September was no bueno!
August was a very good month for the markets, however, September was even worse. I am personally down 5.14% for the month of September, and my YTD returns now stand at 14.49%. For comparison, the S&P is down 4.65% for the month, and up 15.93% for the year.

There was a lot of volatility and an obvious downward bias this past month. In September we have seen the 2nd largest drawdown of the year, I am not expecting but would not be surprised for more drawdown to come in October, even with all the stimulus money. I am hoping for a Santa Claus rally toward the end of the year.


October Investment Changes:
There are changes to the Triad and Russell strategies for October. Triad goes out of both Gold and Russell Mid-Cap Value, and the Russell strategies exit Russell 1000 in favor of Russell Mid-Cap Growth.

See the October 2021 investments, September 2021 results, and link to the full reporting deck here.

Muhammed Ali towering victoriously over a beaten Sonny Liston, if the Triad strategy could feel victorious for crushing the Permanent Portfolio, I imagine this is how it would feel.

I recently highlighted the new Triad strategy and detailed how it works, here. Investing in Triad since coming up with this strategy has made me realize that I find the potential Gold allocation to be too large, a 1/3rd position in Gold is more volatile than Triad was designed to be, and I have modified Triad going forward. Up to 1/3rd of the strategy will go into IWB, the Russell 1000, and up to 1/3rd will go into IWS, the Russell Mid-Cap Value, and up to 1/6th of the strategy will be allocated to SGOL, Aberdeen Standard Physical Swiss Gold Shares; this means that there will always be a minimum of 1/6th allocation to the best performer of VGIT, VCSH, or VGSH, Intermediate Treasuries, Short Term Corporate Bonds, or Short Term Treasuries. This reduction of the allocation to Gold only slightly reduces the long term CAGR, but reduces the Ulcer Index appreciably, as was the goal.

First a quick primer, why was Triad created - what was the goal? This is a conservative strategy that uses no leverage, aims to have a low ulcer index with great returns over a full investing cycle including good and bad years, it will underperform in the good years, however, it will outperform in the bad years.

The two charts below show why a 60/40 (or a 70/30, or an 80/20) will suffer going forward, Bonds have already given what they can, there isn't much left in that allocation.

I was recently asked if I could compare Triad to Harry Browne's Permanent Portfolio, I was curious myself how they would compare, so here is the crushing story.

The data below was compiled with results through September 22, 2021. The results go back to May 1992, not a date I picked, but rather because that is how far back Portfolio Visualizer had results.

Permanent Portfolio is 25%/25%/25%/25% into Stocks/Gold/Long Term Treasuries/Cash

For this exercise I gave Permanent Portfolio the benefit of the doubt and instead of actual "cash" I went with Short Term Treasuries which provided more return. The allocation and funds used are: VTSMX / ^GOLD / VUSTX / VFISX

The Portfolio Visualizer link to the data is here.

For the comparison, I did Permanent Portfolio vs Total US Market vs Triad from May 1992 through current, and then the same comparison for what I refer to as the modern era, 2000 forward.

The results from mid-1992 forward show Triad returning over 2.75X the return that the Permanent Portfolio returned, in fact it bested the Total US Market by a noticeable margin as well.

Not only are the results superior to PP, but the Maximum Drawdown was also less, and all with a virtually identical Ulcer Index. So on a risk adjusted return basis, Permanent Portfolio was absolutely crushed by Triad over this time period, as was the Total US Market.

2000 to current is shown in this second chart. Similar results to the full time period. Triad delivers superior results, as with the full time period in this time period it also has a slightly better Maximum Drawdown than Permanent Portfolio, and a virtually identical Ulcer Index and with over double the total returns. Triad on a risk adjusted basis is towering over the bloody Permanent Portfolio which is broken and lying on the floor.

Enjoy the strategies, feel free to ask questions.

Happy Investing, please be strategic and thoughtful by using Dual Momentum Systems.

