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The Muscular Portfolios Newsletter — No. 50 — Dec. 31, 2022
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An unbroken 50-year track record of gains
 By Brian Livingston
As of Dec. 31, 2022, we now have a track record 50 years long — with independent confirmation from different data-analysis services.
The book Muscular Portfolios shows how investors who buy various asset classes using a simple momentum formula would have enjoyed market-beating gains over the 43-year period from 1973 through 2015.
Independently of the book, the financial website ETFScreen.com uses the prices of actual exchange-traded funds (ETFs) to track the gains of the two Muscular Portfolios over the last 16 years — 2007 through 2022.
When we stitch together both data series, we see that the portfolios have outperformed the total return of the S&P 500 for five decades. That period includes five complete bear-bull market cycles.
Wall Street calls these repeating down-up intervals the primary cycle. The five latest bear-bull spans began in 1973, 1987, 2000, 2007, and 2020. (The cycle that began with the current 2022 bear market is nowhere near over yet.)
Best of all, different financial record-keepers are largely in agreement about how much the Muscular Portfolios would have actually returned over the decades.
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The two Muscular Portfolios continue to win the race
The 1973 through 2015 calculations in the book were produced using custom software by Mebane Faber called the Quant simulator. Faber is the author of The Ivy Portfolio and the sponsor of several specialized ETFs. He’s also the inspiration for the Papa Bear, one of two Muscular Portfolios that our book explains.
Separately, ETFScreen — headed by CEO Hugh Todd — started tracking the two Muscular Portfolios from 2007 forward using the prices of actual funds anyone could easily buy. Back in 2007, low-cost indexing pioneer Vanguard Group launched such ETFs as VEA (which holds developed-market stocks) and EDV (which holds 30-year Treasury bonds). Around that time, ETFs representing all 13 global asset classes used by Muscular Portfolios were finally available.
There’s an overlap between the time periods that are projected by the Quant simulator (which uses the historical prices of stocks, real estate, and commodities) and tracked by ETFScreen (which uses the prices of actual ETFs). If we graph Quant’s 1973–2007 numbers, followed by ETFScreen’s 2007–2022 results, the financially rewarding outcome is what’s shown in Figure 1.
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Figure 1. Quant’s 1973–2006 estimates are shown as solid lines. ETFScreen’s tracking using actual fund prices 2007–2022 is shown as lighter, bordered lines. The two Muscular Portfolios lost far less than the S&P 500 in every bear market. That helped them beat the benchmark over the last 50 years. Sources: Quant and ETFScreen.
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I’ve calculated the numbers in Figure 1 as realistically and conservatively as possible. Fund fees and trading expenses have been deducted all along the way. Many investing books, by contrast, pretend there’s no trading friction. They slyly ignore the expenses that cut into the gain of every security transaction.
- Quant’s numbers in the book were calculated after deducting fees. The Papa Bear Portfolio was charged 0.16% per year and the Mama Bear Portfolio 0.20%. These fees reflect the ETF expense ratios that were in effect when the book was written. In addition, both portfolios were charged a commission of 0.10% for each round-trip buy and sell.
By contrast, buying and holding for 50 years a single index fund would incur no transaction costs. Therefore, the S&P 500 was charged no commissions and only 0.05% per year in fund fees. At the time, that was the expense ratio of VOO, an early Vanguard index fund that tracks the benchmark.
- I reduced ETFScreen’s numbers for each Muscular Portfolio by the same fee and commision amounts as above. Yes, it’s true that most brokerage firms now charge zero commissions. Also, today’s ETF fees can be microscopic. However, I believe it’s fair to reduce Muscular Portfolios’ reported returns by a realistic haircut. Brokerage firms almost universally charged commissions during the years graphed in Figure 1. (Most brokers ended commission charges as recently as 2019 or 2020.)
However, ETFScreen’s numbers for the S&P 500 were not reduced by any fees. The expense ratio of SPY — which ETFScreen uses as a proxy for the benchmark — is already reflected in SPY’s market price.
The results are phenomenal. The Mama and Papa grew at annualized rates of 13.6% and 15.7%, respectively. The S&P 500 returned significantly less: only 10.1%. To add insult to injury, the benchmark also subjected investors to ulcer-inducing losses of 25% to 51% along the way.
