Re ur retirement with the Ultim ate Momentum Portfolio

[Pages:4]Rescue your retirement with the Ultimate Momentum Portfolio

By Brian Livingston, President, AAII Puget Sound Chapter, May 20, 2017

FIGURE 1

In simulations, the Ultimate Buy-and-Hold (a Lazy Portfolio) returned 10% in 1973?2015, the same as the S&P 500. The Ultimate Momentum Portfolio returned 6? points more per year. The Lazy Portfolio's max drawdown was 37% (2009) vs. Momentum's 25% (1987). All portfolios include dividends. Source: Quant backtester.

YOU MAY REALIZE late in life that you didn't save enough money -- or invest your assets well enough -- to fund a comfortable retirement. If you're in that situation, you face three options:

1. Continue working at a job you don't like;

2. Retire with a near-poverty budget; or

3. Seek a higher return on your investments.

This whitepaper describes the third option. You can boost the return of popular Lazy Portfolios -- static asset allocation (SAA) strategies -- by adding a simple tweak known as the Momentum Rule.

This rule was first shown in a rigorous mathematical paper by two UCLA professors in 1993.1 They found that assets with a price increase in the past 3 to 12 months tended to continue to rise for another one month or more. By 2014, a meta-

survey showed that more than 300 papers had verified this.2 Even University of Chicago economist Eugene Fama, who had invented "efficient market" theories decades earlier, agreed by 2007, writing: "The premier anomaly is momentum."3

Figure 1 shows Paul Merriman's Ultimate Buyand-Hold Portfolio. Allocating a fixed percentage of money to 11 asset classes, this Lazy Portfolio returned 10% annualized in a 43-year simulation.

By contrast, what if you held each month only the three asset classes that had risen the most, averaged over the past 3, 6, and 12 months? This Ultimate Momentum Portfolio returned 16.6%.

That difference of 6.6 points would vastly improve how much you could spend in retirement!

These simulations used the Quant backtester by Mebane Faber, co-author of The Ivy Portfolio.

NOTICE

Investing involves risk, and past performance does not predict future performance. Investments should always be part of a balanced portfolio. See notes at the end of this whitepaper.

BRIAN LIVINGSTON is co-author of 11 books in the Windows Secrets series, 1991?2007 (John Wiley & Sons). From 1986 to 1991, he held positions in New York City as assistant IT manager of UBS Securities, computer consultant for Morgan Guaranty Trust (now JPMorgan Chase), and technology advisor for Lazard Fr?res (now Lazard Ltd.). He was the Windows columnist for InfoWorld magazine from 1991 to 2003, during which time he was also a contributing editor of PC World, CNET, PC/Computing, Datamation, and Windows magazine. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold the business in 2010.

A downloadable PDF of this report (version 1.0) is available at

Lacking momentum, static asset allocation strategies (Lazy Portfolios) underperform

FIGURE 2 Every Lazy Portfolio far underperformed the S&P 500 in every reported time period. Ultimate Buy-and-Hold was the Lazy Portfolio with the lowest return over 3, 5, and 10 years.

Source: as of Dec. 31, 2015.

10-year returns:

Ultimate B&H Worst (4.59%)

Best (7.30%) S&P 500

STATS, '73?'15

Ultimate Buy-and-Hold

Ann'd 10.01 Max DD 36.56 Std. dev. 9.37 Sharpe 0.53 Sortino 0.69

Ultimate Momentum

Ann'd 16.64 Max DD 24.84 Std. dev. 13.45 Sharpe 0.86 Sortino 1.25

S&P 500 TR

Ann'd 10.02 Max DD 50.95 Std. dev. 15.38 Sharpe 0.32 Sortino 0.46

Source: Quant. Incl. costs & fees.

HAS TRACKED eight Lazy Portfolios in real time for more than 10 years. The term Lazy Portfolios was popularized by Paul Farrell, author of a 2004 book on the subject and a MarketWatch columnist until 2016.

