Tried and Proven System in a Volatile Market
Posted by admin on February 20th, 2010
Happy much belated New Year everyone! I hope 2010 has started off well for each of you. I have been traveling nonstop for potential new job opportunities and, as a result, have not been able to write. Now, I am back at it.
With that said, are you guys interested in a system that returns high risk-adjusted returns? In one of my investment letters, I came across some commentary on a young up and coming research analyst, Mebane Faber, and I would like to relay it to you. The details to his system are the following:
- It only takes you two hours a year (10 minutes a month) to implement.
- It’s only had one losing year since it started in 1973 (a tiny 0.59% loss in 2008).
- And it’s outperformed the stock market with much less volatility than stocks.
Mebane has just updated his numbers for 2009. The results over the last decade are what any of us would be willing to pay for. If you had invested $10,000 in his simple system in 2000, you would have gotten back nearly $26,000. Meanwhile, $10,000 invested in the stock market would have shrunk to less than $9,100…you know…the lost decade in stocks.
The focus is not losing money in the down years:
**********S&P 500 Meb’s System
2000 -9.1% +13.8%
2001 -11.9% +3.2%
2002 -22.1% +3.4%
2003 +28.7% +20.5%
2004 +10.9% +15.1%
2005 +4.9% +8.2%
2006 +15.8% +14.2%
2007 +5.5% +9.5%
2008 -37.0% -0.6%
2009 +26.5% +14.0%
Just looking at the last decade, you can see how much less volatile this system is than the overall stock market. The stock market’s annual return was about -1% per year. But the actual returns were usually way higher or way lower than that. Compare that to Mebane’s system, where the average annual return was about 10% a year. You can see the annual returns were always within about 10 percentage points of that average.
Here’s how his system works. There are only five holdings and there are two modes: in and out. The five asset classes are: U.S. stocks, foreign stocks, bonds, commodities, and real estate stocks. Your only decision each month is whether you own a fund that tracks that investment, or not. You want to be in when the asset is going up. And you want to be out when the asset is going down. This idea could hardly be any simpler. But, as you can in the above figures, it actually works.
First, you divide your portfolio into five pieces. You dedicate each piece to one of these five asset classes, and you are either in or out of each fund every month. So you might be only 40% invested one month, with the rest in cash (earning interest at the bank…interest?…funny one, right?).
To figure out whether you’re in or out, you just have to do some simple math. You can keep track of it by hand with a pencil and paper. You don’t need a computer or even a calculator. Yahoo Finance would even suffice.
Once a month, get the last 10 monthly closing prices of the five funds. You can get them from a service like Yahoo Finance. Then calculate the 10-month average. If the fund is above its 10-month average, keep 20% of your money in it. If the fund is below its 10-month average, sell the fund and move to cash. Repeat the next month, rebalancing existing positions back to 20% each if they’re buys. Never put more than 20% in a fund. For example, if only three are in buy mode, then you’re 60% invested with 40% in cash.
Remember, with the exception of a tiny loss in 2008, this system has never lost money, and it has delivered double-digit compound annual gains…compound is the key because this system reduces potential volatility. Higher returns with lower volatility (can you hear the angels signing?)! And this is in a portfolio of just five things that you have to manage for minutes a month.
If this seems interesting to you, check out his site at www.theivyportfolio.com. Keep in mind that the potential for making massive gains is heavily suppressed with this system. However, if there is anything I have learned in this depressing economy, SLOW AND STEADY DOES WIN THE RACE!!!
-Samir