As I said yesterday the markets really do seem to be trying to find a trend here. It’s too early to jump in just yet but we’re getting there. If there are no more surprises or reversals we may be dipping a toe in the water soon so stay tuned…
On Tuesday I talked about my process of reviewing a strategy every few years and adding all the new data points to see if any minor tweaks can improve the signals going forward. I’ve finalized those changes for the VTS Tactical Balanced Strategy and I believe the new trading rules are an improvement. If you missed that article it’s here but I can also show you a chart of the update:
I’d like to continue the discussion today and go over the individual components. So as a quick reminder for new members the strategy tactical rotates between positions in MDY stocks, IEF bonds, and GLD gold depending on market conditions. The general long term allocation targets are 50% stocks, 25% bonds, and 25% gold.
You can see allocations fluctuate quite a bit year to year. In bull market years we spend a lot of time allocated to stocks, and in more difficult environments and bear market years we’ll move towards our safety positions of bonds and gold. The question I get a lot is, how have the individual components performed?
MDY stocks allocations:
Clearly a good chunk of the performance is coming from our time in the stock market. In the long-run stocks do trend upwards so it makes sense to allocate a significant portion of a portfolio to equities. Hopefully though people’s memory isn’t short enough that the lessons of the financial crisis are forgotten already (or the lessons of the dot.com bust before that). The truth is stocks can nose dive quite substantially. The S&P 500 was down over 55% from it’s peak in 2007 through the lows in 2009, and it took until 2013 to recover to the break even level.
I know the vast majority of financial advisors recommend just holding through those periods and they aren’t wrong that stocks, at least in the past have always recovered. But 6 years is a long time to suffer through a drawdown so I definitely strive to cut down those drawdown periods substantially. They will happen and no strategy is immune to losses, but I believe we can do much better than the status quo of buy and hold in disappointment.
IEF bond allocations:
On first glance it may appear like there isn’t much point in the bond portion of the strategy and I can certainly understand that. Compared to the MDY stock allocations our IEF contributions are nothing to write home about. There’s two things I’ll say about that. First, 2% annualized return on only 23% of trading days is actually well worth it. Percentage wise in terms of risk that’s a very meaningful rate of return, especially within a “core” portfolio allocation.
Secondly though, investors in general are often guilty of overlooking the value of not losing money during ambiguous times. A lot of people feel the urge to be fully allocated at all times. This is something I try hard to remedy by always steering conversations towards risk management. Sure we could chase stock positions during this lower 25% portion of the strategy but that would definitely be hit and miss.
If the signals I track have deteriorated to the point where we are in IEF, believe me trying to pick a market direction is nearly impossible. At that point the only two allocations that make sense are bonds or cash. Since I believe I can get a meaningfully positive return by being in bonds that’s what I go with.
GLD gold allocations:
Again from a risk reward standpoint this 3.4% annualized off just 22% of trading days is very meaningful in the long run. However I think what I’m most proud of with respect to our gold allocations is when we compare these results to the actual price of gold.
It’s been a while now so people often times forget, but from it’s peak in 2011 to the lows of 2015, the price of gold actually dropped 45%. However if you look at our gold allocation performance during that same time period we’re actually up a little bit. It’s incredibly difficult to not lose any money trading something that has declined 45% in 4 years and I think that’s a strong confirmation of the robustness of my signals. If not for golds horrendous performance in the last 6 years our results could easily be substantially higher here but no complaints. Our gold allocations are doing their job nicely.
As I’ve talked about before, statistics show that roughly 85% of active fund managers fail to outperform their benchmarks. Now there’s certainly plenty of managers that are well worth the fees, but it’s important to keep in mind that the majority aren’t. There’s nothing wrong with buy and hold on a balanced portfolio of index funds, but I personally strive to do much better than that. The VTS Tactical Balanced Strategy is designed to take those same allocations and through tactical rotation, significantly improve on the results.
Coming up Monday: Adding leverage (insert dramatic music)
Current VTS Total Portfolio Solution Allocations
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Temporarily paused: VTS Tactical Volatility Strategy
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