Figure 2 shows that every Lazy Portfolio lagged the S&P 500 in every time period MarketWatch reports: 1, 3, 5, and 10 years. The underperformance was often severe. In 2013?2015, Lazy Portfolios cost you 5 to 10 points of return per year. These static strategies have no Momentum Rule to tilt toward rising asset classes and away from those that are falling. A Lazy Portfolio is like a sailboat with no sail, adrift on the market seas.

The bad news is that Ultimate Buy-and-Hold had the worst performance of any Lazy Portfolio over the most recent 3, 5, and 10 years.

The good news is that Ultimate boasts the best performance when a simple Momentum Rule is added. As shown in Figure 1, the Ultimate Momentum Portfolio achieved a simulated return of 16.6% annualized from 1973 through 2015.

That surpassed the return of every Lazy Portfolio that I tested after adding the Momentum Rule: Coffeehouse (15.1%), Dr. Bernstein's Smart Money (14.8%), Unconventional (14.3%), Aronson Family Taxable (14.1%), and three others.

IMPORTANT: A backtest is not historical fact. For instance, no investor could have bought ETFs in 1973. (They hadn't been invented yet.) And investors in 1973 couldn't enjoy today's ultra-low ETF fees and sub-0.1% round-trip trading costs. (In the 1970s, round-trip friction could be 2%.)

A backtest is only a simulation of what might happen going forward, given today's low costs and fees. It assumes that markets will continue to have bubbles and crashes, just as they always have.

The same Momentum Rule was tested on all portfolios. You hold each month an equal weight of the three assets that have the highest total return averaged over the past 3, 6, and 12 months. To avoid data-mining bias, no other rules were tested.

Realistic current expenses. The average annual fee of today's ETFs was deducted from each simulated portfolio. For example, Ultimate Buyand-Hold and Ultimate Momentum were both charged 0.11% in ETF annual fees. Also, a generous 0.1% round-trip friction was subtracted from each momentum portfolio for every buy and sell pair. The S&P 500 was charged 0.05% annually (Vanguard's former VOO fee, which is now only 0.04%). Lazy Portfolios and the S&P 500 were charged no friction, although rebalancing the Ultimate Buy-and-Hold would incur trading costs.

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Buy-and-hold portfolios fall to the bottom of Hulbert's ratings over 15, 20, and 30 years

Performance over the trailing 20 years through 4-30-2017

NEWSLETTER

PORTFOLIO

RETURN

RISK RATING

SHARPE RATIO

Prudent Speculator, The

Newsletter Average

11.92

7.31

0.15

Investment Reporter, The

Newsletter Average

11.78

5.13

0.18

Buyback Letter, The

Newsletter Average

11.72

4.32

0.20

Investor Advisory Service

Newsletter Average

11.28

5.19

0.17

NoLoad FundX

Newsletter Average

10.63

4.68

0.17

Investment Quality Trends

Newsletter Average

10.61

4.13

0.18

Turnaround Letter, The

Newsletter Average

10.60

7.08

0.13

Bob Brinker's Marketimer

Newsletter Equity Portfolio Average

10.18

4.21

0.17

Fidelity Monitor & Insight

Newsletter Equity Portfolio Average

9.58

4.88

0.15

Chartist Mutual Fund/ETF Letter Newsletter Equity Portfolio Average

8.34

4.05

0.14

Sound Advice

Newsletter Average

8.07

4.91

0.12

Performance Benchmark

Wilshire 5000 Total Return Index

7.99

4.48

0.13

Performance Benchmark

S&P 500 (with dividends reinvested monthly)

7.62

4.37

0.12



Vanguard Tax-Deferred Portfolio (Aggressive)

7.34

4.85

0.11



Paul's MF Recommendations for Fidelity (Aggressive) 7.13

4.83

0.11

Blue Chip Investor, The

Newsletter Average

6.45

4.63

0.10



Vanguard Tax-Deferred Portfolio (Moderate)

6.85

2.84

0.15



Paul's MF Recommendations for Fidelity (Moderate)

6.43

2.89

0.14



Vanguard Monthly Income Portfolio

5.41

1.20

0.23



Newsletter Equity Portfolio Average Vanguard Emergency Fund Portfolio

5.38 3.67

4.92 0.57

0.08 0.24

FIGURE 3 Buy-and-hold portfolios underperformed all other portfolios in Mark Hulbert's published 20-year and 30-year rankings. They're in the bottom one-quarter of the 15-year rankings.

