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The Muscular Portfolios Newsletter — No. 27 — July 17, 2020
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 50%-off sale with special coupon code
The publisher of Muscular Portfolios, BenBella Books, has announced a 50% sale on the hardcover edition. This price break is only available at the publisher’s website, not at Amazon.
To get this limited-time 50% discount, you must first put the book in your shopping cart. On the checkout page, you then enter coupon code MP50 to get the hardcover book for half off or MP799 to get the ebook for $7.99.
To get these discounts:
Use this link to the publisher’s order page or enter bri.li/200717a.
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Is weekly trading better than monthly?
 By Brian Livingston
The question I’m asked most often about Muscular Portfolios is this: “Would we make more money if we switched to the highest-rated ETFs once a week rather than once a month?”
It’s natural to wonder. After all, I’ve set up the Muscular Portfolios website so it updates the latest ETF rankings every 10 minutes during market hours — free of charge.
But that frequency is merely intended to support investors who may choose any day they like to reallocate their portfolios. I’ve never encouraged long-term investors to trade more often than once a month.
Now we have new data to answer the question with some real facts. At my request, the gains of the Mama Bear and Papa Bear were recalculated six different ways by Felix Bertram, the head of the Turing Trader testing site. Using the historical prices of actual exchange-traded funds, he computed the gains and losses from reallocating each portfolio once a week — every Monday, every Tuesday, and so forth — as well as once a month.
Bertram’s numbers go back to 2007, when ETFs covering most of the world’s asset classes became widely available. The latest bear-bull market cycle — using monthly closes — ended on Jan. 31, 2020. Bertram’s study, therefore, covers the entire 2007–2009 financial crisis and the nearly 11-year bull market that followed it.
As I’ve said before, one complete bear-bull market cycle is the shortest period in which any two portfolios should be compared. I want to caution you, however, that the latest market cycle is a sample of one; the results may never repeat. Even so, I think you’ll find the information below to be very eye-opening.
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Figure 1. Trading once a week would not have improved the Mama Bear in the most recent market cycle. Data source: Turing Trader.
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There’s a lot going on in Figure 1, so let’s summarize the major points:
- With its ETFs reallocated on the last day of each month, the Mama Bear gained 303% from Jan. 1, 2007, through Jan. 31, 2020. The S&P 500, including dividends, gained only 196%.
- If you reallocated into the strongest ETFs once a week, and you happened to choose the weekday that would have turned out to be the best, you would have gained 250%. That’s actually a smaller gain than trading once a month.
- If you somehow chose the weekday that would do the worst, your gain would have been just 182% — less than the S&P 500 itself.
- Bertram writes, “I am opposed to pointing out the specific days of the week because this will most likely influence people’s decisions.” So don’t use this data to choose a specific day to trade! But it will be important later in this article for us to know now that the “best” weekday was Friday, followed by Wednesday, Thursday, and Monday. The “worst” weekday was Tuesday. (In Figure 1, the days in the middle of the pack are graphed using very light colors for legibility.)
- When the market was closed on a given holiday, Bertram’s program used the price of the next-closest day (just as a human would).
- Besides producing lower gains in this model, weekly trading also produced slightly worse drawdowns during the 2007–2009 financial crisis. As shown in Figure 1, each of the variants peaked on a different day, but they all bottomed on Oct. 31, 2008. Measuring from the highest month-end to the lowest, the Mama Bear dropped only 15.3%. The weekly strategies would have lost 16.3% to 20.4%.
- Those tolerable losses were nothing compared to the S&P 500’s heart-stopping collapse of more than 50% between month-ends. (The index’s crash was about 55% if measured between daily closes.) And it should be noted that every Mama Bear variation started rising on Oct. 31, 2008 — more than four months before the index itself started to recover.
- Bertram’s program subtracted $0.015 per share for each buy and sell that a portfolio made. Today, most ETFs trade commission-free, of course. But bid-ask spreads still ding you when you trade, so accounting for these small haircuts is important. In addition, using the prices of actual ETFs, as Bertram did, automatically subtracts each ETF’s annual expense ratio in each year.
- Each portfolio started on Jan. 1, 2007, with $1 million. That’s a big chunk of change, but it’s a necessary starting point to avoid holding a lot of unallocated cash. For most of the study period, ETFs could only be purchased in whole shares, so that’s what the tests used. Fractional shares became widely available only recently.
- In the early years of the study, not all of the ETFs that are recommended in the book were available. In that case, a ETF that tracked the same index was substituted. You can see which three ETFs were held each month on ETFScreen’s Mama Bear and Papa Bear performance pages.
