In previous articles, we described the principles of our ETF conservative model portfolio before digging further on its mechanics. These dynamic strategies are particularly well suited for dealing with modern markets as they flexibly adapt to market developments.
Two months after publishing our first article, it is worth taking a look back at the performance of the model and seeing how it behaved in the midst of a debt crisis on both sides of the Atlantic and concerns over a slowing global economy.
During the choppy month of July, our conservative portfolio had a mild +0.13% return. Although very small, it is worth stressing that such performance was achieved with half of the portfolio in cash while the SPY lost 2% and with limited volatility: 6.1% versus 15.6% for the SPY. But it is increadibly enlightening to see how the portfolio composition adapted to market developments to clearly switch in a very defensive month at the end of July.
Indeed, on July 30, we posted a list of ETFs to hold through August. While market noise was high, the model was able to identify where the markets were likely headed and suggested the following portfolio composition:
- Equity: Net short through a long position in SH for 10%.
- Commodities: GLD for 10% and DBB for 10%.
- Bonds: 20% in TLT, 10% in TIP and 10% in AGG.
- Cash: 30% in SHY.
On August 4, world equity markets experienced their worst day since the depth of the great crisis in October '08. While mainstream media were focusing on the debt talks, traders were becoming increasingly concerned with the economy; hence the sharp move towards safe assets in late July, a trend caught by the model. There you get how rewarding it is to follow a sound and flexible strategy that dynamically adapts to market developments: During the first four trading days of August, the SPY lost 7.01% with a 37% volatility. In the meantime, our conservative model portfolio is up 2.12% with a low 11.2% volatility.
Such strategies perform best when there are trends developing in at least one asset class. The stronger the trends, whether up or down, the better the results. Are we in for another leg of bear markets? I do not know. But what I do know is that our strategies will allow us to be well positionned to benefit from it if it occurs. I also know that once the markets eventually recover, we'll be able to catch the meat of the strongest rebounds.