Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Friday May 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Long Term Stock Market Timing Since 1871 Revisited

It’s one of our core beliefs that a sensible long term stock market timing strategy can reasonably improve investment returns and dramatically reduce risk. We have regularly reviewed a simple 10-month simple moving average based timing strategy over S&P 500 index. For the recent review, please see April 24, 2017: The Long Term Stock Market Timing Return Since 1871

It’s certainly interesting to look at the updated data in light of the recent market stress induced by the coronavirus pandemic. 

Latest Data

A few words on the data: we take S&P 500 composite data from Shiller’s famous site and among the S&P 500 monthly data (dividend, price), we perform a 10-month moving average over the composite’s total return series: when the S&P 500 total return is above its moving average, it invests 100% in the index, otherwise, it just retains the previous month’s value (that means it derives 0 interest from cash generated from selling S&P 500). Technically, this strategy is different from a pure S&P 500 price based as it relies on its total returns. This strategy actually underestimates returns in some meaningful way: in a real world implementation, when the index is under its 10-month average, one can at least invest in cash (i.e. money market) or better yet, invests in a bond fund such as an intermediate Treasury bond fund or better yet, invest in a good fixed income strategy such as those on our Fixed Income page when not holding S&P 500 index. 

Unfortunately, as we don’t have earlier data of Treasury bond funds or our active fixed income portfolios, we can only estimate that, based on our data since 2000, it probably underestimates at least 1% or so annually. So please keep this in mind when interpreting the following data.

As always, the returns are total returns, i.e. dividend reinvested. 

To give a sense of how the historical returns look like for both S&P 500 and the 10-month moving average portfolio, we simply include the following long dated chart up to 2016 from the previous newsletter: 

The updated data as of April 2020: 

  S&P 500 AR Since 1871 S&P 10-Month MA Port S&P Rolling 10 Years S&P 10-Month MA Port Rolling 10 Years S&P Rolling 15 Years S&P 10-Month MA Port Rolling 15 Years S&P Rolling 20 Years S&P 10-Month MA Port Rolling 20 Yearrs
AVERAGE 9.88% 10.1% 9.2% 9.4% 9.2% 9.4% 9.3% 9.4%
STDEV     5.1% 3.8% 4.1% 3.1% 3.2% 2.3%
MIN     -4.0% 0.9% -0.3% 2.6% 2.1% 3.2%
MAX     21.1% 19.4% 19.3% 16.7% 17.9% 15.3%

We want to summarize what we found from the latest data spanning over 149 years: 

  • S&P 500 annualized total return is 9.88%. This is a very encouraging data. Again, as we have said, buying and holding S&P 500 is basically owning an extremely solid ‘business’ or ‘conglomerate’ that hasn’t lost money in a single year since 1871!
  • However, this comes with ‘short’ term risk: for example, there exists a rolling 10 year period when S&P 500 lost -4% annually, -0.3% annually for a rolling 15 year period.  It however never lost money for any rolling 20 year period. So it’s possible to lose money even if you are holding S&P 500 for 10 or 15 years. That’s why we have emphasized that a ‘long’ term period for a buy and hold strategic asset allocation strategy should be preferably 20 years or longer. 
  • The biggest drawdown can be as steep as -60%. In the current crisis, it actually lost -30% from its peak at some point this year. 
  • For the 10-month MA (Moving Average) based portfolio, the annualized return is 10.1%. Again, this is underestimated by probably 1% or more if money market or bonds are used instead of no interest yielding cash.  
  • For any rolling 10, 15 and 20 year period, the MA portfolio never lost money. In general, we believe a good timing strategy such as this moving average or our tactical strategies (both Asset Allocation Composite (AAC)  and Tactical Asset Allocation(TAA) ) can shorten ‘long’ term holding period to be 15 years or 10 years (aggressive). 
  • Maximum drawdown of the MA portfolio is about 1/3 of S&P 500. In the current crisis, it experienced -12.7% for P SMA 200d VFINX Monthly (goes to cash) or -18.6% for P SMA 200d VFINX Total Return Bond As Cash Monthly (instead of cash, it invests in a total return bond fund portfolio, see Advanced Strategies). 

The following chart compares VFINX (S&P 500) with P SMA 200d VFINX Total Return Bond As Cash Monthly:

To summarize, a simple long term (10 month) moving average strategy can yield better returns with about 1/3 of risk when investing in an S&P 500 stock index fund. In the recent crisis, this strategy was again able to avoid larger loss (so far). With other improvements such as in portfolio MPIQ Core ETFs Asset Allocation Composite Moderate or those listed on Advanced Strategies,  one can further enhance returns without increasing risk.  We will review those portfolios in future newsletters. 

Market overview

Stocks continued their volatile price ‘discovery’ process (or trial and error phase to come up with reasonable pricing for businesses). As of this writing, S&P 500 had a very strong one day rise today. Investors were truly encouraged by the slowdown of the disease. 

As we stated before, though no one can precisely predict the progress of this pandemic, we do believe it’s useful to look at some trends and get a sense of the progress. Specifically, we find the projects given by The Institute for Health Metrics and Evaluation (IHME) at the University of Washington are informative. The following charts are from IHME

Using death rates caused by Covid-19 are more accurate to gauge the progress as number of infected cases is greatly dependent on how comprehensive testing is done. 

From the above charts, we could see that by the end of April, the disease will be basically contained in the US. Using the terminology we used in our previous newsletters, that means we will enter phase 4 by the end of this month. Depending on various factors such as vaccines, cures and how draconian containment/testing measures will be, we can come out of phase 4 quickly (unlikely but still possible) or might have to deal with it for many months. Furthermore, since the effect on businesses is usually delayed, it doesn’t look like we will have a V shape faster recovery. 

Regardless of our subjective opinions, we believe the best way to navigate through this process is to stick to the investment strategies rigorously. 

In times like this, our boiler plate suggestion is the following (just like in the last newsletter):

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are finally getting cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles.

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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