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Five asset allocation strategies to avoid a stock market crash

asset allocation and risk

How do market crashes affect investment portfolios?

Stock market crashes can be devastating for individual investor investment portfolios.  

As can be seen in the chart below, as the loss from a stock market crash grows larger, the farther behind an investor becomes. The percentage gain required to get back to where they started grows at an even faster rate.  

What is a Drawdown?

A drawdown is the loss or drop in value of an investment or account from a high or peak value until it recovers back to the same high.

Referred to as a percentage, two key elements must be considered:

  • Time – how long will it take to recover from the loss
  • Money – the dollar amount of the loss

Drawdowns are a vital factor that is often overlooked when evaluating different investment options.  Unfortunately there is no requirement that they be reported to investors.

Investors nearing retirement may not have the luxury of time to recover from a large drawdown.  If drawdowns can be minimized, then  investments can continue growing sooner after a stock market crash.

Indexfundtrends.com reports drawdowns for all their strategies and also allows members to compare strategies with other investments.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

Indexfundtrends has 5 strategies that have all shown to reduce portfolio drawdowns

1. Dynamic U.S. Market Strategy

This strategy invests in the S&P500 index, which comprises 500 of the largest U.S. publicly traded companies and represents approximately 80% of the overall U.S. stock market. An S&P500 index fund or like-fund is available in most investor accounts. This strategy, despite outperforming buy-and-hold investment portfolios, has had only a small number of trades per year, making it easy to follow.
The maximum drawdown for the Dynamic U.S. Market strategy is -10.1%.    

2. Dynamic TSP Strategy

The Dynamic TSP Strategy is designed to generate higher returns and minimize losses for employees of the U.S. Government who invest with Thrift Savings Accounts. Stock market performance is evaluated each month and determines the strongest performing funds at the time.

Investment fund recommendations are then made for the next month in the TSP account. Unlike traditional buy and hold (or static allocation) strategies, the Dynamic TSP Strategy can improve returns and minimize losses by increasing allocation to assets expected to outperform and reducing allocation to assets expected to underperform.

The maximum drawdown of the Dynamic TSP strategy is -10.7%.

3. 20 x 5 Strategy

The 20 by 5 Strategy is designed to gradually increase holdings in stocks as market momentum gets stronger. It increases and decreases holdings in 20 percent increments. Stock market performance is evaluated each month and determines the strongest performing funds at the time. Investment fund recommendations are then made for the next month. Unlike traditional buy and hold (or static allocation) strategies, the 20 by 5 Strategy can improve returns and minimize losses by increasing allocation to assets expected to outperform and reducing allocation to assets expected to underperform.

The maximum drawdown for the 20 by 5 Strategy is -11.2%.

4. Dynamic Sector Strength Strategy

This aggressive global momentum investment strategy is designed to invest most funds domestically in U.S. based investments including the S&P500 index, and NASDAQ 100 index (QQQ), heavily weighted in U.S. based technology companies, or internationally in either developed foreign markets and emerging markets. Up to 85% of funds can be invested in the index with the strongest recent performance.

In addition, up to 15% of funds can be invested in a less diversified sector index (described below), when that sector is performing strongly. The strategy will switch to the safety of government bonds or cash when performance of U.S or foreign markets turns down.

The maximum drawdown for the Global Dynamic Sector Strength Strategy is -11.6%.

5. Dynamic Technology Strategy

This aggressive global momentum investment strategy is designed to invest funds in U.S. based investments including the S&P500 index, and NASDAQ 100 index (QQQ), heavily weighted in U.S. based technology companies, or internationally in developed foreign markets and emerging markets. This is a particularly aggressive strategy in that it invests all the funds each month in the top performing index fund.

The strategy will switch to the safety of government bonds when performance of equity markets slows down.

The maximum drawdown for the Dynamic Technology Strategy is -9.8%.

Tactical Asset Allocation (TAA)

TAA is a strategy that takes advantage of strong market sectors or market pricing anomalies by shifting the percentage of assets held in several categories. This creates extra value. TAA adjusts sustained target weights –actively considering on strategic asset allocation – for a short period. This allows maximum capitalization of the market.

Strategic asset allocation (SAA) define how investment portfolio assets are divided among asset classes, such as equities, cash and bonds.

Strategic asset allocations ensure that the portfolio achieves its objectives over the long term. However, performance can be improved by making short term adjustments. This is referred to as TAA.

Tactical Asset Allocation is structured around the Strategic asset allocation. Investment managers use tolerance bands ensure that the portfolio lines up with its long-term objectives.

Read More

Three Country ETFs that beat the S&P 500 in 2018

Wow, what a difference a year makes in the stock market.  While 2017 was a banner year for many foreign ETF‘s as well as the S&P 500, 2018 performance was quite different.  The U.S. stock market experienced a loss for the year, while the only foreign markets to experience any growth were in the middle east.

SymbolNamePercent Return
QATiShares MSCI Qatar ETF20.1
KSAiShares MSCI Saudi Arabia ETF13.1
GULFWisdomTree Middle East Dividend Fund11.2
SPYS&P 500 index-4.4
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Benefits of adding Sector Funds to investment portfolios

What are sector funds?

