Back in early 2008 I wrote an article called “Equities Without Tears” for the Spectator. You can read it here:
Here is the list of ETFs I used for the back test:
EWA ISHARES MSCI AUSTRALIA ETF # EWC ISHARES MSCI CANADA ETF # EWD ISHARES MSCI SWEDEN ETF # EWG ISHARES MSCI GERMANY ETF # EWH ISHARES MSCI HONG KONG ETF # EWI iShares MSCI Italy Capped ETF # EWJ iShares MSCI Japan Index # EWK ISHARES MSCI BELGIUM CAPPED ETF # EWL iShares MSCI Switzerland # EWM ISHARES MSCI MALAYSIA ETF # EWN iShares MSCI Netherlands Investable Mark # EWO ISHARES MSCI AUSTRIA CAPPED ETF # EWP iShares MSCI Spain Capped Index Fund # EWQ ISHARES MSCI FRANCE ETF # EWS ISHARES MSCI SINGAPORE ETF # EWU iShares MSCI United Kingdom ETF # EWW ISHARES MSCI MEXICO CAPPED ETF # SPY SPDR S&P 500 ETF
The premise was simple enough and it still holds. Stock picking is an expensive waste of time so go for Index Trackers. Complement this by using a simple rule based system to keep you invested in markets when times are good and to revert to a reserve asset such as cash or treasuries when the markets turn sour.
I have neither the original data I used for the article nor the system but I nonetheless thought it worth applying TAA1 (which I am currently trading) to the original portfolio to see how it has performed in the interim.
Unfortunately, it looks as though my portfolio choice was not ideal. How very easy to see that with hindsight. Was my portfolio choice “wrong” in some way? No: but it does nonetheless serve to emphasise the futility of prediction. At the time the portfolio looked like a well-diversified and sensible choice across markets and geographies.
It is STILL a well-diversified and balanced portfolio but it has fallen on relatively hard times in recent years. The charts below show the application of the system to the portfolio up to 2008 and then right through to 2016. The metrics need no further commentary. CAGR has fallen while volatility and drawdown have increased – in the latter case dramatically. The back test has a base currency of US dollars.
How so? Well it is pretty obvious when you look at a rebased chart of the portfolio since 2008 again rebased into US dollars. Emerging markets have dramatically underperformed while the US has greatly outperformed.
According to Reuters, in percentage terms and in US dollars, the US and Swiss markets are the only markets to show a positive return over the period. The position doesn’t change much in local currency terms. As you can see most markets were severely down with Austria the worst hit at -62%
With hindsight of course had the portfolio been weighted more along the lines of market capitalisation, the US would have been heavily weighted in the portfolio and all would have looked a great deal more cheerful.
But this is a nonsense view and who is to say how and where markets will go from here?
In any event, the portfolio did at least record a positive return for the period 2008 to 2016 and the system ensured that the performance was very much better than the benchmark MSCI World Index.
The system combined with the portfolio also greatly outperformed a buy and hold strategy of equally weighting the portfolio at the beginning of the period with no rebalancing:
As can be seen despite the (retrospectively) disappointing portfolio, the simple system nonetheless coped very well and achieved a higher return than Buy and Hold both in absolute and risk adjusted terms at a greatly reduced volatility and drawdown.
What is the point in revisiting ancient history?
The point is very simple and very important. You cannot predict which markets will do well but you can diversify wisely and by operating a simple Tactical Asset Allocation solution you should be able to protect yourself from the worst ravages of a bear market by fleeing to cash when times get tough.