In recent weeks a lot of improvements were made to the systematic individual investor site. The development of the new Meta Strategy, that I now use across my own portfolio, has led to several practical ideas that may be useful to a much broader range of investors and traders than most of the previous, deep-diving content.
These ideas generated a lot of interest among fellow investors, friends and family.
In a range of conversations, I quickly realized, that, while many were really interested in investing systematically, the actual implementation of the Meta Strategy is too complicated and time consuming for the average investor.
On the other hand many people feel they are adrift in an ocean of conflicting information and would really like to know what to actually do beyond sticking their savings under the mattress.
I decided that publishing a newsletter with two model ETF portfolios, that anyone could simply follow along, with less than half an hour per month spent, can add a lot of value for investors.
So here we are, the first issue is out today – you can get more information and subscribe here or start digging into the details here.
In addition to the monthly newsletter, there is a free eBook out and and an area dedicated to premium content for subscribers is new to the blog.
The Meta Strategy ETF Portfolios
What really convinced me of the value of a very simple active ETF portfolio – usually invested only in one or two broad based market ETF at a time – was the 15-year backtest of the model portfolios:
A 15-year backtest (06-2003 to 12-2018) of the Meta Strategy Defensive (red) and Aggressive (blue) ETF Portfolios shows the advantages over buy-and-hold portfolios distinctly: Losses in the worst bear markets were reduced, while overall returns were improved in the defensive ETF portfolio. The defensive strategy earned about 1% more annually than an investment in the S&P 500 (grey) and the ride was a lot smoother, avoiding the sleepless nights of 2008/09.
These lower drawdowns make a responsible use of leveraged and inverse ETF possible. The aggressive strategy (blue) more than doubled the annual return of an investment in the S&P 500 with fewer than two allocation changes per year on average – 16,70% vs 6,73% leading to 3,6x more money earned over the 15 year period (not including dividends or transaction costs). For comparison we included the performance of a buy and hold investment in a 2x leveraged S&P 500 ETF (green): here the lethal properties of untamed leverage become apparent in a 83% drawdown in 2008/09.
Backtested results are hypothetical and NOT an indicator of future performance.
The most interesting aspect to me is, that the Meta Strategy was built from first principles and common sense. Each building block adds value over buy-and-hold investing on its own and their combination strengthens the reliability and mitigates many individual disadvantages.
Only after building the model, did I backtest different possible implementations (the ETF model portfolios are only the two easiest possibilities) without adjusting any parameters. This avoids much of the curve fitting many systematic strategies suffer from – often leading to exaggerated return expectations.
As many building blocks used in the strategy are part of established, time-tested investment strategies, whose authors did diligent tests on their own, large parts of the results are supported by independent data.
In a nutshell this is how the ETF portfolio works:
The Meta Strategy uses fundamental and technical inputs to gradually rotate a portfolio between different asset classes according to market conditions. It is most often completely invested in stocks, because they return more than other financial assets (for example bonds, real estate or commodities) over the long term. A traffic light model, that judges the health of the economy and the stock market, determines how much of the portfolio is allocated to these risky assets to protect against the risk of large losses.
We run two model portfolios suited either for normal or for more aggressive investors:
- Our defensive portfolio aims to earn the same returns as the stock market, but with only half the maximum losses from the peaks over the long term.
- The aggressive version, for investors who can stomach the risk of drawdowns as high as we have seen in the stock market in the past, aims for returns that beat the stock market over the long term.
We will be happy to email you a current newsletter edition as a sample, if you send us a short request via email.