Blue rows represent the average of all of an adviser's portfolios. White rows represent individual Merriman portfolios that were added to this table for comparison purposes. Orange rows represent the total return of market benchmarks (Wilshire 5000 and S&P 500). Source: as of Apr. 30, 2017.

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How you can get the extra gains of the Ultimate Momentum Portfolio for free

MERRIMAN HAS PUBLISHED dozens of fund allocations that bear the name Ultimate. In the Quant backtester, I used the percentages and ETFs

-------------------------------------------------------------------- NOTES

documented for the "Ultimate Buy-and-Hold Lazy Copyright ? 2017 by Brian Livingston. All rights reserved.

Portfolio" by My Plan IQ. This website rates 401(k) plans and other professional investing strategies.4

My Plan IQ's ETF selection is very similar to

Brian Livingston is a private investor, is not a registered investment adviser or a broker/dealer, and does not accept accounts for management. Readers are advised that this report is issued solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities. The opinions and anal-

's Vanguard Tax-Deferred ETF Portfolios page (Moderate Allocation column).5

To get the extra return of the Ultimate Momentum Portfolio, you can use free features of to pick the top three ETFs to hold.

yses included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. All information contained in this report should be independently verified with the companies mentioned. Past performance does not predict future performance. Investments are not appropriate for all investors. Statements are made without consideration of your financial sophistication, financial situation, investing time horizon, or risk tolerance. Readers are urged to con-

Step 1. On the last day of each month -- or on sult with their own independent financial advisers with respect to any investment.

whatever consistent day of the month you prefer -- visit the following ETF Screener page:

ww w.screener.php?sn=b6abf Step 2. The ETF Screener page should show

The American Association of Individual Investors (AAII) did not produce or approve this study and is not responsible for its content. Brian Livingston is solely responsible for any omissions or errors.

Author's e-mail: mailbyte-screenstudy@

ratings for the following 11 ETF symbols: VEA VGIT VGSH VIOO VIOV VNQ VONV VOO VSS VTIP VWO Step 3. In Figure 4, the Avg_3_6_12 column pro-

See for more whitepapers

How to profit from the Hulbert Sentiment Indices -- April 2017

vides the average of each ETF's total return for the Boost the gain of Morningstar's ETF portfolio

past 3, 6, and 12 months. The rows should already be sorted for you with the best three ETFs at the top. In the example below, the ETFs with the greatest momentum are VEA, VWO, and VSS.

-- May 2016

Using the Shareholder Yield screen to pick the best stocks -- November 2015

Step 4. Sell any ETF you own that is not in the Study tests whether AAII stock screens work

top three. Use the cash to buy any new top-three -- November 2013

ETF (even if it has a negative momentum score,

since top ETFs tend to recover). If you already own Footnotes

all three ETFs from a previous month -- which

will be true a few times per year -- do nothing.

For additional screening tools, register for free at the site. Premium Access, currently $15.95 per

1 onlinelibrary.doi/10.1111/j.1540-6261.1993.tb04702.x/full 2 sites/default/files/current-issues/Award Recipients/

JIC151_MultiStyleGlobalInvesting.pdf

month, gives you even more analysis capability.

3 publication/4769783_Dissecting_Anomalies

The Ultimate Momentum Portfolio requires only 15 minutes each month to follow. Your increased

4 LTISystem/f401k_view.action?ID=1210 5 vanguard-tax-deferred-etf-portfolios

gain should be well worth the effort!

FIGURE 4 To follow the Ultimate Momentum Portfolio, check each month and hold the three ETFs with the best momentum (the highest average total return over the past 3, 6, and 12 mo.). Tops in this example: VEA, VWO, and VSS.

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