VTS community,

I feel today’s blog is rather important so please consider giving it a read.  I’ll definitely put together a little review of the recent questionnaire but one of the comments that I heard a lot this past week was that I don’t spend enough time talking about the VTS Tactical Balanced strategy and I think this is a fair criticism.  After all it is 50% of our Total Portfolio Solution so I should be spending more time on it.

 In my opinion having a solid “core” portfolio strategy is arguably the most important aspect of long-term investing.

Growth strategies are always exciting and I certainly love volatility and option trading, that will never change.  However every retirement fund must have a reliable core position and that’s exactly what the Tactical Balanced is designed for.  It’s not always sexy but it’s the foundation of my portfolio and allows me to more confidently dedicate smaller portions to the more exciting Aggressive and Conservative Vol strategies as well as investing with options.

This is especially valuable during recessions.  If the core portfolio is down 30-40% as is quite normal for most investors they will be hesitant to even bother investing in alternative strategies.  Remember even the VBINX 60/40 balanced index fund was down -38% in the financial crisis and took over 4 years to break even.

As a quick reminder the Tactical Balanced Strategy rotates between positions in stocks bonds or gold depending on market conditions.  In general during calm market periods we will mostly be allocated to stocks and in more volatile uncertain times we’ll mostly be allocated to bonds and gold.  I used to talk about it a lot, but for the past year or so the markets have been marching higher so consistently that the strategy for the most part has been a long equity position.

Here are the long term allocations to each potential asset class and you can see that 2017 saw the highest percentage allocation to MDY Stocks the strategy has ever seen.  Not surprising considering 2017 was one of those “one off” years that likely won’t repeat itself any time soon.  It had the lowest volatility in history and the longest period in history without even a 3% correction.  It was a unique year so we maintained our stock positions through most of it.

Since this strategy doesn’t use any leverage at all, by very design it can’t outperform stocks during stable times because we will also just be holding stocks, and there’s nothing wrong with that.  The stock market is a great performer during good times so we do enjoy those up trending periods.  The main goal then is to try to exit stocks before the drawdowns get unmanageable and for the most part I’ve been successful at that.

 

The S&P 500 peaked this year on Jan. 26, 2018 and since then it’s dropped nearly 10%.  Here’s how the strategy has handled this:

We’re actually up 1.8% since that peak despite stocks crashing pretty hard.  This is due to us being nimble enough to exit and move into bonds and gold.

 

This now 2nd longest bull market in history has actually only seen three other periods with a 10% or greater drawdown in the S&P 500.  Let’s take a look at how the VTS Tactical Balanced Strategy performed during each one of those rough patches, measured from the initial S&P 500 drop through to a full recovery back to the original 25,000 value.

 

2010 Flash crash:

 

2011 European debt crisis:

 

2015  (China worries and rate fears):

* I combined both drawdowns as there were two in succession

You can see that in each case the Tactical Balanced strategy had a substantially higher return with much lower drawdowns and that’s by design.

 * Remember, sometimes not losing money in rough periods is more valuable than making money in good times.  In the long-run risk management and drawdown reduction is the key to a higher rate of return.

Let me further illustrate why this strategy plays such an important role in my portfolio.  How many of you were aware of the fact that the S&P 500 suffered a 5 1/2 year drawdown during and after the financial crisis?

It reached a peak price of 1565 on Oct. 9, 2007 and didn’t get back over 1565 until Mar. 28, 2013.  That is an extremely long wait to get back to break even.  Most financial advisors just recommend holding because historically speaking stocks do always recover.  How many people would be comfortable sitting in a 5 1/2 year drawdown?  And after the great depression it took stocks nearly 25 years to break even.  Yes they always go up, but the waiting periods in-between can be difficult to stomach.

I don’t make any forward predictions and I do remain agnostic with respect to future market direction, but recessions do happen.  It’s a natural part of the economic cycle.  I have no idea when this bull market will end and neither does anyone else.

For all we know, maybe the market top was reached on Jan. 26, 2018 and we won’t see that price again for many years.  Or perhaps we have several years to go yet before this party ends.  I don’t know, but one thing I am sure of is:

 

 The larger and longer the downturn, the more potentially valuable a risk reduction strategy may be.

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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