Not everyone is having a terrible year.
While stocks and bonds have tumbled since Jan. 1, some simple, low-cost, all-weather portfolios are doing a much better job of preserving their owners’ retirement savings.
Best of all, anyone can copy them using a handful of low-cost exchange-traded funds or mutual funds. Anyone at all.
You don’t need to be clairvoyant and predict where the market is going.
You don’t need to pay high-fee hedge funds (which usually don’t work anyway).
And you don’t need to miss out on long-term gains just by sitting in cash.
Money manager Doug Ramsey’s simple “All Assets Without Authority” portfolio has lost half as much as a standard “balanced” portfolio since January 1, and a third as much as the S&P 500. Meb Faber’s even simpler equivalent it has held up even better.
And when combined with a very simple market timing system that anyone could do from home, these portfolios almost break even.
This, in a year in which almost everything has collapsed, including the S&P 500 SPX,
the Nasdaq Composite COMP,
(I know, shocking, right?), Small Business Stocks, Real Estate Investment Trusts, High Yield Bonds, Investment Grade Bonds, and US Treasury Bonds.
This isn’t just the benefit of hindsight, either.
Ramsey, the chief investment strategist at Midwestern money management firm Leuthold Group, has for years monitored what he calls the “All Assets Without Authority” portfolio, which is pretty much the portfolio you’d have if I told you to your pension fund manager that you have some of all the major asset classes and they don’t make decisions. Therefore, it consists of equal amounts in 7 assets: US Large Company Stocks, US Small Company Stocks, US Real Estate Investment Trusts, US Treasury Notes. 10 years, international stocks (in developed markets such as Europe and Japan), commodities and gold. .
Any of us could copy this portfolio with 7 ETFs: For example, SPDR S&P 500 ETF trust SPY,
the iShares Russell 2000 ETF IWM,
Vanguard Real Estate VNQ,
iShares 7-10 Year IEF Treasury Bonds,
Vanguard FTSE Developed Markets ETF VEA,
Invesco DB Commodity Index ETF DBC,
and SPDR Gold Trust GLD.
These are not specific fund recommendations, they are simply illustrations. But they show that this wallet is accessible to anyone.
Faber’s portfolio is similar, but excludes gold and US small company stocks, leaving 20% in large US and international company stocks, US real estate trusts, US Treasury bonds and commodities.
The magic ingredient this year, of course, is the presence of raw materials. The S&P GSCI XX:SPGSCI
it has soared 33% since January 1, while everything else has tanked.
The key point here is not that commodities are great long-term investments. (They’re not. In the long run, commodities have been a mediocre to terrible investment, though gold and oil seem to have been the best, analysts tell me.)
The key point is that commodities usually do well when everything else, like stocks and bonds, does poorly. Like during the 1970s. Or the 2000s. Or now.
That means less volatility and less stress. It also means that anyone with commodities in their portfolio is in a better position to take advantage when stocks and bonds tumble.
Just out of curiosity I went back and looked at how Ramsey’s All Asset No Authority portfolio would have done for, say, the last 20 years. Outcome? She crushed it. If he had invested equal amounts in those 7 assets at the end of 2002 and rebalanced them at the end of each year, to keep the portfolio evenly spread across each, he would have achieved a stellar total return of 420%. That’s a full 100 percentage points above the performance of, say, the Vanguard Balanced Index Fund VBINX..
A simple portfolio check once a month would have further reduced the risks.
It’s been 15 years since Meb Faber, co-founder and chief investment officer of money management firm Cambria Investment Management, demonstrated the power of a simple market timing system that anyone could follow.
In a nutshell: all you have to do is check your portfolio once a month, for example on the last business day of the month. When you do, look at each investment and compare its current price to its average price over the previous 10 months, or about 200 trading days. (This number, known as the 200-day moving average, can be found very easily here on MarketWatch, by the way, using our charting feature.)
If the investment is below the 200-day average, sell it and transfer the money to a money market fund or Treasury bills. That’s it.
Keep checking your portfolio every month. And when the investment is back above the moving average, buy it again. It’s that easy.
Own these assets only when they closed above their 200-day average on the last day of the previous month.
Faber found that this simple system would have allowed him to sidestep all the really bad bear markets and reduce their volatility, without hurting his long-term returns. This is because crashes don’t usually come out of the blue, but rather tend to be preceded by a long slip and loss of momentum.
And it doesn’t just work for the S&P 500, he found. It works for virtually every asset class: gold, commodities, real estate trusts, and treasuries.
It took it out of the S&P 500 this year in late February, well before the crashes in April and May. He took you out of treasuries at the end of last year.
Doug Ramsey has calculated what this market timing system would have done with these 5 or 7 asset portfolios for nearly 50 years. Bottom line: Since 1972, this would have generated 92% of the S&P 500’s average annual return, with less than half the variability in returns.
So no, it wouldn’t have been as good in the very long run as buying and holding stocks. The average annual return is around 9.8%, compared to 10.5% for the S&P 500. Over the long term, that makes a big difference. But this is a portfolio of controlled risk. And the returns would have been very impressive.
Amazingly, his calculations show that in all that time his portfolio would have lost money in just three years: 2008, 2015, and 2018. And the losses would have been trivial, too. For example, using his All Asset No Authority portfolio, combined with Faber’s monthly trading signal, would have left him just 0.9% in the red in 2008.
A standard portfolio of 60% US stocks and 40% US bonds that year: -22%.
The S&P 500: -37%.
Things like “all-weather” portfolios and risk management always seem abstract when the stock market is flying and you’re making money every month. Then you wake up trapped on the roller coaster of hell, like now, and they start to look much more attractive to you.