Article #590) Defense at the cost of offense? - TPS top 10 gains and losses

May 18, 2020

VTS Community,

One of the core principles in my overarching investing philosophy is that I believe it's far more important to be conservative and reduce portfolio drawdowns than it is to get aggressive and chase big gains.

I wrote a previous article on this you can check out that was called: The best offense is a good defense. That sums up my investing philosophy very succinctly.

The vast majority of the investment industry is focused on the gains side of the equation, getting aggressive, adding leverage, and bragging on Twitter every time they have a good month. But I believe it's the defense that really makes the big difference in the long run. That's why, try as they may, the vast majority of the financial industry underperforms the S&P 500 in the long run. We're talking 90% or more of them below it. And of the small percentage that are above it in the long run, most aren't by much.

Since I do focus on reducing drawdowns though, it means I don't lose much ground every time the market doesn't cooperate, which is increasingly more often in the last few years. As a result, the VTS Total Portfolio Solution is significantly higher than the S&P 500. 345% total return for TPS vs 173% total return for SPY

Performance comparison since VTS launched in January 2012:

  • Total Portfolio Solution is my diversified VTS portfolio
  • SPY - S&P 500
  • TLT - 20+ yr US Treasury
  • HFRI - HFRI Hedge Fund Index
  • CBOE - CBOE Eurekahedge Short Volatility Index

So it's pretty clear if you follow my work, I'm all about reducing drawdowns and providing that low stress long term investing experience.

But does that mean I completely neglect the gains side?

To explore this, here are two tables. The first will be no surprise to anyone, it's showing the top 10 worst months for my Total Portfolio Solution vs the 10 worst months for the S&P 500.

Top 10 worst monthly returns since January 2012:

  • TPS - VTS Total Portfolio Solution
  • SPY - S&P 500 including dividends

And remember that old saying, "Losses are more costly to a fund than gains are beneficial."

- The Total Portfolio Solution losing -29.25% compounded in my worst 10 months requires a subsequent gain of 41.34% to get back to break even.

- The S&P 500 losing 50.04% compounded in its worst 10 months requires a subsequent gain of 100.16% to get back to break even.

Due to the drawdown being so much less for our TPS, the losing months are far less costly and as a result we spend much more time at or near all time highs in our long term progress. As I showed in the "best offense is a good defense" article, of the six largest drawdowns for the Total Portfolio Solution since we launched in January 2012, five of them were recovered entirely one month later.

But what about the 10 largest winning months? If my portfolio is focused so much on defense, does that mean we sacrifice the best months?

Top 10 best monthly returns since January 2012:

  • TPS - VTS Total Portfolio Solution
  • SPY - S&P 500 including dividends

Fortunately, our top winning months outperform the S&P 500 in the long run as well.

However, despite the fact that the TPS outperformed the S&P 500 in both the best months and the worst months, I still want to stress that I absolutely believe the outperformance in losing months is by far the most important side of the equation. While stretches of winning months are always fun, it really is the reduction of losing months that will help us reach our retirement goals.

"Losses are more costly to a fund than gains are beneficial"

- Brent Osachoff

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