VTS Community,

Unless something crazy happens in the markets and veers me off in a different direction, I’ll spend the week just reviewing our strategies.  For many of you this will just be a refresher course, but our VTS community did grow substantially this year which is awesome and thank you to all the newcomers in 2017!  We’ll start with the core holding that’s 50% of the Total Portfolio Solution:

VTS Tactical Balanced Strategy

The reason it’s called “tactical” is because it’s not buy and hold.  We move in and out of positions in Stocks, Bonds, and Gold depending on market conditions.  Those possible positions are represented by the following tickers:

Stocks:  MDY  –  SPDR S&P 500 MidCap 400 index
Bonds:  IEF  –  iShares 7-10 yr Treasury Bonds
Gold:  GLD  –  SPDR Gold Shares

If you’re wondering why we trade those tickers, you can learn more in the following YouTube video:

https://www.youtube.com/watch?v=ICioCFY6jrk

VTS Tactical Balanced allocations:

2017 was the highest “MDY Stocks” allocation going back many years which just goes to show yet again how incredibly calm the markets were last year.  I’m more of a conservative investor and I certainly don’t like the idea of holding stocks 85% of any year, but it is very important that we trade the market as it is right now.

Trade what the market is, not what we think it should be.  So until something changes it seems we will be benefiting from any further rise in the stock market.  We’re off to a decent start in 2018 thanks to a 2.5 Sigma weekly move in the stock indexes to start this year.

But why trade “tactically” at all?  Why not just buy a diversified portfolio of assets and occasionally rebalance?

I actually don’t think there’s anything particularly wrong with that.  As I’ve often said, passive index investing is likely to outperform a good percentage of active fund managers out there, and it absolutely crushes the average hedge fund so it’s not the worst idea in the world.  If you’re just looking to track the markets and don’t mind the normal ups and downs of the business cycle then indexing is the easiest and most reliable way to achieve that.

But I do try to do much better than average which is why tactical investing is what I focus on.

It’s interesting to see the S&P 500 finally catch up to the more balanced 50/25/25 buy and hold portfolio after 9 years of this bull market.  It’s impossible to know when the next recession will be, but it’s a pretty good bet that it will beat down the stock market quite a bit when it eventually arrives.  Then afterwards stocks will spend the next 5-10 years trying to recover those losses, and rinse repeat.

That’s really the main benefit to tactical trading over buy and hold.  The real outperformance comes when we have an opportunity to increase our relative performance by reducing drawdowns.  Since the S&P 500 hasn’t seen a 5% drawdown in nearly 2 years, the benefit to tactical investing is less clear.  At some point though these markets are going to gas out and start going the other way.  If history is any guide, likely in the -40-60% range of drawdown.  When that happens, our Bond and Gold allocations should help reduce the damage.

The VTS Tactical Balanced Strategy currently makes up 50% of the Total Portfolio Solution.

January 2012 through December 2017:

 

Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

 

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