By Brett Arends
Just out of curiosity I went back and looked at how Ramsey’s All Asset No Authority portfolio would have done, say, over the past 20 years. Result? It crushed it. If you’d invested equal amounts in those 7 assets at the end of 2002 and just rebalanced at the end of every year, to keep the portfolio equally spread across each one, you’d have posted stellar total returns of 420%. That’s a full 100 percentage points ahead of the performance of, say, the Vanguard Balanced Index Fund /zigman2/quotes/208139840/realtime VBINX -0.47% .
A simple portfolio check once a month would have slashed the risks even further.
It is 15 years since Meb Faber, co-founder and chief investment officer at 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 workday of the month. When you do, look at each investment, and compare its current price with 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 at MarketWatch, by the way, using our charting feature ).
If the investment is below the 200-day average sell it and move the money into a money-market fund or into Treasury bills. That’s it.
Keep checking your portfolio every month. And when the investment goes back above the moving average, buy it back. It’s that simple.
Own these assets only when they closed above their 200-day average on the last day of the previous month.
Faber worked out that this simple system would have allowed you to sidestep every really bad bear market and slash your volatility, without eating into your long-term returns. That’s because crashes don’t tend to come out of the blue, but tend to be preceded by a long slide and a loss of momentum.
And it doesn’t just work for the S&P 500, he found. It works for pretty much every asset class: Gold, commodities, real estate trusts, and Treasury bonds.
It got you out of the S&P 500 this year at the end of February, long before the April and May meltdowns. It got you out of Treasury bonds at the end of last year.
Doug Ramsey has calculated what this market timing system would have done to these 5 or 7 asset portfolios for nearly 50 years. Bottom line: Since 1972 this would have generated 92% of the average annual return of the S&P 500, with less than half the variability in returns.
So, no, it wouldn’t have been as good over the very long term as buying and holding stocks. The average annual return works out around 9.8%, compared to 10.5% for the S&P 500. Over the long term that makes a big difference. But this a risk-controlled portfolio. And the returns would have been very impressive.
Amazingly, his calculations show that in all that time your 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 you just 0.9% in the red in 2008.
A standard portfolio of 60% U.S. stocks and 40% U.S. bonds that year: -22%.
The S&P 500: -37%.
Things like “all weather” portfolios and risk control always seem abstract when the stock market is flying and you are making money every month. Then you wake up stuck on the roller coaster from hell, like now, and they start to seem a lot more appealing.