Introducing the Papa Bear Portfolio
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The Goldilocks Investing NewsletterNo. 5May 2, 2016
Welcome to our occasional newsletter! Today's issue is designed for people who attended a recent beta-test Goldilocks Investing seminar in Boston or Seattle.

Please do not forward this newsletter to others. Our book on investing is in stealth mode, and people who did not attend a seminar would be baffled by the following discussion. Please don't share this information until the book is released in 2017.

Introducing the Papa Bear Portfolio

Brian LivingstonBy Brian Livingston

After five years of research into what works for individual investors, I'm proud to reveal complete details on a second portfolio that will be published in my book Goldilocks Investing. This strategy is called the Papa Bear Portfolio.

I first disclosed in November 2014 the Mama Bear Portfolio and the concept of Muscular Portfolios. Such portfolios are easy-to-use strategies that hold low-cost exchange-traded funds (ETFs). Each ETF delivers the gain from an entire global class of assets: US and non-US equities, bonds, real estate, commodities, gold, and so forth.

By contrast with Lazy Portfolios — strategies that hold an unchanging, static asset allocation — Muscular Portfolios periodically rotate toward different ETFs. The strongest three ETFs are selected each month by a Momentum Rule — a principle that hundreds of finance studies have confirmed to be a timeless, indelible feature of markets.

When Goldilocks Investing is published and (sob) an expensive publicity campaign is launched, investors can fire their expensive stockbrokers and manage their own money as well as most big Wall Street banks could do.

Figure 1 shows part of the new Papa Bear page at Goldilocks-Investing.com. The Papa Bear selects 3 out of 13 ETFs. By contrast, the Mama Bear page specifies 3 out of 9. Both pages are updated with new figures every 10 minutes while the market is open. (Just click your browser's Refresh button.) But don't trade every 10 minutes! Check the page only once a month, on whatever consistent day is convenient for you.

On your chosen day, open the page an hour or so before the market closes. If the order has changed, switch your holdings to the top three ETFs before the market closes. Three or four times a year, you'll see the exact same three ETFs on top as last month. If so, you're done — you're free until the following month!

Both of the ranking tables have a new icon in the lower-right corner. Click this icon to go back as far as three months and see what the top positions were on previous days. If you don't wish to view a different date, simply click the icon a second time to close the pop-up calendar.

The Papa Bear Portfolio

Figure 1. The top 3 ETFs out of 13 in the Papa Bear Portfolio. Visit the Web page to see the symbols of all the ETFs.
The Papa Bear has higher returns but larger declines, too

Why didn't I reveal the Papa Bear in my previous seminars? Because only the Mama Bear could be checked for free using an easy, one-line Web address. Back then, there was no such address that worked for the Papa Bear.

Now my site has a working Papa Bear page in addition to the existing Mama Bear page. The ranking tables are both powered by ETFScreen.com, a fabulous charting service that offers basic ETF testing with free registration.

My two Muscular Portfolio pages are intended to be free — totally free — forever. You no longer need to pay anyone 1%, 2%, or 3% of your life savings each year for mere asset selection.

Simple, effective portfolios can now be had at no cost. Most mobile phones today don't charge you for each long-distance call (which could cost you $1 a minute on landlines years ago). In the same way, we are now driving the cost of security selection to zero.

The Papa Bear and the Mama Bear are two excellent portfolios that are both easy for novices to use and attractive for experienced investors. The two strategies are very unlikely to become "overgrazed" — worn out due to too many people following them — for reasons that I'll explain below.

For now, let's take a look at Figure 2. This graph simulates the returns of the Papa Bear, the Mama Bear, and the S&P 500 for the past 43 years. The simulation is generated by the Quant backtester, a spreadsheet that's included with a subscription to the Idea Farm newsletter of Mebane Faber. He's co-author of The Ivy Portfolio (the original 2009 book that first revealed a five-asset precursor of Muscular Portfolios).

You'll immediately notice that the Papa Bear offers about 2 percentage points more annualized gain than the Mama Bear. The CAGR (compound annual growth rate) is 16.2% for the Papa vs. 14.3% for the Mama. The Papa generates a great return, especially considering that it's a simple, once-a-month asset-rotation strategy that anyone can use.

But the tradeoff is that the Papa Bear experienced declines of 21% and 25% in two of the past three crashes. The Mama Bear's declines were much easier to tolerate: only 18% in both crashes. The S&P 500 dived a horrendous 51% in the 2007–2009 financial crisis. (For clarity's sake, only three of the last five bear markets have markers on the graph.)

