And the winner was… the G fund! The lowly no-risk G fund, of course.
Now let me add some useless trivia for perspective. The SP500 index gained and lost 181% during the 252 trading days in 2015 using the end-of-day price changes. That works out to an average movement up or down of 0.72% per trading day.
Where did the SP500 index end up after 252 days?
Down 0.73% from 31 December 2014’s closing price of 2,059 to 31 December 2015’s closing price of 2,044. The 1.46% gain in the C fund was obtained thanks to dividends and a low expense fee.
So after risking one’s hard earned savings for the entire year, buy & hold investors were rewarded with half a percent less than the risk-free G fund. BTW, the TSP G fund traveled 2.04% compared to the 181% during the same 252 trading days ending the year up, well… 2.04%. Kind of reminds me of the turtle and the hare story.
The TSP S and I fund certainly traveled further than 181% during the year and both ended slightly down by the end. The TSP S fund’s annual return does not look so bad compared to its 10.4% loss from its 23 June peak. The only consolation is this was better than the TSP I fund’s 11.4% loss from its 21 May peak.
Market calls and our first override
As you may be aware, I adopted a Seasonally-Modified Buy & Hold strategy that only holds stocks during the favorable season for equities (roughly late October through Spring). How can you get more simple than two trades per year other than buy & hope. I optimized the strategy for the TSP C and S fund and soon after offered my timing service.
The strategy navigates bear markets quite well but it was obvious that avoiding bear markets all together would further reduce risk and might actually improve the strategy’s impressive record. I began looking for indicators that signal bear markets and significant market corrections – there are not many. After eliminating much of the dribble spouted by the financial media, I focused my research on an ensemble of indicators.
Even though my timing models were out of equities over the summer, I started writing about what I was seeing. I think my post on 18 August titled “Skating on Thin Ice” was pretty clear when I stated:
“Holding equities during conditions of poor market internals and high market valuations is not investing – it is speculating. Add to the mix a rapidly rising aversion to risk in bond market then it becomes high risk speculating… With the state of market internals, I would expect a significant correction in excess of 10% for the S&P 500 once technical support is breached.”
Five trading days later, the TSP C and S fund were trading about 10% lower than 18 August. I expected a slightly deeper correction, but then again the exchange’s “circuit breakers” kicked in to limit the market losses. Many ETFs were not so lucky and traded significantly below the indexes they were designed to track for a few hours during the sell-off. Of course, the global central bankers attempted a rescue once again through talk of more monetary stimulus which they failed to deliver on in the end.
Oops…pat, pat, pat
I don’t bring this up to just pat myself on the back and gain new subscribers – well not just. But also to explain that in October when our models dutifully signaled it was time to enter the markets, the same conditions that I warned about in August were still present in our cyclical indicators. So I chose to override the models this year and wait for the adverse conditions to diminish or for a better to entry point to present itself. Of course the SP500 climbed 4% in two weeks thanks to central banker jawboning and a short covering rally.
Such is investing, but I do not regret it. Market risk is not static and we know avoiding the markets when risk is elevated will lead to much higher long term returns. The broader market and the TSP S fund did not participate in the three best months of the year rally and fell further behind the large cap TSP C fund. Even the SP500 gave back most of its November gains and is limping into the new year. If we stuck with our objective timing models, our C model would have ended the year 0.74% higher and the S model would have ended 2.24% lower.
Today, market risk remains elevated and I recommend waiting on the sidelines until conditions improve or market valuations are much better than they are today (in other words, much lower). If you are a member, you will receive an e-mail alert when it is time to re-enter. Members can also check our investor dashboard from time-to-time for more market updates.
So how did TSP & Vanguard Smart Investors do this year?
In the following table, you can see the compounded returns of the TSP funds and our models. This year’s results are under the “1” column. Our S fund timing beat the TSP S fund by a respectable 8.94% and our C fund timing beat the TSP C fund by just under 3%. We did this by significantly limiting market exposure or the exact opposite of mainstream thinking that you have to increase risk to increase returns. If the table displays blurry, you can also see it on our results page.
Looking back 10 years we see that the seasonal tendencies have a greater impact on the small cap stocks making up the TSP S fund. Remember, those impressive long term returns come with only 50% of the market exposure of a buy & hold investor and fewer gut wrenching drops of our account statements. Avoiding the bulk of bear markets will help going forward and if history is our teacher, the bulk of the drawdowns will be during the unfavorable season for equities.
I have been posting timing signals since 2012 (look back year 4), the rest of the years are how the objective rules based models would have performed. For those needing more confirmation of how the seasonal strategy worked real-time, you can view my discussion of Sy Harding’s Seasonal Timing Strategy and see his professionally timed track record. You will understand why I use the seasonal strategy as my core timing model.
Our goal is ensure our members make informed allocation decisions and significantly beat the indexes over the full market cycle as well as beating the fee generating wall street at their game. This year members who invested only $1,000 dollars with our TSP S fund timing model made more back than our basic subscription service. There are no guarantees in any one year, but over the long term the odds look pretty good following a seasonal strategy will make for a much better retirement.
TSP & Vanguard Smart Investor is professionally tracked by Mark Hulbert’s Financial Digest and Timer Digest but our service will not make their list until we establish a longer track record. I will be posting links to TimerTrac in the near future which does currently provide our timing performance. If interested in learning more about how we can help with allocation timing decisions, please visit our levels of service page.
And Happy New Year!