Following a Muscular Portfolio’s simple momentum formula allows you to reap the gains of powerful markets in the US and around the world. But these gains come with a huge plus. You’re protected against crashes, which are defined as losses of 30% or more. To avoid huge drawdowns, the portfolios switch each month into whichever asset classes happen to have the best statistical probabilities of outperformance in the next 30 days.
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Compounding stacks your gains on top of your gains
How do the numbers in Figure 1 actually work? Here’s an example. Let’s say you began your 50-year working career with a nest egg of $1,000 in 1973. If you bought Vanguard’s VFINX — the first fund that tracked the S&P 500 — your stake would have turned into $125,480 by the end of 2022. (VFINX didn’t launch until 1976, but we’ll ignore that for this example.)
If you had instead followed the Mama Bear formula, you’d have wound up with a generous $579,600. And the Papa Bear would have given you a cool $1,494,620.
That ending value of the Papa Bear is over 10 times more than you’d have had with a buy-and-hold of the S&P 500. It’s enough money that you could easily tell your overbearing boss, “See you later, I can do whatever I want now!”
Some might question how a simple asset-rotation formula could give you a pile of money that much greater than a buy-and-hold. The answer is the miracle of compounding.
Over a 50-year working career, an annualized return even 1 percentage point grater than the benchmark gives you a much better ending value. For example, if your account returned 11.1% instead of the S&P 500’s 10.1%, you’d end up after 50 years with 57% more money.
“But I heard it was impossible to outdo the S&P 500.”
No one had ever run a four-minute mile, after many years of attempts. Then the barrier was broken by British athlete Roger Bannister at a 1954 Oxford University track meet. Since then, sub-3:59 runs have been achieved by more than 1,000 runners.
In a similar way, the S&P 500 is not unbreakable. It’s routinely beaten by, for example, the S&P 600 small-cap ETF (SLY) and several other indexes. (See StockCharts’ graph of SPY vs. SLY.)
To grasp compounding’s power, try the Rule of 72. You divide this number by your portfolio’s annualized rate of return. Dividing 72 by the Papa Bear’s 15.7% return suggests that your money doubles roughly every 4.6 years. Over a 50-year working career, your nest egg would double almost 11 times. That’s a lot of doubling! Exponential growth like that is how you’d wind up with $1,494,620 after starting with only $1,000. (See Wikipedia’s Rule of 72 page.)
To get a more precise calculation, use the compound-growth Web form at Omni Calculator. Enter the Number of Periods as 50, an Initial Value of 1000, and a Final Value of 1494820. The calculator will show that your rate of return is 15.7%.
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The past horrid year shows exactly why this works
The year 2022 delivered one of the worst all-around collapses in market history. From the high on Jan. 3, the S&P 500 fell more than 25% by Oct. 12. The benchmark ended with an irritating drawdown of 19.9%. The Nasdaq suffered a crash low of 35% on Nov. 3, ending the year with a disastrous 33.2% drawdown. (See Figure 2.)
Bonds gave you no safety. Long-term Treasury bonds (including dividends) lost 29%, largely due to the Federal Reserve’s raising interest rates.
That was fixed-income’s worst 12-month loss since 1792, the statistician Edward McQuarrie recently told CNBC. Far from providing a safe harbor, long-term bonds subjected investors to the greatest pain in 230 years.
People who buy and hold, thinking diversification alone will protect them, were hammered. The sacred cow known as the “pension model” — 60% stocks and 40% bonds, which pension funds and other institutions call a “balanced portfolio” — cratered 28.5% in 2022.
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Figure 2. The S&P 500 and Nasdaq fell as far as 25% to 35% by autumn 2022. Several times, the indexes teased people with sudden gains. But each surge was a “sucker’s rally.” The benchmarks never broke out of the downtrending channel that had begun on Jan. 3. Sources: ETFScreen (S&P 500/SPY and Muscular Portfolios), Yahoo Finance (Nasdaq/QQQ).
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I’ve said many times that periods shorter than one complete bear-bull market should never be used to compare portfolios. The long-term view in Figure 1 shows us how much Muscular Portfolios outperform the market. But it’s also useful for us to examine the one-year history in Figure 2 to see why the portfolios outdo the S&P 500.
