The Papa Bear Portfolio

The Papa Bear is based on the forthcoming book Muscular Portfolios (2018). The strategy is a clone of a 2013 whitepaper by Mebane Faber, co-author of The Ivy Portfolio.

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.

Check your portfolio only once a month, on the same day of your choosing each month.

The Papa Bear 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.

Strategy rules:

  1. Select any consistent day of the month to reallocate your portfolio.
  2. Momentum Rule: Before the market closes on your chosen day, note the three ETFs with the highest average 3, 6, and 12-month return (the green rows with a Buy percentage).
  3. If, because of a previous month’s rankings, you already own all of the ETFs in the green rows, do nothing.
  4. Sell any ETF you own that now has no Buy percentage.
  1. Use the cash from any sales to buy any indicated ETF you don’t already own. Exact percentages are not crucial.
  2. Hold each of the top 3 ETFs, whether the average 3, 6, 12-month return is positive or negative. Even if slightly negative, the strongest ETFs tend to rise in the following one month or more.
  3. 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.

 


KEY TO STATS

Average of 3, 6, 12-mo. return is equal to an ETF’s nominal total return (not inflation-adjusted but including dividends) over the average of the past 63, 126, and 252 trading days.

Prices and returns, at least 20 minutes delayed, are recalculated approximately every 10 minutes while the market is open. To refresh your browser window, press F5 or Command+R.

Bid-ask spread is the difference between the bid price and ask price of a security, typically expressed as a percentage.

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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