Article #567) VTS Tactical Balanced strategy vs S&P 500

Updated: Nov 3, 2020

VTS Community,

As a longer term tactical investor, I don't like to talk about performance that often.  Every few months is fine, but I certainly try to avoid the day to day noise.  Even the month to month noise, I try to look longer term than just that.  That's why you don't ever see me spamming Twitter every time I have a successful trade or a good month.  I measure success in longer time frames than that.  Especially in this news driven style environment where a single tweet or news headline could change the entire dynamic of the market.

However, since the S&P 500 does find itself in a bit of a drawdown, this is the stage when I start getting a lot of questions about being in safety positions.  Questions like this one:

"The S&P 500 is only down about 5%, so I'm wondering why your Tactical strategy is in gold right now?  Is the market really that dangerous to not be in stocks?"

This is something that I sometimes struggle explaining to people, because I know how bad it sounds when they first hear it.  But the honest truth is, my tactical style of investing isn't designed to make money day to day.  I'm not in gold right now because I think gold will perform well today, or even tomorrow for that matter.  I really don't know what's in store for gold on a day to day basis.  

Trust me, I know how bad that sounds.  I essentially said that I'm in a position that isn't for the purpose of making money today.  But it's true, it's a safety position meant to protect my portfolio against the possibly of a further market decline.

It's meant to be an effective way to avoid drawdowns.  In the long run, that's the best way to maximize performance.

The Tactical Balanced strategy does have periods of under-performance.  That's normal, all strategies have bad periods.  The strategy is meant to outperform my benchmarks in the long run, and the way they do that is by avoiding drawdowns.

In the short term it's sometimes very difficult to see if it's working.  It's not uncommon at all for the strategy to underperform the stock market when stocks are going higher.  But when stretched out over longer periods of time it becomes more clear why I invest the way I do.  It's a process, and not always clear month to month.

VTS Tactical Balanced vs the S&P 500:

Tactical Balanced has crushed the S&P 500 over the last 12 months and since January 2018, and not just the rate of return either.  I also mean from a risk adjusted performance stand point, it's not even close.  Look at the maximum drawdown and Sharpe ratios, it's night and day.  If you're not familiar with those I have dedicated videos you can check out at your convenience. 

Sharpe Ratio video Maximum Drawdown video

The reason for the outperformance is that the stock market has been a wild ride and provided plenty of opportunities for the savvy investor to improve upon it.  The massive -20% decline in Q4 2018 and the recent -5% and -7% declines this year have kept the S&P performance pretty flat.

But having signals that move me to safety has meant I have largely avoided those periods.  So even though when stocks are going straight up I might lag behind, there's plenty of opportunities to smooth things out and actually take a commanding lead in the race.  As I always say:

Investing is a marathon, not a sprint

So why am I in gold when the S&P 500 is only down -5%?  Well, let me ask you.  If this was the start of a recession, and the S&P 500 was about to drop -50% or more, would we still be wondering why I'm in safety positions?

I know it's a "buy the dip" environment so the first instinct of people is to just hang on for dear life, stick with stocks, and of course it'll bounce right?  It always bounces right?  Well, sometimes it doesn't.

Hanging on to stocks hasn't worked for nearly 2 years now, and I strongly believe there will be a time in the coming years when a recession is going to wipe out a pretty good portion of the gains of this bull market.  I'm not being an alarmist, that's just the natural business cycle.  It happens every 6-7 years on average, and this latest bull market has lasted 10 years so far. 

A recession will come at some point  (who knows when)   and when it does, the average decline after the longest 6 bull markets was -51%. 

It's totally normal for the S&P to get cut in half.  Even if the next decline is just average, we're looking at an S&P 500 of about 1500.  People are freaking out when it drops below 2800 these days, but how are they going to feel at 1500?

Long story short, I highly value my safety positions, even if they don't always work.  I will still happily take them when they signal.

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