VTS Defensive Rotation Strategy won big in 2023

VTS Community,

With 2023 in the books we can crown the performance winner among all our active VTS strategies.  Drum roll...

VTS Defensive Rotation Strategy:  +82.89%

Something I briefly touched on in the full performance review for all our strategies here was that the Defensive Rotation Strategy was also the worst performer for us in 2022.  Interesting how that works out right? 

Having said that, this is somewhat expected given Defensive Rotation is our highest returning strategy in the long-term.  It has the ability to perform exceptionally well, but it will also be susceptible to larger drawdowns at times too.

The risk reward ratio can only be reduced, but not eliminated

VTS Defensive Rotation Strategy in 2023:

The Tactical nature of the Defensive Rotation Strategy

Similar to our Tactical Volatility and Strategic Tail Risk strategies, Defensive Rotation is designed to be in aggressive positions during stable market periods but also have the ability to rotate into full safety when Volatility metrics are elevated and risk in the market is rising.

2x Nasdaq  (QLD)  during stable markets:

Utilities  (XLU)  during high Volatility:

100% Cash during extreme Volatility:

20+ Year Treasury  (VGLT)  during Low Volatility

Defensive Rotation Strategy vs Benchmark

Given that the Defensive Rotation Strategy uses Bonds and Utilities as well as Equities, the benchmark should also reflect a little more diversification than just the stock market.  In this case we measure against a 60% stocks 40% bonds balanced index fund called the Vanguard VBINX.

Going back in time we can see that the Defensive Rotation Strategy was not just a great performer in 2023, but in fact has been putting up good numbers in many different market environments as well.

Really solid year for the strategy, and timely too given we had some ground to make up after last year.  Now if you're curious why it struggled I made an entire video talking about why 2022 was the worst investing year ever.  Yes, even worse than the financial crisis.  You can check that out here if you're interested:

Here's why 2022 was the worst year ever

The important thing though is that we had a great 2023 and the strategy has made a full recovery of what it lost the previous year, plus about 10% extra so we're off to the races.  None of us have any idea what's in store for the future, but it's nice to be back on top making fresh all time highs.

Reality check, a 15-20% return is still very good

I'm never one to incessantly brag about results or give everyone false expectations of future performance.  To me everything should always be viewed through the lens of risk management first as the top priority, and increasing rate of return second.  After either a good year or a bad year it's always important to focus on what happens most of the time. 

-  Thinking a strategy is broken after a bad year like 2022 can be a disaster because it could easily lead to someone missing out on the following recovery.  Good strategies will bounce back.

-  Assuming results in a good year like 2023 will just last forever though is also dangerous as it may lead someone to ignore warning signs and refuse to move to safety when needed.

We have to stay focused on the big picture, be willing to move to safety when we see the red flags, and always remember that investing is a multi DECADE process.