These backtests are not historical records. Asset rotation would have been utterly impossible back in 1973. Low-cost ETFs hadn't even been been invented yet. It wasn't until 2014 that what I consider an acceptable range of ETFs covering all 13 global asset classes in the Papa Bear became available.

Instead of reflecting the past, the Quant backtester shows us what we might expect in the future, assuming markets continue to have bear and bull cycles, as they always have. (Today's trading costs and ETF expense ratios have been subtracted from both of the Muscular Portfolios to make the simulations realistic. See the caption of Figure 2.)

Please notice that the Papa Bear page has no Negative Momentum Rule. Such a policy, which held cash when a top-three ETF had a slightly negative return, was originally part of the Mama Bear page, but it proved not to be necessary. Beta testing revealed that slightly negative returns soon reverse themselves. The gains in Figure 2 were simulated using no Negative Momentum Rule. All of the top-three ETFs were held in every month. This generated higher CAGRs in both portfolios.

Muscular Portfolios are designed to decline no more than 25%, regardless of how much the S&P 500 may crash. People who can emotionally handle a 25% loss in their life savings as "the cost of doing business" are free to choose the Papa Bear. To experience even smaller declines, stick with the Mama Bear. Goldilocks Investing helps you find the investing plan that's just right for you.

Papa Bear, Mama Bear, and S&P 500
Figure 2. A 43-year simulation of the Papa Bear, Mama Bear, and S&P 500 total return. The two Muscular Portfolios were charged 0.1% per round-trip trade and an annual fee of 0.20%, which is the average fee of each portfolio's ETF universe. The S&P 500 was charged nothing for trades and only a 0.05% annual fee — the cost to hold VOO, Vanguard's index-tracking ETF. Simulation by the Quant backtester.
Investing strategies have hot streaks and cold streaks

Hey, isn't it impossible to beat the S&P 500? It's not impossible at all — if you have enough discipline to wait one full bear market and one full bull market for an asset-rotation formula to prove itself.

The secret is that the S&P 500, being the focus of so much greed and fear, is crash-prone. Every seven years or so, the S&P 500 collapses 30%, 40%, 50% or more. This happened five times in just the 37 years from 1973 through 2009.

After a 25% loss, a Muscular Portfolio needs to gain only 33% to recover. But after a 50% loss, the S&P 500 must gain 100% to recover. Bigger losses require geometrically longer recovery times.

By keeping losses low during bear markets, Muscular Portfolios snap back quickly. The benefits continue to compound over the years.

What's the catch? The catch is discipline, a trait that many individual investors don't have. Most people never learn three essential truths about the market:

1. It's impossible to beat the S&P 500 every calendar year. Some gurus, by chance, have had hot streaks for a decade or longer, only to see their volatile formulas hit cold streaks and produce big losses. At times, the S&P 500 happens to be the strongest asset class there is, and no diversified portfolio will beat it.

2. It's easy to design portfolios that lose way less than the S&P 500 during crashes. With today's low-cost index ETFs, a simple diversification-and-momentum policy can keep losses small. Even University of Chicago finance professor Eugene Fama, who famously claimed in 1970 that markets were "efficient," changed course by 2007, writing: "The premier anomaly is momentum." Momentum has worked for hundreds of years — and is likely to keep working for hundreds more — because human nature is hard-wired for herd behavior (that is, trends).

3. A Muscular Portfolio will lag the S&P 500 during bull markets. A three-ETF portfolio, which has enough diversification for safety, will never beat whatever is the strongest asset class. The S&P 500 or dot-coms or gold — or whatever the herd is hot about this year — might be No. 1. The bull-market "lag" of a diversified strategy is actually key to preventing Muscular Portfolios from becoming "overgrazed," as I mentioned before.

Most investors will bounce to a flashier (more crash-prone) strategy after their portfolio has lagged the S&P 500 for two or three years. These "armchair investors" will never find the perfect system. It is "informed investors" — people who measure success across an entire bear/bull market cycle — who have the discipline for steady-growth formulas like Muscular Portfolios. Most investors don't have the patience to stick with any such long-term plan.

Let's illustrate this using the performance of the Mama Bear since I revealed it in Boston on Nov. 30, 2014 (and at small seminars in Seattle around that same time).

Figure 3 shows a real-money account at FolioInvesting.com. The Mama Bear dived in the August 2015 devaluation of the Chinese yuan, and responded by rotating into bonds and other conservative ETFs. With a loss of 2.5% in the full 17-month period, the Mama Bear lags the S&P 500. The index is slightly up: 3.7%.