In the awfulness of 2022, the two Muscular Portfolios protected your money from crashing. Each portfolio was down only about 11% by year-end. That’s one-half or less of the losses of the S&P 500 and Nasdaq. To get this outperformance, you just make sure once a month that your account is holding the three strongest ETFs. The rankings are posted for free on the Muscular Portfolios website, at ETFScreen, and elsewhere.
Only nine times a year, on average, is any change from your previous month’s holdings needed at all. Checking the website and making any necessary trades requires no more than 15 minutes a month. That’s time well spent for investors who understand two simple facts:
- Sailboat captains learn to tack their sails. Any sailor who doesn’t know how to tack against the wind will never get to the desired destination unless the weather is exactly perfect — which it rarely is.
- Individual investors learn to tilt their portfolios. People who hold the same assets all the time suffer an equity crash every 10 years, on average. Simply tilting your portfolio once a month is enough to keep your money in the three ETFs that have the best statistical probability of outperforming in the following 30 days.
As an investigative journalist, I wanted to make sure when I was finalizing the Muscular Portfolios manuscript in 2018 that its formula would work permanently into the future. Most investing books boast huge gains from the past. But after such claims come out, the techniques typically lose three-fourths of their excess returns. This is called post-publication decay. (See Figure 10-4 of my book for details.) The market will not act in the future as it did in the past.
Only the simplest and most classic investing formulas continue to work decade after decade. That’s because human nature never changes. Every free market goes through boom-and-bust cycles. As investors, it would be foolish for us to insist that we’ll never change our positions. Instead, we shift our accounts a little each month in response to good and bad market conditions.
This knowledge has many names. It’s been called asset rotation, momentum investing, trend following, relative-strength investing, and tactical asset allocation. These are all different terms for mechanical investing. Our all-too-human opinions deceive us when our money is at risk. Only by following a proven and trusted mechanical formula can we protect ourselves from our unconscious behavioral biases.
Muscular Portfolios require no market timing (which doesn’t work), no expensive gurus (who aren’t worth it), and no commentary-watching (which makes us trigger-happy).
Informed investors remain 100% invested at all times in whichever global asset classes happen to have the best statistical odds of success in the coming month. That’s all you need. Anything more complicated can be just a distraction.
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Different tracking methods produce nearly the same numbers
The book’s projections of the Muscular Portfolios’ returns over 43 years — 1973 through 2015 — were produced by the Quant simulator. I’ve been asked, “How do we know these numbers are reliable?”
Quant’s estimates and ETFScreen’s calculations overlap for nine years: 2007 through 2015. This duplication gives us the opportunity to see for ourselves how Quant’s use of historical asset-class data holds up against ETFScreen’s tracking of actual ETF prices.
Figure 3 shows that Quant’s projected returns were very close to ETFScreen’s computed returns. In fact, the returns from holding actual ETFs were slightly better than Quant had estimated.
Quant had calculated that the Mama Bear would have an annualized return of 10.7% during the nine years. But the return of the actual ETFs was slightly better at 13.3%. For the Papa Bear, the estimate was 7.0%. But the ETFs’ actual annualized rate was a more rewarding 11.3%.
Over the duplicated period, the asset-rotation formulas made the portfolios grow and grow — significantly more than expected.
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Figure 3. Quant’s projections turned out to be very similar to ETFScreen’s calculations of actual ETF gains. But the real ETF accounts, in fact, gained more than Quant had predicted. Sources: Quant and ETFScreen.
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How could an exchange-traded fund produce a higher gain than the underlying benchmark it tracks?
- Payments from short sellers. ETF sponsors can and do loan out some of their shares to short sellers. The traders pay the ETF a fee for the privilege.
- Marketing to an affluent clientele. Once a sponsoring firm has a roster of clients, other products and services can be sold to them by the sponsor or its “business partners.”
Let’s just enjoy the fact that Quant’s statistics in the book agree with the gains ETFScreen says anyone could have achieved since 2007 with their own hard-earned dollars.
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Lazy Portfolios have proved to be total failures
“Lazy Portfolios” were fads that sprang up in the 1990s. They were invented by people who noticed something about Vanguard’s S&P 500 tracking fund: VFINX. The index beat more than 90% of the professional traders who tried to use active investing. (See AEI.) Being “active” means using one’s opinions to pick stocks — the opposite of mechanical investing.
