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A Few Notes on Muscular Portfolios

| | Posted in: Momentum Investing, Strategic Allocation

Brian Livingston introduces his 2018 book, Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk, as follows: “What we laughingly call the financial ‘services’ industry is a cesspool filled with sharks intent on siphoning your money away and making it their own. The good news is that it is absolutely possible to grow your savings with no fear of financial sharks or stock market crashes. In the past few years, we’ve seen an explosion of low-cost index funds, along with serious mathematical breakthroughs in how to combine these funds into low-risk portfolios. …This book shows you how.  …You can start with just a little money and make it grow.” Based on research from multiple sources and extensions of that research, he concludes that:

From Chapter 1, “Goldilocks Investing: Not Too Risky, Not Too Tame, Just Great Gains” (Page 30): “Muscular Portfolios offer less risk of crashing but perform long term like the broad market or better. The two Muscular Portfolios in this book select from menus of 9 or 13 ETFs. Each month followers of the portfolios tune up their holdings using a specific Momentum Rule.”

From Chapter 2, “How Do You Know Whether Your Portfolio Is Lazy or Muscular?” (Page 60): “…Muscular Portfolios use asset rotation to keep you out of assets that are sinking. Avoiding the huge losses that the S&P 500 subjects investors to every 10 years or so keeps your investment strategy on track.”

From Chapter 3, “When Lazy Portfolios Fail You and Muscular Portfolios Support You” (Page 78): “One of the things a Lazy Portfolio doesn’t have is a Momentum Rule. Muscular Portfolios use such a rule to find the three ETFs with the strongest momentum over the last 3 to 12 months. Informed investors tilt once a month into those ETFs.”

From Chapter 4, “Find the Investment Portfolio That’s Just Right for You” (Page 94): “The Mama Bear uses the simplest menu of asset classes of any Muscular Portfolio. The Papa Bear is a Muscular Portfolio with a slightly larger asset-class menu, but with the potential for greater gains. The Baby Bear is the easiest possible portfolio–it grows like the S&P 500 over time but with smaller drawdowns. The End Game Portfolio is a simple wealth-preservation strategy. It has a large allocation to bond ETFs (for income) and a small allocation to a Muscular Portfolio (for growth).”

From Chapter 5, “The Mama Bear Is About as Simple as a Muscular Portfolio Can Be” (Page 98): “People who are very risk averse may prefer the Mama Bear to the Papa Bear because it offers smaller losses during crashes.”

From Chapter 6, “The Papa Bear Adds a Distinction Between Value and Growth” (Page 108): “The Papa Bear Portfolio is for people who …[will] stay the course even during market crashes, when [it] may be down 25%.”

From Chapter 7, “The Baby Bear Is a Starter Portfolio as Easy as an Annual Tune-up” (Page 118): “The Baby Bear…keeps trading costs low for people with less than $10,000 to invest. And unlike Muscular Portfolios, which are checked monthly, the Baby Bear requires a checkup only once a year.”

From Chapter 15, “You Don’t Need Indicators that Don’t Really Indicate” (Page 228): “To avoid data-mining bias, no attempt has been made to find the ‘very best’ Muscular Portfolios… The models in this book are time-tested and will work for you just fine–without being ‘optimized’ by random chance.”

From Chapter 17, “Use Bargain Brokerages But Watch Out for Hidden Fees” (Page 252): “The ideal online brokerage for Muscular Portfolios is…FolioInvesting.com. It has by far the easiest website to use. And it’s one of the least expensive brokerages.”

From Chapter 18, “Rebalance Your Portfolio without Getting All Obsessive About It” (Page 258): “…don’t obsess about giving each of a Muscular Portfolio’s ETFs the exact same dollar value every month. If each ETF is within 20% of its target–and you bring any wanderers within 10%–any differences in performance are probably too small to worry about.”

From Chapter 19, “Reduce the IRS Tax Bite with 401(k)s, IRAs and Roths” (Pages 262-263): “The Papa Bear Portfolio is great in a taxable account for people in middle-class tax brackets… [It] is also very attractive to people in the highest tax bracket. …More than 50% of the Papa Bear’s sales are long-term capital gains or gold gains. …Over the last 43 years, the Mama Bear Portfolio would have risen at an annualized rate of return of 14.3% in a tax-deferred account. For taxpayers in middle-class brackets…that return would have been reduced by only 1 percentage point…”

In summary, investors will likely find Muscular Portfolios a very easy-to-understand and thorough approach to implementing simple asset class momentum strategies.”

The book has a companion website of the same name, with daily portfolio tracking.

Cautions regarding conclusions include:

  • As for all backtesting, future market conditions may differ from those used to test Muscular Portfolios in the book.
  • Though the author does not inject data snooping bias directly (by experimenting with strategy variations), the strategies presented may inherit snooping bias from the source research.

The Mama Bear Portfolio, as noted in the book, is nearly identical to the Simple Asset Class ETF Momentum Strategy (SACEMS) portfolio. See the list of supporting robustness research for that strategy. See also the second set of links at “What Works Best?” for other related research, including more complex asset class momentum strategies pursuing further risk reduction.

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