financial websites are beginning to publish independent confirmation of the returns.
The performances of Muscular Portfolios from the 2007–2009 bear market through the 2009–2020 bull market are now in the history books. The Mama Bear and Papa Bear formulas have been measured by independent authorities against inspirational speaker Tony Robbins’s All-Seasons Portfolio, financial adviser Gary Antonacci’s Dual Momentum, and ETF guru Mebane Faber’s Ivy Portfolio — and Muscular Portfolios passed the test.
I’m extremely pleased to say that the Mama Bear outperformed all of those much-hyped strategies and the S&P 500 total return index. In addition, the Papa Bear beat most of them.
As we’ll see below, both of the two Muscular Portfolios performed near the top when evaluated alongside 10 different asset-rotation strategies. Using the returns of actual ETFs, these strategies have been newly tested by Turing Trader, a rising analysis site.
The success of Muscular Portfolios is beyond the wildest dreams I had when I started this investing-research project in 2012. The idea that you can enjoy market-like returns with no crashes and without market timing — requiring no more than one change per month — was radical then but is becoming accepted now.
As the book Muscular Portfolios explains, only the returns from complete bear-bull market cycles are meaningful. Shorter periods can leave out the crushing effects of bear markets and financial panics. Your long-term returns are determined not by how much you make in rallies but by how much you keep in downturns.
Muscular Portfolios will never beat everything — someone will always earn more than you do — but getting market-like returns while avoiding severe crashes is now a proven fact, not mere theory.
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The Mama Bear handily beats the benchmarks
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Figure 1. The Mama Bear Portfolio actually went UP during the global financial crisis. By the market bottom on Mar. 9, 2009, the portfolio was in a drawdown of only 4.98% from its “bear-market high.” (What a refreshing concept!) By contrast, the widely used 60/40 “balanced portfolio” collapsed a heart-wrenching 35.62%, and the S&P 500 crashed more than 50%. Source: Turing Trader’s Mama Bear page.
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Turing Trader usually graphs various strategies’ performances against a Vanilla 60/40 Portfolio. This passive formula — called a Lazy Portfolio — is also known as the “pension model” or the “balanced portfolio.” It holds 60% in stocks (SPY) and 40% in bonds (AGG), rebalancing once a year. This allocation tends to have near-market returns but gives investors slightly smaller drawdowns than holding 100% equity.
The way most Americans save these days is either a 60/40 portfolio or its kissin’ cousin, a “target-date fund.” TDFs start with more than 60% in equities early in a worker’s career. The equity/bond allocation is gradually reduced to 60/40 by the saver’s middle age. Equities are reduced to 50% or by the time of a worker’s retirement. (For details on TDFs, see the analysis at Sound Mind Investing and my critique at MarketWatch.)
The Vanguard Group — by far the largest sponsor of target-date funds — says 77% of participants in its 401(k)-type plans now own shares of a TDF. Remarkably, 52% of Vanguard plan participants own no funds other than a TDF. And the generational trend is a tsunami: An astounding 84% of employees who recently started a 401(k) plan hold nothing but a single TDF.
Passive 60/40 portfolios and TDFs may be popular. But Turing Trader’s numbers prove that simple, low-risk asset-rotation strategies — such as Muscular Portfolios — can outperform a 60/40 model and even the S&P 500 over complete bear-bull market cycles.
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The Papa Bear outshines ‘balanced’ portfolios
Figure 2 shows that the Papa Bear Portfolio beat the common 60/40 strategy over the most recent bear-bull market cycle. This is true even though the Papa Bear is super-easy. Like the Mama Bear, the Papa Bear requires an average of only 9 changes every 12 months and uses low-cost ETFs that anyone can buy.
Figure 3, however, shows Turing Trader estimating that the Papa Bear, unlike the Mama Bear, did not outperform the S&P 500 in the latest bear-bull market cycle. This confirms the axiom: In investing, you never get guarantees, only probabilities.
However, other testing authorities show the Papa Bear slightly outperforming the S&P 500, as we’ll see in Figure 4.
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Figure 2. The Papa Bear, like the Mama Bear, also rose during the housing-bubble crash. On Mar. 9, 2009, the portfolio was only 11.19% off its “bear-market peak.” The Papa Bear rose from there, and the “balanced portfolio” could never surpass it. Source: Turing Trader’s Papa Bear page.