- You may have noticed that all versions of the Mama Bear lagged the S&P 500 during the long bull market. The portfolio that was reallocated monthly gained 232% in the bull phase, while the S&P 500 gained 444%. But the Mama Bear still outperformed the index over the complete bear-bull market cycle. The secret to long-term outperformance is keeping your losses small during corrections and crashes. This is a trait of all stategies that have succeeded in surpassing the S&P 500, according to studies by the Vanguard Group and the Hulbert Financial Digest.
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The Papa Bear mostly did best when traded monthly
Figure 2 shows the calculations for the Papa Bear Portfolio. In this case, two of the five weekly strategies ended with a higher total than the monthly strategy. But, again, this will probably never repeat in the years to come. Don’t make any trading decisions based on this small piece of history.
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Figure 2. Monthly reallocation of the Papa Bear Portfolio would have given investors larger gains than most, but not all, of the weekly trading days that investors could have chosen. Data source: Turing Trader.
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- This test shows that the Papa Bear Portfolio noticeably outperformed the S&P 500 over the entire 2007–2020 period. (The Mama Bear beat the index even more.) This confirms the findings in tests of the two Muscular Portfolios by ETFScreen, as described in the Apr. 13, 2020, newsletter.
- Like the Mama Bear, the Papa Bear had the smallest losses during the financial crisis when reallocated monthly, not weekly. The monthly version lost only 17.8% between the highest and lowest month-ends. The weekly versions lost 17.9% to 22.0%.
- As noted previously, the order of the days will probably not repeat. With that caveat, the “best” day for weekly trading of the Papa Bear was Tuesday, followed by Wednesday, Thursday, and Friday. The “worst” day was Monday.
- Now you can see why weekly trading isn’t recommended. Friday was the best day to reallocate the Mama Bear weekly — but Friday was the next-to-worst day to reallocate the Papa Bear! How would you know on which day to make weekly trades in the future? You can’t predict it!
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Why would monthly trading gain more than weekly?
While cautioning investors against making decisions based on limited data, Bertram has ideas on why monthly reallocation might produce higher gains and smaller drawdowns than weekly trading.
“In the short term,” he explains, “stock returns are mean-reverting.” Some research shows that US stocks with large gains or losses in one week tend to reverse somewhat in the following week or so. (Connors Research demonstrates one example of this statistical tendency in a 2019 blog post.) It’s possible that trading asset classes as often as every week would expose you to “head fakes,” also known as “whipsaws.”
It also takes a full month for momentum to show up in asset class gains. More than 300 academic papers have documented the momentum factor, according to a metastudy by David Garff. Those investigations overwhelmingly point to a momentum effect that is monthly, not weekly.
Eugene Fama, who won the Nobel Prize in Economics in 2013, wrote: “The premier anomaly is momentum ... Stocks with low returns over the last year tend to have low returns for the next few months and stocks with high past returns tend to have high future returns.” [Emphasis added.] Notice that nothing is said about this effect working within a single week. This principle is covered in more detail around Figures 1-13 and 1-14 of the book Muscular Portfolios.
What can we take away from all this information? I’ll leave you with one bad idea and what I think is a better one:
A FALSE PREMISE: “Monthly reallocation will always perform better than weekly reallocation.” We simply can’t conclude this with confidence, based on the limited information so far.
A MORE-REASONABLE PREMISE: “There’s little or no evidence that weekly trading will reliably perform better than monthly reallocation.” We can continue to tilt our portfolios into the strongest asset classes once a month. Weekly trading is a lot more work, with no proof that it will be more financially rewarding.
For savers, it’s good to know that monthly reallocation is effective: Most 401(k)-type savings programs prohibit investors from making changes more often than once or twice a month anyway.
In the next newsletter: Is there a “best day of the month” to reallocate a Muscular Portfolio? We’ll see in the next issue. (Sneak peek: The book’s advice in Chapters 5 and 6 to reallocate on or around the last trading day of the month is looking good.)
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We’re running a little behind schedule
Sharp-eyed readers may notice that today’s newsletter is coming out more than 30 days after the previous one. I did publish a short “newsletter update” on June 19, but that doesn’t count as a newsletter.
I’ve been swamped lately. In the last four months, my wife (the Fulbright Scholar and artist Margie Livingston) and I bought a smaller house in Seattle to downsize into; moved to a temporary apartment; started some needed repairs on the new place; sold our old house; and relocated into the new digs.
Unfortunately, the construction projects in our new house were not yet finished when our lease on the apartment ran out and we were required to move. I always advise people to never live in a house that’s undergoing renovation, but that’s exactly what we did. (See Figure 3.)
Moving twice, and accomplishing construction during a pandemic — when skilled workers and supply chains vanished — soaked up all of my available time. To compensate, I plan to publish the next few newsletters less than four weeks apart to catch up. Thanks for your patience! —Brian Livingston
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Figure 3. What my house looks like these days. Contractors from Paradigm Builders of West Seattle install a beam to support the second floor.
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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.