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The Muscular Portfolios Newsletter — No. 56 — Oct. 13, 2023
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The S&P 500 has lost 9.9% since 2022
 By Brian Livingston
No one likes it when the balance in their brokerage account is down. That affects a lot of people right now, because the S&P 500 and many other indexes are down about 10% since the market’s high on Jan. 3, 2022.
The two Muscular Portfolios are down since that high, also. But the good news is that their performance has been much less volatile than the benchmark.
The S&P 500 subjected investors to a bear-market dive of a heart-wrenching 25% in October 2022. The index still shows the scars of a 9.9% loss as of the end-of-quarter Sept. 29, 2023, market close.
By contrast, the Papa Bear Portfolio never subjected investors to a bear market at all. The Papa has been down no more than 14.18% since the Jan. 3, 2022, high. Asset classes of most kinds declined in 2022–2023. Even US bond funds fell in 2021, 2022, and 2023 to date — the first multiple-year dive in Bloomberg’s bond tracking going back to 1976.
Despite the pressure on so many asset classes, the Papa is still slightly ahead of the S&P 500 in the current down cycle. (See Figure 1.)
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Figure 1. Stocks, bonds, and many other asset classes declined in the disappointing 2022–2023 period (through September 2023). The S&P 500 and both of the Muscular Portfolios are down. But the Mama and Papa gave investors a smoother ride and saved them from the ulcers that the benchmark’s 25% bear-market nosedive gave investors. Source: ETFScreen.com
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Even better, the Mama Bear Portfolio has been down in 2022 and 2023 to date no more than 12.77% — a mild correction. That’s only about half of the steep collapse that the S&P 500 made investors endure.
(The Mama Bear’s equity curve is similar to the Papa Bear’s, so for the sake of legibility, it’s not drawn in Figure 1. The Mama fell 11.83% through Sept. 29.)
Followers of Muscular Portfolios know that we strive to achieve the “Holy Grail of Investing.” That means we enjoy market-like returns with less than bond-like volatility — and no crashes!
How do we long-term investors succeed in these goals? We accept some down years in our portfolios without becoming discouraged or throwing in the towel.
Ignore periods that are shorter than one or more complete bear-bull market cycles. “Long-term investing” means for the rest of our lives. We’ll end up with greater gains that the S&P 500 — without the heart-wrenching crashes (losses of 30% or more) that the index torments investors with every 18 years, on average.
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Risk portfolios go up — and they must go down, too
No portfolio that offers the powerful gains of the global marketplace goes up every month or even every year.
That’s because the greatest gains only come from investing in asset classes that fluctuate: stocks, bonds, and hard assets (real estate, commodities, and precious metals).
Only a portfolio of short-term Treasury bills, which typically pay low yields, can give you an account balance that pretty much goes up every month. If you want your money to grow faster than that — a lot faster — your portfolio must hold risk assets that go up and down.
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Figure 2. The model strategy (the Mama Bear Portfolio) remains far ahead of the benchmark (the S&P 500 including dividends) across the past 16¾ years. The Papa Bear Portfolio has similar results. Best of all, both strategies have saved investors from suffering losses greater than 23%, even when the S&P 500 was down more than 55%. (Drawdowns measured between daily closes.) Source: ETFScreen’s Mama Bear performance page
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Focus on the long term — complete bear-bull market cycles, preferably more than one — and you see how Muscular Portfolios can build your wealth faster than the crash-prone S&P 500.
Figure 2 shows the performance of the Mama Bear Portfolio from 2007 to 2023 — the 16¾-year period when exchange-traded funds have been widely available. The graph includes at least three bear markets: 2008, 2020, and 2022.
The performance of the Papa Bear Portfolio has been similar, as you can see at ETFScreen.
Computed by ETFScreen using the closing prices of actual ETFs, the two Muscular Portfolios have beaten the S&P 500 (including dividends) on every metric that Wall Street uses to measure investment success.
The proof is in Figure 3. Over the long term, the two Muscular Portfolios have beaten the S&P 500 (including dividends) on every metric Wall Street uses to measure investment success.