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The Mama Bear outearns almost all monthly strategies
Figure 3 shows the final results of the complete bear-bull market cycle for all 10 of the monthly investing strategies that Turing Trader currently tracks. These formulas all use “asset rotation”: You invest only in assets that are rising and stay out of ones that are falling. The exceptions are the Vanilla 60/40 and Tony Robbins’s All-Seasons Portfolio, both of which are Lazy Portfolios.
The Mama Bear Portfolio and three other asset-allocation strategies beat or statistically tied the S&P 500. The benchmark’s huge drawdowns and corrections held its full-cycle performance down to the middle of the pack.
(The asset-rotation formulas are adjusted for costs. Turing Trader dings the monthly portfolios a commission of $0.015 per share per trade. That’s the fee Interactive Brokers recently charged its clients, although IB launched commission-free trading several months ago.)
Caution: Don’t take small differences in the returns literally. In my view, variations in the full-cycle gains of 30 percentage points or so are random and should be ignored:
- Gains do not repeat. In the next bear-bull market cycle — 2020 to 2028? — the gains and ranking order of these portfolios will certainly be different.
- Only losses are predictive. A portfolio that has lost more than 25% in the past is certain to lose more than 25% in the future. Serious drawdowns tend to make investors liquidate, causing a permanent loss of capital. (For evidence, see Figure 14-3 of Muscular Portfolios.)
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Figure 3. The Mama Bear Portfolio and three other strategies beat or tied the S&P 500 over the latest full cycle. By design, every asset-rotation portfolio — all of which include bonds — lagged the S&P 500 during the index’s roaring bull-market phase. But the leaders outperformed the index in the long run by keeping their losses small during corrections and crashes. Source: Data extrapolated from Turing Trader.
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The Papa Bear Portfolio keeps pumping out gains
I’m not too concerned that Turing Trader’s statistics show the Papa Bear lagging the S&P 500. ETFScreen.com is a different financial tracking site, which also uses actual ETF returns, not indexes, just like Turing Trader. ETFScreen’s numbers show that the Papa Bear slightly outperformed the S&P 500, including dividends, from the close of Oct. 8, 2007, through Feb. 19, 2020, as shown in Figure 4.
ETFScreen’s independent findings were reported in detail in the April 2020 newsletter.
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Figure 4. A separate financial website, which also used actual ETF returns and fees, calculated that the Papa Bear beat the S&P 500 in the latest bear-bull market cycle. Variations among computations by individual Web developers will probably never be completely eliminated. Source: ETFScreen.com.
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Why is it desirable to use the returns of actual ETFs, not just indexes? For one thing, using actual ETF prices inherently subtracts the annual expense ratios and other fees that the funds charged over the years.
In addition, many ETFs have ways to slightly improve their performance over an index. Some ETFs use a “sampling” technique, automatically excluding some losers. Others lend out shares to short sellers, thereby earning small interest payments.
We can simulate asset-class returns all the way back to 1973, as demonstrated in the book Muscular Portfolios. But with the advent of actual ETFs that real people could really purchase, using those indisputable numbers gives us a dose of reality.
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What about the other top portfolios?
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I’m constantly on the lookout for proven strategies that could be added to our list of Muscular Portfolios. The formulas of special interest to us in Figure 3 are Engineered Portfolios’ Accelerated Dual Momentum and Wouter Keller’s humorously named Defensive and Lethargic Asset Allocation. Before you pour serious money into them, however, you should be aware that they have some issues:
• Accelerated Dual Momentum. The Engineered Portfolios website announced its ADM formula after backtesting several modifications to Gary Antonacci’s 2014 book, Dual Momentum. In a May 2018 blog post, Steve Hanley — VP of sales and marketing at Mide Technology — documented his ADM strategy. It ranks assets using an average of an ETF’s performance over the past 1, 3, and 6 months — not 12 months, as in Antonacci’s original formula. Also, Hanley substituted a different international stock fund and a longer-term Treasury bond fund than the ones specified in Dual Momentum.
Antonacci was not amused. In a September 2018 rejoinder, he accused ADM’s promoters of “data mining” — finding meaningless patterns in historical data — and “distortions” of Dual Momentum’s principles.