If one index fund was good, these people thought, why not buy a lot of different index funds? Just hold 5 or 10 specific funds to form what’s called a static asset allocation. The percentages allocated to each fund would never change. This was supposed to make investors wealthy — with no work at all!
Static asset allocation was popularized in a 2004 book titled The Lazy Person’s Guide to Investing by Paul B. Farrell, Ph.D. Formerly a Morgan Stanley investment banker, he was at the time of publication a MarketWatch columnist.
Unfortunately, Lazy Portfolios have completely failed the test. This is proved by MarketWatch’s own numbers, which are updated on a tracking page after each trading day. In the 10 years ending Dec. 31, the website shows that Lazy Portfolios generated only one-third to two-thirds the annualized returns of the S&P 500. (See Figure 4.)
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Figure 4. The eight major Lazy Portfolios have much poorer long-term rates of return (4.57% to 8.60%) than the S&P 500 (12.74%), as shown in this comparison. The rows have been sorted in descending order of 10-year annualized returns, and the right-hand column has been highlighted in yellow. Source: MarketWatch tracking page as of Dec. 31, 2022.
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To be sure, you can justify holding a portfolio that delivers a lower rate of return than the S&P 500. The slower growth would be worth it if the portfolio helped you avoid crashes (losses worse than 30%). But that protection would only be possible if a portfolio minimized the emotionally crushing bear markets that equities subject you to approximately every 10 years.
Lazy Portfolios do nothing of the sort. A data-analysis firm called My Plan IQ has tracked the performances of several Lazy Portfolios from 2007 through today. During this 27-year period, the S&P 500 has crashed several times — as much as 55.3%, between any two daily closes. (See Figure 5.)
Lazy Portfolios vaporized investors’ money nearly as badly. Innocent followers suffered heart attacks as they watched 35% to 49% of their life savings vanish. Thanks for nothing, Lazy Portfolios!
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Figure 5. Every Lazy Portfolio subjected investors to crashes of 35% to 49% since 2007, according to tracking data. These enormous losses were not compensated for by market-beating performances. Source: My Plan IQ.
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What can we learn from Lazy Portfolios’ poor performances, both in up markets and down markets?
- The S&P 500 returned 12.74% annualized in the past 10 years. The best that the most successful Lazy Portfolio could do, as shown in Figure 4, was 8.6% annualized — one-third less — and the strategy forced investors to endure major losses along the way.
- The worst Lazy Portfolio, investment adviser Paul Merriman’s Ultimate Buy & Hold, returned a miserable 4.57% annualized. That’s little more than one-third the return of the S&P 500. Even the Treasury’s Series I bonds yield more than 4.57%!
And the Buy & Hold strategy, typical of Lazy Portfolios, tormented investors with an intolerable loss worse than 38%, as shown in Figure 5. Compounded over a lifetime, B&H’s poor showing would leave you with a lot less money than you expected.
Dr. Farrell has seen the disappointing numbers, like many other people. To his credit, he possesses an open mind and has seen the light. After reading the book, he emailed to me a quote that he allows me to use: “Muscular Portfolios is the next evolution of Lazy Portfolios — a must-have in every investor’s library.”
For more information on each Lazy Portfolio, see the lead article in Newsletter #42 (Feb. 13, 2022). Today’s Figure 5, which is taken from last February’s newsletter, hasn’t been updated with 2022 returns yet. But you can easily subtract the terrible losses in the “1-year return” column of Figure 4 from the ending values of Figure 5. That will show you how badly the lazies have done to date against the S&P 500.
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I hope you feel fortunate to have found Muscular Portfolios. Unique in the shark-infested world of investing, the Mama and Papa are:
- Completely free of charge
- Supported by websites that reveal the statistically best ETFs
- Tracked by independent financial analysts
- Proven to have superior performance for 50 years
- Usable in accounts that allow only one or two changes per month
The fact that our 50-year track record was completed just in time for this issue — Newsletter #50 — was a matter of chance. But there are no coincidences! Maybe it was meant to be.
For more information on investing performances, see ETFScreen’s Mama Bear and Papa Bear pages..
Have a great new year, and happy investing!
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