Last month felt like one for the record books. Broad equity indices rose without resistance throughout the month as if all was well with the world. The markets fell a little at the very end of January but even with that decline, my tactical asset allocation strategy which uses ETF’s rose 6.69%.
Volatility remains on the low side but did increase and is pushing the limit for me to be prepared to reduce leverage. Currently, I am using 30% leverage and have been doing so for some time. Interest rates are low and volatility, until now, has been low so it has been an opportune occasion to use margin.
It is at times like this when my equity chart moves ever so continuously higher that I remind myself to not confuse a bull market with brains. Conditions have been exceptional for a tactical asset allocation strategy such as mine and I used margin responsibly and it paid off. Let’s keep in mind that we, as investors, should focus on process over outcome. Every month I report the outcome but it is the underlying investing process that is truly important.
By now you know that the US equity markets, in particular, had a solid 2017. My ETF investment strategy selects five or six ETFs at the end of each month and holds them until the end of the following month when selections are made again.It should be no surprise that my tactical asset allocation style of investing had me hold SPY every month throughout 2017.
Volatility was historically low last year. On average, I used 30% leverage in 2017 but the annualized volatility of my ETF portfolio was almost always below 10%.
I have been asked about my expectations regarding which markets will be the 2018 winners. My style of investing is based, in part, on an understanding that I as an investor do not make predictions. Yes, I can tell you which asset classes are represented in my holdings right now but I can’t tell you how long I will have them. Nor can I make any sort of educated guess regarding how my portfolio will fare overall in 2018. As I alluded to in earlier posts, I consider monthly returns analogous to picking green and red marbles from a bag while blindfolded. My strategy determines if there are more green marbles (positive monthly returns) than red marbles (negative monthly returns) but I have no say in the order the marbles will be picked.
December’s performance was yet another green marble as my portfolio grew by 2.29% giving an overall gain for 2017 of 22.4%. The amazing characteristic of 2017 was the low volatility. If you look at my equity chart below you will see how incredibly smooth it was last year.
My Gain to Pain Ratio is an absurdly high 4.96 due to it being measured over just under two years when the markets have provided solid returns. In the long run, I expect this ratio to lower to between 1.5 and 2.0.
My five ETF holdings for January cover US equities, Asian equities, and energy.
Another month, another great performance. My strategy produced a 3.0% return in November and again volatility remains exceptionally low. Nobody knows how long this regime of low volatility will remain but strong gains with minimal draw down can make investors very comfortable if not overconfident and we must be aware that higher volatility will return some day and monthly losses will be more prevalent than they have been for the past two years.
The low volatility combined with consistently positive monthly returns has resulted in a Gain To Pain ratio of 4.52 which is beyond exceptional and which I expect to be lower in the future.
You never know what path your monthly returns will follow. My strategy has now provided 13 months of returns without a loss. I couldn’t have predicted that. Yes it feels good but one must never confuse a bull market with brains. As per the chart below, anyone following a global passive ETF strategy has done almost as well as my strategy. The true test will come when the markets become bearish and every investor’s willingness to stick to their strategy (if they even have one) is tested.
My holdings remain unchanged from November to December with my largest holding being EPP (iShares MSCI Pacific ex-Japan).
I track the performance of my ETF strategy on Collective2.
I think of Van Tharp’s marble game when it comes to monthly performance of an investing strategy. Green marbles represent positive monthly returns and red marbles represent negative monthly returns. Your strategy has an influence on the number of each colour of marbles in a bag. Each month you put your hand in the bag, pull out a marble and look at it to see if your strategy provided a positive or negative return. In that frame of reference I have just pulled out the twelfth consecutive green marble as my strategy provided a 3.23% return in October garnering a 16.2% return year-to-date.
Suffice it to say that I am very pleased with such consistent returns but that is what the combination of my strategy and the markets have provided. At some point, the markets will not be so kind and I will experience a draw down. Provided that the markets do not drop precipitously in a very rapid pace, my ETF momentum strategy should provide downside protection. Such is a key benefit of a tactical asset allocation investing strategy.
My largest holding for November is EPP (iShares MSCI Pacific ex-Japan).
For eleven consecutive months my ETF momentum strategy has posted gains giving it an eye-popping Gain to Pain Ratio of 3.34. My strategy gained 1.25% in September giving it a year-to-date return of 12.6%.
The largest holding for October is EWJ (iShares Japan).
I do track my strategy against a global passive ETF strategy and for the first time my strategy has outperformed the global one on the basis of total return.
Total return is only one performance measure. My strategy has a lower volatility of monthly returns (1.39% vs 1.58%) and a higher Gain to Pain Ratio (3.34 vs 3.23) compared to the global passive ETF strategy. Keep in mind that momentum strategies rarely outperform in a bull market. They are designed to minimize draw down in a bear market and thus end up further ahead than a passive strategy in the long run.