One of the findings in Hanley’s backtests makes us want to stay away. By his own numbers, ADM has crashed as much as -34% and Dual Momentum an even worse -43%. His calculations are based on stock-market databases that go back 120 years. (Having no data on international stocks prior to 1970, Hanley simply ignored them for the first seven decades, an omission Antonacci called “selection bias.”)
• Keller’s Asset Allocation. Wouter Keller is CEO of Flex Capital, a wealth manager in The Netherlands, and is associated with VU University in Amsterdam. Turing Trader tracks his Defensive, Lethargic, and Classic Asset Allocation portfolios. Kelley published these formulas as academic white papers in August 2018, December 2019, and May 2015, respectively.
Conclusion: All of the above asset-rotation methods are too new to satisfy several of the criteria that the book Muscular Portfolios calls “Strategy Sanity.” (These are features that all investors desire and should require.) To be specific, ADM and Keller don’t yet have (A) years of use by actual people, (B) a large online forum or support community, or (C) websites that present the picks for free and provide updated information. These attributes are all satisfied in the works of Steve LeCompte, Meb Faber, and Jack Bogle (the inspirations for the Mama, Papa, and Baby, respectively).
I’ll report on the newer portfolios in a future newsletter, but I can’t recommend them at this time.
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Who’s behind Turing Trader?
Turing Trader is the brainchild of Felix Bertram, a native of Germany who moved with his wife and children to the United States more than a decade ago. Prior to developing his backtesting software, he lived in California and was a chief hardware architect at Apple, hardware director at Avid, and VP of engineering at Native Instruments.
He now resides in Kirkland, Washington, a suburb of Seattle, where I myself live. Despite our proximity, we had never met. I didn’t know of his work until I discovered his website last month. (Neither Publica Press nor its affiliates, including yours truly, have any business relationship with Bertram.)
How to use Turing Trader’s resources
Bertram has developed a free, open-source backtesting engine. Its clever “splice” technique can use the returns of one ETF in the early years of a backtest but switch to a better (e.g., lower-cost) ETF that appeared later, just as a real investor would have. The software runs on Windows after you obtain it from Bertram’s download page.
The open-source code that shows which ETFs Bertram chose when modeling the Mama Bear and Papa Bear is readable in plain text on a GitHub repository page. (See the comments at lines 278 and 331.)
For more information on the asset-allocation portfolios that are ranked in Figure 3, see the following pages of TuringTrader.com: Accelerating Dual, Mama Bear, Lethargic, Defensive, Dual Momentum, Papa Bear, 60/40 (Classic and Vanilla), All-Seasons, Ivy Portfolio, and Classical.
Bertram also tracks approximately a dozen strategies that require weekly or daily trading. These, of course, require more effort and have higher trading costs than portfolios with monthly reallocation. You can see the backtested performance of the dailies and weeklies at the portfolio comparison page.
TuringTrader.com offers a basic registration, which is free, and a premium subscription for $49.95 per month. The cost of the premium membership gives you real-time signals for several of Bertram’s daily and weekly trading models. Members pay no additional asset-management fees. (Basic subscribers see the same signals but with a 31-day delay.) For descriptions, see TuringTrader.com’s home page.
Finally, Bertram is a fiduciary, fee-only registered investment advisor (RIA). He provides wealth management and financial planning through his LLC, Bertram Solutions.
I’ll have more about this fascinating constellation of free and premium services in future issues of the newsletter. Meanwhile, we can enjoy knowing that Muscular Portfolios perform in the top tier of strategies that offer low risks and market-like gains.
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Publisher offers a 50%-off coupon!
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 For a limited time, the publisher of Muscular Portfolios will deliver the full-color, hardcover edition to you or your loved ones for 50% off the list price.
To get this bargain before BenBella Books comes to its senses, use the coupon code MP50 at checkout.
The ebook version is also available at a discount using coupon code MP799.
To get the savings, you must use this link to go to the BenBella order page, or enter the following into any browser:
BenBellaBooks.com/shop/muscular-portfolios
If there’s anyone you know who would benefit from an easy-to-use and low-risk (but market-beating) investment plan, now’s the time to send them a copy — the price will never be lower.
“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
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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.