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The Muscular Portfolios NewsletterNo. 30 Oct. 30, 2020
Table of contents
 
Why not hold both Mama and Papa?
What to do if the top three ETFs change at the close

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Why not hold both Mama and Papa?

Brian LivingstonBy Brian Livingston

I’m often asked, “If holding the Mama Bear and Papa Bear Portfolios is good, wouldn’t it be better to hold both of them for diversification?”

Based on calculations I’ve done exclusively for this story, there are indeed benefits to holding both of the portfolios for the long term.

First, let’s look at some of the reasons why we like the Mama Bear and the Papa Bear in the first place:
  • The Mama Bear Portfolio has smaller and more-tolerable losses than the Papa Bear. The Mama has never lost more than 20% between any two month-ends, as demonstrated in tests going all the way back to 1973. By contrast, the S&P 500, adjusted for dividends and inflation, has given investors heart-attack-sized losses of more than 50% twice in just the past two decades (2003 and 2009). Severe crashes like that make investors liquidate, locking in their losses and hurting their performance.
     
  • The Papa Bear Portfolio has had a higher return than the Mama Bear since 1973. But the Papa Bear does have greater losses: as much as 25% in the 1987 market crash. The Papa Bear quickly recovered, but some investors can’t tolerate losses greater than 20% — even with an opportunity for a greater gain.
Figure 1 shows how much you would have made if you’d put your money into a “blend” on Dec. 31, 1972. That means you’d invest half your funds in the Mama Bear and the other half in the Papa Bear. To maintain a 50/50 ratio, you’d rebalance the two portions of your money every year on Dec. 31.
 
Blend of Mama and Papa
Figure 1. A blended portfolio earned more than the Mama Bear but kept its worst month-end drawdown as low as 21% (during the 1987 crash). In the same period, the S&P 500 including dividends turned $100 into only $8,268. Source: Quant simulator, 1973–2015; Folio real-money tracking account, 2016–2020.
What lessons can we take away from the returns shown in Figure 1?
  • A rough average. The Papa Bear turned $100 into $75,250 from Dec. 31, 1972, through Mar. 31, 2020. The Mama Bear produced a smaller ending value of $33,687. Putting half of your money into each strategy and rebalancing the two portions back to 50/50 on Dec. 31 of each year produced a healthy $53,145. That was a better return than the Mama Bear alone, and you’d have suffered only a 21% drawdown — not much worse than the Mama’s 20% loss. (The S&P 500, including inflation, produced only $8,268 while exposing buy-and-hold investors to the agony of three crashes worse than 40% during the same period.)
     
  • The cons of a blend strategy. The two Muscular Portfolios require you to hold only three exchange-traded funds at a time. If the Mama and the Papa both happened to rate the same three as the best, a beldn strategy would still make you own only three ETFs. But the Mama and Papa’s varying methods could occasionally rank six different ETFs as the best. In that case, you’d own all six, if you were using the blend strategy. Maintaining both portfolios is a little more work (but not much).
     
  • What about rebalancing every month? The Mama and Papa aren’t different asset classes. That means there’s no significant benefit to rebalancing the blend portfolio as often as once a month. The two Muscular Portfolios have a 99% correlation, according to an Excel calculation. That means that in 99% of the months when the Mama Bear went up, the Papa Bear went up, too, and vice versa. So you wouldn’t really get more diversification by owning both of them. The main benefit of a blend is the smaller, Mama-like drawdowns.
     
  • What about never rebalancing? If you invested $50 in the Mama Bear and $50 in the Papa Bear on Dec. 31, 1972 — and you never rebalanced the two portions — you’d end up owning their exact arithmetic average: $54,468.50. That’s slightly more than the $53,145 ending value that was delivered by the blend strategy. But you’d have to tolerate the Papa Bear’s occasional 25% drawdowns along the way. The blend portfolio would have softened your losses to just 21%.
     
  • How did I compute these numbers? I used the monthly return calculations that are shown on the Muscular Portfolios website’s data page. The returns from 1973 through 2015 were generated by the Quant asset-class simulator, which was developed by wealth manager Mebane Faber. Those from January 2016 through March 2020 are from real-money tracking accounts I maintain at FolioInvesting.com. Anyone can download from the data page a spreadsheet with these historical returns and perform whatever analyses you like.
I don’t have a clever name for the “blend portfolio,” so I’m open to your suggestions. We can’t call it the “50/50 portfolio,” because that term means holding 50% stocks and 50% bonds (like the Baby Bear Portfolio, inspired by Jack Bogle). We also can’t name it the Family Portfolio — there’s a mama and a papa, get it? — because that’s the name of a well-known Lazy Portfolio promoted by financial adviser Ted Aronson (see my Chapter 3). If you have a naming idea, send it in an email.

Given the above information, I plan to recommend in the future that investors split their money between the Mama and the Papa, if and only if they’re willing to do the extra work. But for the ultimate in simplicity — market-beating returns with no fear of crashes — owning either the Mama or the Papa, whichever one matches your loss tolerance, is still the best approach I’ve found.
 
What to do if the top three ETFs change at the close

As you probably know, my book and website clearly state that investors should check up on and change their portfolios no more often than once a month. To make your tune-ups easy, the website computes every 10 minutes during market hours the rankings of the ETFs that comprise the Mama Bear and the Papa Bear.

I recommend in my Chapter 4 that people check the website after 3 p.m. Eastern Time and make any trades before the market closes at 4. The August 2020 newsletter also reinforces the book’s message that reallocating around the end of the month produces the biggest gains over time.

Reader A.S. asks: “At 3:45, the top three Mama Bear funds were IAU, VWO, and PDBC. But at the market close, they were IAU, VWO, and VONE. Should we switch out PDBC with VONE the next morning?”

There’s no way to know whether the No. 3 ETF or the No. 4 ETF will perform better in the next 30 days. However, I myself switched PDBC to VONE after the open the next morning, because I want my tracking portfolios to follow the formulas precisely. (You should never place market orders that will execute right at the open, to avoid excessive charges that Chapter 4 explains.)

If your brokerage offers you transaction fees of $0, you may want to switch ETFs the next day, if a portfolio’s rankings changed between the time you traded and the close of the market. But if your brokerage firm or 401(k) plan imposes high fees, switching isn’t necessary. The performance difference between the No. 3 and the No. 4 ETF in a single month should be minor and can’t be predicted.
 
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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, and the editor of E-Business Secrets. 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.

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