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August was a very good month for the markets, and the strategies. You can get this and past reporting decks by going to the Reporting Decks item on the menu. This months reporting deck can be found right here.

There are no change of investments for September, same investments as in August. Pinch me, is this year really going so well after last year, I hope I'm not dreaming! In full disclosure, I was up 3.47% in August over all accounts.

The summer continues, it seems like many summers to my eyes, not a lot of net movement, but more volatile, not my favorite time for investments. I barely came out of July with a winning percentage of +0.81%, 7 months in a row this year, how unusual.

For August: Triad goes back into Gold after a month out of it, and The Russell OG switches from Russell Mid-Cap Value after 6 months and goes into the Russell 1000.

July was a month of the S&P powering forward, the strategies lagged a little bit but kept us in an upward market. See the full reporting deck for all the data.

If you know somebody who would appreciate investing with these strategies, please let them know, thank you.

How do I invest my money? Do I put my money where my mouth is and invest in the DMS strategies that I run?

YES is the short answer.

My high level targets are to have around 25% of my investments in investment real estate (residence does not go towards this allocation), and 75% in the markets, of that 75%, I have two accounts that are in the S&P, a 529 plan and my 401k. I hold 2% of my IRA in Lucid stock, and around a 6% total allocation in two oil and gas stocks. The remainder is invested in the DMS strategies.

I am of the opinion that if you do not write down your investment goals and target allocations, then it is not too likely to happen the way that you want. I have mine documented to help keep me on track.

2021 has been a year with quite a few changes and updates to the DMS strategies, my allocation has changed as a result. This is how I am currently invested into the DMS strategies.

My equity investments have the three stocks I mentioned, and the 529, and 401k accounts, I also hold around a 10% allocation in global technology. These non-DMS investments total 25% of my equity investments, the remaining 75% is invested into DMS strategies as follows:

10% Triad
10% The Russell OG
18% Global Navigator
10% The Russell
14% Global Navigator XL
28% The Russell XXL
10% MAX PAIN

I did not come to this allocation from a macro perspective, rather I look at each individual account and take the goals for it into account and select which strategies to use. I look at the metrics for the strategies to decide how aggressive or conservative I want to be.


Lucid is a car company that I appreciate and decided to take a flyer on it, put a little money into it and see where it is in 10 years. If I lose it all, bummer. If it does amazing, terrific! There are two individual oil and gas companies I own which have been terrible long term holdings for me, that is up through about April 2020, and they have been on fire ever since. I have literally been sitting on paper losses since buying them and just recently that flipped to turning a profit. I have already sold some of them and will continue to liquidate them fully before the end of 2021. The proceeds will go into my strategies. Ultimately I'm glad to have gone through this experience with these stocks 1st hand, it really reinforced my opinion that the only way that I want to be holding individual securities is when they are above their 200 day moving average, if they tank, sell them and move on, don't hold forever hoping that they will recover - I consider myself fortunate that these have recovered.

From January 1, 2021 through June 30, 2021 my overall brokerage returns for all accounts is 17.64% using money weighted returns. I track all +/- into the accounts, however, I use a mid-month date for all money in and money out to make it easier, I don't track the actual day of the month that there was money in or out. I assume it kind of washes out over time, so my actual return could be just slightly +/- if I had tracked it all by the day not mid-month.

17.64% is 2.4% ahead of the S&P halfway through the year, and 19.3% better than the aggregate bond return, resulting in a 9.16% better performance than the venerable 60/40 return of 8.48%.

The two oil & gas stocks gave me a bump in performance this year, otherwise I would likely be just slightly ahead of the S&P.

