Some Defensive Income Strategies For Stressful Times

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 |  Includes: AGG, BIV, DVY, EFZ, EMB, EUSA, FXF, GLD, HYG, ICF, IDV, IGE, ITE, IYR, JKD, LQD, SHY, SLV, SPY, TIP, TLT, UBT, VIG, VTI, VWO
by: MyPlanIQ

We have been looking for ideas for investments in these very turbulent waters. We have recently reviewed Following the Fed, Best of Bonds and we always keep in mind the uncanny permanent portfolio. In this article we compare the three different approaches to see what they have delivered using simulated results.

Permanent Portfolio

The simple version:

  • 25% in U.S. stocks
  • 25% in long-term U.S. Treasury.
  • 25% in cash in order
  • 25% in gold

Portfolio Structure

  • Gold 20% (GLD)
  • Silver 5% (SLV)
  • Swiss Franc Assets 10% (FXF)
  • U.S. and Foreign Real Estate and Natural Resource Stocks 15% (5% IYR, 10% IGE, based on report)
  • Aggressive Growth Stocks 15% (VTI)
  • U.S. Treasury Bills, Bonds and Other Dollar Assets 35% (5% LQD, 15% TLT, 15% SHY)


Best of Bonds

We have previously reported on the best of bond strategy that we first published in November 2010. Out of the seven top bond managers (according to Morningstar) own the top performing bond fund which you review on a monthly basis.

Currently, the top seven are:

Bond Fund

Ticker

PIMCO Total Return

PTTRX

TCW Total Return Bond

TGLMX

Western Asset Core Bond

WATFX

Metropolitan West Total Return Bond

MWTRX

Loomis Sayles Bond

LSBDX

Dodge & Cox Income

DODIX

FPA New Income

FPNIX

Click to enlarge



Follow the Fed

Based on the fed monetary policy, this follows the Fed's stance and allocates its assets in three equal parts:

  • Large/small stocks
  • Gold/Treasury bonds
  • Intermediate government notes


If money is tight, the portfolio is composed of:

  • 1/3 in large stocks
  • 1/3 in Treasury bonds
  • 1/3 in intermediate government notes

If money is easy, the portfolio is made up of:

  • 1/3 in small stocks
  • 1/3 in gold
  • 1/3 in intermediate government notes


The fund selection for testing the strategy is listed below with the ETF alternatives:

Large cap

VFINX

ETF alternatives: SPY, JKD

Small cap

NAESX

ETF alternatives: EUSA, EFZ

Gold

GLD

Long term treasury

VUSTX

ETF alternatives: TLT, UBT

Intermediate term treasury

VFITX

ETF alternatives: ITE, BIV, AGG

Click to enlarge



We compare this against a portfolio of dividend bearing ETFs that we have reviewed and use as a recommended plan for those looking to invest for income.We have used this benchmark many times and for this exercise, we are only going to use the TAA strategy.

Asset Fund in this portfolio
REAL ESTATE ICF (iShares Cohen & Steers Realty Majors)
CASH CASH
FIXED INCOME TIP (iShares Barclays TIPS Bond)
Emerging Market VWO (Vanguard Emerging Markets Stock ETF)
US EQUITY DVY (iShares Dow Jones Select Dividend Index)
US EQUITY VIG (Vanguard Dividend Appreciation ETF)
INTERNATIONAL EQUITY IDV (iShares Dow Jones Intl Select Div Idx)
High Yield Bond HYG (iShares iBoxx $ High Yield Corporate Bd)
INTERNATIONAL BONDS EMB (iShares JPMorgan USD Emerg Markets Bond)
Click to enlarge


The comparison is

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 4% 92% 11% 212% 9% 154%
Harry Browne Permanent Portfolio 15% 246% 11% 125% 9% 101%
P Doug Roberts Follow the Fed Add Treasury Note One Month Simple Indicator Moving Average 64 Days 21% 236% 13% 106% 11% 89%
Permanent Portfolio ETF Version 22% 271% 13% 107% 10% 86%
Retirement Income ETFs Tactical Asset Allocation Moderate 8% 75% 11% 88% 10% 71%
Click to enlarge

The results are ordered by the five year Sharpe ratio although this is not the only measure. It is not surprising that the bond funds give the best long term stability but the worst short term returns. This gives an interesting set of alternatives to review and consider.



Three Month ChartOne Year ChartThree Year ChartFive Year Chart



Full Details

In these turbulent conditions, these all provide interesting alternatives and, even in the recent mayhem behave reasonably well. It is not surprising that, over the last three months, the portfolios holding gold have a marked advantage over those without. The simple, permanent portfolio continues to do well in choppy conditions. With all the pundits giving a variety of investment choices, the above mentioned are simple strategies that continue to do well and deserve a hearing.

Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.