A sector fund focuses investments in businesses that operate in a particular industry or sector of the economy. Sector funds can exist as ETF’s, ETN’s or Mutual Funds.  By focusing investments in a smaller portion of the economy, sector funds enable investors to concentrate their investments in an area of the economy that can grow faster than the economy as a whole.   A sector fund is not as diversified as a broader index like the S&P 500, and thus is more volatile. This can lead to potentially greater gains, but with the risk of greater losses.

Why should you consider investing in sector funds?

Our Global Dynamic Sector Strategy invests up to 15% of its portfolio in sector funds that demonstrate the best recent price momentum.  This has allowed the strategy to outperform our other strategies over a 20 year period.

Our Global Dynamic Sector Strategy invests up to 15% of its portfolio in sector funds that demonstrate the best recent price momentum.  This has allowed the strategy to outperform our other strategies over a 20 year period.

Investment Strategy / Fund20 year annualized return
Global Dynamic Sector Strength Strategy15.0%
Global Dynamic Strength Strategy12.8%
Dynamic Sector Strength Strategy12.6%
Global-US Focus Strategy11.8%
Dynamic TSP Strategy10.7%
Dynamic US Market Strategy9.3%
S&P 500 Index (SPY)7.1%
Vanguard Balanced Fund (VBINX) 60/40 Stocks/Bonds6.7%

Below is a table showing the sectors chosen by the Global Dynamic Sector Strength Strategy on a year-by-year basis.

YearSector Tickers# Months invested during year
1998EWS - iShares MSCI Singapore Capped ETF1
1999EWS - iShares MSCI Singapore Capped ETF4
2000XLE - Energy Select Sector SPDR ETF
XLF - Financial Select Sector SPDR ETF
3
20010
2002EWY - iShares MSCI South Korea Capped ETF2
2003EWZ - iShares MSCI Brazil Capped ETF
IBB - iShares Nasdaq Biotechnology ETF
SOXX - iShares PHLX Semiconductor ETF
10
2004EWZ - iShares MSCI Brazil Capped ETF
XLE - Energy Select Sector SPDR ETF
9
2005EWY - iShares MSCI South Korea Capped ETF
EWZ - iShares MSCI Brazil Capped ETF
XLE - Energy Select Sector SPDR ETF
11
2006EWZ - iShares MSCI Brazil Capped ETF
XLF - Financial Select Sector SPDR ETF
XLY - iShares MSCI South Korea Capped ETF
EWS - iShares MSCI Singapore Capped ETF
9
2007EWS - iShares MSCI Singapore Capped ETF
EWZ - iShares MSCI Brazil Capped ETF
9
20080
2009GDX - VanEck Vectors Gold Miners ETF
EWZ - iShares MSCI Brazil Capped ETF
EWS - iShares MSCI Singapore Capped ETF
XLF - Financial Select Sector SPDR ETF
8
2010EWZ - iShares MSCI Brazil Capped ETF
XLY - iShares MSCI South Korea Capped ETF
GDX - VanEck Vectors Gold Miners ETF
FDN - First Trust Dow Jones Internet ETF
XLE - Energy Select Sector SPDR ETF
7
2011XLE - Energy Select Sector SPDR ETF
IBB - iShares Nasdaq Biotechnology ETF
7
2012IBB - iShares Nasdaq Biotechnology ETF
XLF - Financial Select Sector SPDR ETF
12
2013FDN - First Trust Dow Jones Internet ETF
XLF - Financial Select Sector SPDR ETF
IBB - iShares Nasdaq Biotechnology ETF
12
2014IBB - iShares Nasdaq Biotechnology ETF
SOXX - iShares PHLX Semiconductor ETF
GDX - VanEck Vectors Gold Miners ETF
EWZ - iShares MSCI Brazil Capped ETF
12
2015IBB - iShares Nasdaq Biotechnology ETF
GDX - VanEck Vectors Gold Miners ETF
FDN - First Trust Dow Jones Internet ETF
7
2016GDX - VanEck Vectors Gold Miners ETF
EWZ - iShares MSCI Brazil Capped ETF
SOXX - iShares PHLX Semiconductor ETF
9
2017SOXX - iShares PHLX Semiconductor ETF
XLF - Financial Select Sector SPDR ETF
EWY - iShares MSCI South Korea Capped ETF
11
2018SOXX - iShares PHLX Semiconductor ETF
FND - First Trust Dow Jones Internet ETF
6

As you can see, this strategy was not invested in any sectors during the 2001 and 2008 bear markets.  

Interestingly, the strategy was invested in the iShares NASDAQ Biotechnology Index ETF (IBB), shortly after Obamacare was enacted (signed into law by on March 23, 2010) during the years 2011-2015 and took advantage of the growth in the healthcare industry that resulted from the new law.

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Six Foreign Country ETFs that beat the S&P 500 in 2017

Seoul, South Korea

Last year was a big year in foreign markets for US investors. In 2017 many country ETFs outperformed the S&P 500 index (SPY).

The following is a list of the more popular ETFs.

ETF NameSymbol2017 return (%)Approx 21-day volume
iShares MSCI South Korea Index FundEWY45.72138m
WisdomTree India EarningsEPI40.8743m
IShares China Large Cap ETFFXI38.98536m
iShares MSCI Germany Index FundEWG30.3398m
iShares MSCI Taiwan Index FundEWT26.74106m
iShares MSCI Japan Index FundEWJ25.24455m
SPDR S&P 500SPY23.5921b
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