We fully expect a diversified portfolio to lag the S&P 500 while the index is in a bull market. (The S&P 500 has never declined 20% since March 2009, so it's still in bull mode.)

I've repeatedly emphasized that the Mama Bear can drop 20% or 25% at any time. Crashes occur when people least expect them. We must allow any investing strategy to have cold streaks as well as hot streaks. A decline of 5% or 10% is so far from a loss of 25% that it should not concern us.

It's important not to compare our portfolios to the S&P 500 over short periods, but only over a complete bear/bull market cycle. This pattern — known as the primary cycle — will never be "cured." It is in fact how we make our money.

You might think I kept quiet about the Papa Bear until now in order to keep its superior performance to myself. I hate to disappoint you, but I'm not that cynical. Since Nov. 20, 2014, my real-money Papa Bear tracking account is down 7.6% — five percentage points worse than the Mama Bear. Since I had no easy link to allow people to follow the Papa Bear until recently, no one experienced its underperformance in 2015 except me!

As long as my portfolio's decline is less than 25% or so, I'm not worried. I keep the majority of my personal life savings in the Mama Bear and the Papa Bear. I'm sure they'll perform very well in the long run (but they won't shoot the lights out during a bull market).

Mama Bear performance
Figure 3. The Mama Bear has slightly underperformed the S&P 500, just as expected during a bull market. Source: FolioInvesting.com.
How to follow the portfolios if my site is down

It's not really a fully disclosed strategy if there's only one Web site where you can get the rankings.

For that reason, I'm providing the following steps, so anyone can get the Muscular Portfolio picks for free, even if Goldilocks-Investing.com is down for whatever reason.

Method 1: Create a free personal portfolio at ETFScreen.com

After a free registration process, use the Create/Edit a Portfolio page at ETFScreen.com to define a new portfolio. Enter the 9 ETF symbols for the Mama Bear or the 13 for the Papa Bear. Name and save your portfolio. You can then view it using the site's My Pages, Portfolios menu.

• To find the top three ETFs for the Mama Bear, sort your portfolio's right-hand column on Return–5 Months. Simply hold that month the three ETFs with the highest 5-month returns.

• For the Papa Bear, start by sorting on the built-in column labeled Return–1 Year. Then hold that month the three ETFs that have the highest average of 3-month, 6-month, and 1-year total return.

Method 2: Use a free PerfChart at StockCharts.com

• For the Mama Bear, use the same link to StockCharts.com that I gave you last year:

http://stockcharts.com/freecharts/perf.php?VONE,VTWO,VEA,VWO,VNQ,PDBC,IAU,TLT,SHV

See Figure 4, which is keyed to the steps that follow:

The Mama Bear at StockCharts.com
Figure 4. Use StockCharts.com to determine the top three ETFs.

Step 1. Click the Show Histogram Chart button to display columns, not lines.

Step 2. Double-click the number of days, enter 106 to request the five-month total return, and then press Enter to scale the chart. (StockCharts requires you to enter 106 to get 105 trading days, which is five months.)

Step 3. Hold that month the three ETFs with the highest 5-month total return. They are marked in this example with "3" in a black circle. (The return of SHV is too faint to see, but it is "0.02%" in faint white type atop the 9th column in this example.)

• For the Papa Bear, you must use two separate links, because PerfCharts can display only 10 symbols at a time:

http://stockcharts.com/freecharts/perf.php?VTV,VUG,VBR,VBK,VEA,VWO

http://stockcharts.com/freecharts/perf.php?VNQ,PDBC,IAU,EDV,VGIT,VCLT,BNDX

Step 1. Click the Show Histogram Chart button to display columns.

Step 2. To get 3-month, 6-month, and 12-month returns, enter 64, then 127, then 253. After each chart redraws, note the returns of each ETF. Do this with both Web addresses until you've noted all of the returns.

Step 3. Hold that month the three ETFs with the highest average of 3-month, 6-month, and 12-month returns.

Whew! Lots of steps. This is exactly why I've created the Mama Bear and Papa Bear pages. I plan on my site staying up for a long, long time.

Good luck with everything and don't get discouraged!
Free stuff you might enjoy

If you've read this far, your reward is a downloadable, one-page overview of my entire book. For a limited time, you can download it free of charge at:

Goldilocks Overview

If you missed any of our previous newsletters, links to them can be found in the lower-right corner of our home page.

If you have comments to contribute, start a new message to a special address that goes directly to me:

MaxGaines "AT" BrianLivingston "DOT" com

Thanks for your support!
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