Annual Returns: 1966 - 1981
The targets for the most aggressive sample allocation are 75% in stocks, 25% in bonds, and 0% in money market. The unmanaged (buy and hold with rebalancing) portfolio will never be in money market. The two that employ the risk reduction models will sometimes be partially or completely in the money market fund.
The relative performance of the three methods will be seen to be similar for each of the three example target allocations. The differences will be the most dramatic for this, the most aggressive, allocation.
1966-81 Performance Measures
Compound Worst Percent
Annual Return Drawdown Down Months
Unmanaged 5.6% -35.4% 43.2%
Basic Application 10.1% - 6.2% 14.1%
Aggressive Application 10.6% - 7.3% 23.4%
The worst drawdown is the largest drop from a peak in account value to the
subsequent lowest point before the previous peak is surpassed or the end
of the period. As the worst case, it is one measure of risk. The
frequency of losing months is another risk measure. The number of losing
years and their severity is yet another risk measure, and you can see those
from the graph.
The graph and the data in the table show how the use of the risk reduction models makes an enormous positive impact, both in terms of higher return and lower risk, during a secular bear market. The aggressive application of the models increases both the return and the risk levels by modest amounts. It is up to the individual investor to decide which is preferable.
1982-99 Performance Measures
Compound Worst Percent
Annual Return Drawdown Down Months
Unmanaged 17.2% -26.6% 30.1%
Basic Application 14.0% -14.3% 22.2%
Aggressive Application 15.4% -14.7% 26.9%
The contrast between the 1966-81 and 1982-99 periods is striking. It
shows that secular bulls and bears are quite different animals as their
names imply. During the secular bull market, the risk reduction models
still reduce the risk characteristics significantly. However, in bull
markets they are quite likely to lead to investment returns that are
somewhat lower than those of the unmanaged portfolio. This relationship
usually holds also in years when stocks show good gains regardless of the
type of market. However, the
returns in the portfolios that employ the risk reduction models are
still quite healthy and superior to those seen during the
secular bear market. Since the change in long-term market types is
not evident until some time after it occurs, most likely one to two
years, portfolios employing the risk reduction models will be using
them at the start of the next secular bull market and possibly for
its entire duration. It is comforting to know that the price of risk
reduction during strong markets is relatively low.
2000-11 Performance Measures
Compound Worst Percent
Annual Return Drawdown Down Months
Unmanaged 5.6% -41.3% 41.0%
Basic Application 10.1% -14.3% 31.9%
Aggressive Application 10.5% -15.5% 33.3%
Now that we are back in another secular bear market, the value of the
models in both greatly reducing risk, which is the primary purpose of
the models, and increasing returns can be seen. If this is a typical
secular bear market, it has another 5-10 years to go. The ten year
results shown in the table may be quite different when it has run its
course. However, the comparisons are similar to the last secular bear,
and the relationships can be expected to hold during this one.
Note that the drop in 2008 and early 2009 of the unmanaged portfolio was by far the worst since the beginning of the data in 1963. Even in such poor market conditions the portfolios employing the models made money, particularly the aggressive application, which took advantage of falling interest rates for treasury securities late in 2008.
Finally, here are the values for the entire 49 year testing period, 1963-2011:
Compound Worst Percent
Annual Return Drawdown Down Months
Unmanaged 9.6% -41.3% 36.8%
Basic Application 9.6% -14.3% 20.9%
Aggressive Application 10.9% -15.5% 26.2%
The period is not split evenly between years in a secular bull
market (21: 1963-65, 1982-99) and in a secular bear market (28: 1966-81,
2000-11). The history shows that the lower investment returns during the
bull markets are more than made up by the superior returns during the
long-term bear markets when the models are employed. That means using the
risk reduction models all the time is a good course of action. More
aggressive investors who are willing to accept higher levels of risk can
move to not using the models once they are sure the secular bear market
is over and that a new secular bull is on the loose. However, since it
is highly unlikely that one will be able to identify the end of the bull
market until some time afterwards, it would be wise to start using the
models again once the bull has reached a ripe old age.
Please keep in mind that past performance is no guarantee of future returns. You should not assume that any of the returns or results shown on these pages will be achieved in the future. It is possible that the models and methods discussed and accounts managed using them will show losses in the future.