The Papa Bear Portfolio | Muscular Portfolios

The Papa Bear is based on the book Muscular Portfolios (BenBella Books, 2018). The strategy is a clone of a 2013 whitepaper by Mebane Faber. It is an extension of his book The Ivy Portfolio, which has been tracked with real money since 2006.

The Papa Bear is designed to (1) keep losses small during bear markets, (2) underperform the S&P 500 with less volatility during bull markets, and (3) wind up with superior performance over each complete bear-bull market cycle.

The investing menu consists of low-cost exchange-traded funds (ETFs) that track 13 asset classes. Your portfolio allocates roughly equal dollar amounts to the three ETFs with the strongest momentum, as determined by the strategy rules.

The table below updates once each market day. The closing prices and bid-ask spreads of each ETF are updated a few hours after the New York exchanges close. Once a month, use yesterday’s closing numbers to determine the three ETFs you should hold for the following month. According to several independent studies, the largest gain is achieved by reallocating on or around the last trading day of the month, as described in Newsletter #52.

Strategy rules:

Select any consistent day of the month to reallocate your portfolio — ideally on the last trading day of each month.
Momentum Rule: Using the closing prices from the day before you trade, note the three ETFs with the highest average 3, 6, and 12-month gain (the green rows with a Buy percentage).
If, because of a previous month’s rankings, you already own all of the ETFs in the green rows, do nothing.
Sell any ETF you own that now has no Buy percentage.

Use the cash from any sales to buy any indicated ETF you don’t already own. Exact percentages are not crucial.
Hold each of the top 3 ETFs, whether the average 3, 6, 12-month gain is positive or negative. Even if slightly negative, the strongest ETFs tend to rise in the following one month or more.
There’s no need to rebalance the three ETFs back to their original Buy percentages unless an ETF is more than 20% off its target dollar amount.

Execution Rule: Buy or sell an ETF only if its bid-ask spread is less than 1.0%. (If greater than 1.0%, a “flash crash” might be occurring. Check an hour later to see whether an orderly market has been restored.) Popular ETFs typically have spreads below 0.2%, but some bond and commodity ETFs have legitimately higher spreads due to trading differences. For information on how to determine spreads and avoid flash crashes, see Newsletter #54.

KEY TO STATS

Average of 3, 6, 12-mo. gain is equal to an ETF’s nominal total gain (including dividends) over the average of the past 63, 126, and 252 trading days.

A flash crash is a temporary situation lasting a few minutes, during which prices and spreads suddenly move far from their typical values.

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BRIAN LIVINGSTON is a successful dot-com entrepreneur, author of Muscular Portfolios (2018, BenBella Books), and a contributor of scores of articles to MarketWatch, StockCharts, and AskWoody. He is also the author or coauthor of 11 books in the Windows Secrets series (1991–2007, Wiley), which has sold more than 2.5 million copies. From 1986 to 1991, he worked in New York City as assistant IT manager of UBS Securities; a consultant for Morgan Guaranty Trust (now JPMorgan Chase); and technology adviser for Lazard Ltd. He was the weekly Windows columnist for InfoWorld magazine from 1991 to 2003. During portions of that period, he was also a contributing editor of CNET, PC World, eWeek, PC/Computing, Datamation, and Windows magazine. In 2003, he founded the Windows Secrets Newsletter, which grew from zero to 400,000 email subscribers. He served as its editorial director until he sold WindowsSecrets.com in 2010. He is president emeritus of the Seattle regional chapter of the American Association of Individual Investors (AAII).