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Figure 3. Using standard Wall Street calculations, the Papa Bear and the Mama Bear have beaten the S&P 500 (SPY) on EVERY metric: gains, losses, and risk-adjusted return ratios. The statistics use the prices of actual exchange-traded funds, going all the way back to 2007 — when many ETFs began. Source: ETFScreen’s Papa Bear and Mama Bear performance pages
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Of course, we’d all like to make even larger gains. But we need to stop and just enjoy how the two Muscular Portfolios’ track records reflect the “Holy Grail of Investing.” Outperforming the S&P 500 over complete bear-bull market cycles is something most active investment managers are simply incapable of doing.
“More than 90% of active managers fail to beat the market over 10- and 20-year periods,” according to a Sept. 13, 2023, Wall Street Journal article by Burton G. Malkiel.
The answer for individual savers isn’t active investing. It’s mechanical investing. That means following a simple, computerized formula rather than trading on your own fallible opinions — as active managers do.
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Muscular Portfolios deliver gains and keep losses small
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It’s important to remember how the book Muscular Portfolios explains the math behind the two strategies’ strong performances:
- Muscular Portfolios almost always LAG the S&P 500 during bull markets.
The reason is that the portfolios are diversified into three different asset classes to keep risks small. The Vanguard Group studied the tiny number of actively managed US equity funds that had outperformed their benchmarks during a 15-year perod. Almost every one of these superior funds — 97% — returned less than the benchmark for at least five of those years, mostly during bull markets. (See Chapter 16 of the book.) Patience is your friend.
- Muscular Portfolios almost always OUTDO the S&P 500 during bear markets.
The portfolios don’t attempt any market timing, which doesn’t work. Instead, the portfolios gradually tilt away from stocks and tilt toward other asset classes during corrections and crashes.
- Mathematically, the result is that Muscular Portfolios beat the index over complete bear-bull market cycles.
Keeping losses small is the key. If your account is down 25%, you need to gain 33% to get back to even. But if you lose 50% — as the S&P does every couple of decades — a hard-to-achieve gain of 100% is required to recover. Warren Buffett’s amazing outperformance is due to this exact mathematical principle. His diverse portfolio always lags bull markets and shines during bear markets. The result is a great gain over the long term. (See the book’s Figure 2-2.)
Complex strategies that hedge funds developed to impress potential clients have been shown not to work. The future will not be like the past. The more a strategy has been molded to a past decade’s patterns, the more likely it is that it won’t repeat its backtested success.
Simple strategies that are based on timeless market principles — diversification, compounding, and momentum — continue to work decade after decade. These principles have held up since the first open-outcry market began as the Amsterdam Stock Exchange in 1602. The same foundation should serve us well for the rest of our working lives and throughout our financially independent sunset years,
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Don’t assume the worst is over for the S&P 500
In June, July, and August of 2023, the two Muscular Portfolios pretty much tracked the S&P 500. Yes, we’d like our accounts to be up every month. But that just isn’t the way portfolios that hold risk-based assets work.
The strength of the two Muscular Portfolios is that they will automatically tilt toward stronger asset classes if the S&P 500 begins another leg down, as many market watchers expect.
As a general rule, I ignore market predictions. There are too many surprises that can move the S&P 500 — up or down — for anyone to anticipate them with certainty.
But a warning that we should at least consider is being sounded by JPMorgan’s co-head of global research Marko Kolanovic. He was added to Institutional Investor’s Hall of Fame in 2020 after ranking as a No. 1 equity strategist 10 years in a row. (See Figure 4.)
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Figure 4. Marko Kolanovic, a No. 1-rated equity strategist, says the S&P 500 is vulnerable. “It could be 20% downside.” Video screen cap from CNBC article
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“JPMorgan’s Marko Kolanovic is bracing for a 20% sell-off to hit the S&P 500,” writes Stephanie Landsman on the CNBC cable channel’s website.
The reason is that interest rates are now so high in the US that a business slowdown and a full-blown recession are likely, the strategist says.
“Could there be another five, six, seven percent upside in equities?” Kolanovic asked the panelists on CNBC’s Fast Money news program. “Of course... But there’s a downside. It could be 20% downside.” The excessive valuations of high-flying US stocks, he says, make the market vulnerable to a stumble.
Let’s not try to guess! We can rest easy with Muscular Portfolios. They will automatically guide us to those ETFs with the best probability of success at any given moment. Our accounts will go up and down, no matter what stocks may do. But at least we won’t have to agonize over every decision.
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