Triad

Why a conservative strategy?
The Triad strategy created out of necessity. I have a couple of accounts where I want to be invested, but more conservatively, for example one of the accounts is our general savings/emergency money. A balanced approach like a 60/40 doesn't seem like a great strategy going forward. I've heard several heads of large investment firms when asked what they were going to do with investors accounts who used to be in 60/40 portfolios [with the understanding that bonds are not likely performing well in the years ahead] and they straight faced replied that they were shifting to a 70/30 allocation. Excuse me? What the heck, that's not a solution in my book. I had been investing in SWAN, a barbell approach ETF, but it heavily relies on intermediate term treasuries and this didn't seem like a great option going forward either.

This struck me as a worthwhile challenge, would I be able to come up with a sustainable strategy which was close in performance historically compared to a Balanced 60/40 portfolio, but likely be positioned to perform better than a 60/40 allocation going forward? Yes I was able to! The resulting strategy is Triad.

Why Triad, why not just invest in the market? The "index" is tough to beat, here are some staggering statistics from Dalbar:

Investors don't beat the Index, so why not just index?
For the twenty years ending 12/31/2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.19%.
Why is this? Investor behavior is illogical and often based on emotion. This does not lead to wise long-term investing decisions.
-Dalbar, Inc.


Over the longest span, the numbers were particularly brutal. The S&P 500 outperformed more than 92% of large-cap funds over the last 15 years. Mid- and small-cap funds fared no better over the time period, with their benchmarks besting them 95.4% and 93.2% of the time, respectively. Overall, 82.2% of all active funds were outperformed over the 15-year period.
-Fortune Magazine, 2017

There are many psychological investing barriers which investors face:

If the average retail investor and professional managers fail to beat the index over time, why does anybody even try, why doesn't everybody just by the S&P 500 and be done with it? I think it is because of the volatility and drawdowns that one experiences in an index like the S&P 500. The long term results are great, but massive drawdowns and volatility are difficult for many to stomach. I am no different, I can't stomach massive drawdowns, espeically for accounts from which I may need the money in a short term time frame.

This is why I wanted to see if I could come up with a strategy for the future that will excel the traditional 60/40 allocation.

Triad Basics
Triad splits the portfolio into 1/3rds. Based on the lookback methodology (which I am not divulging at this time) Triad will invest 1/3rd of the portfolio into the Russell 1000, another 1/3rd into the Russell MidCap Value, and 1/3rd into Gold. Triad only invests those 3 separate 1/3rd allocations if the investments qualify based on the lookback. If the lookback for the Russell 1000 is a go, then 1/3rd of the portfolio is invested in the Russell 1000, if the lookback says to stay out of the Russell 1000 for the next month, then that 1/3rd is instead invested in the best option of Short Term Treasuries, Intermediate Term Treasuries, or Short Term Corporate Investment Grade Bonds based on their lookback relative performance. Each of the three separate investments works this way, we either invest in three components, or their amounts are put into holding in one of the bonds.

How does the lookback work?
From January 1980 through May 2021 a buy and hold investment into a 60/40 portfolio would have provided an annualized return of 10.35%, however, it also had a maximum drawdown of 32.33% and has an ulcer index of 5.95 which is a measure of it's relative overall drawdown behavior (the higher the Ulcer Index the worse.) For reference, the Russell 1000 had an average annualized return of 12.12% with a maximum drawdown of 51.03% and an Ulcer Index of 13.81, the balanced 60/40 portfolio does have a reduced annualized return but it also has much more tame drawdown and Ulcer Index compared to 100% in broad US Market equities.

Triad uses a lookback which I believe to be something unique, I've not ever heard of this methodology used in other investment strategies. It is not looking for upward momentum over X number of months, nor is it using a weighted lookback, it is not looking for the current price to be above the SMA or EMA, it is not looking for moving average lines to intercept. It's something different that I came up with in order to try and be invested in the components without being subjected to too much drawdown, let's see how well it works.

By investing in the Russell 1000 using the lookback of Triad which has us invested when the lookback says to be invested, and out of the market in cash when not invested. This would result in an annualized return of 10.00%, which is only 0.35% lower than a balanced 60/40 [2.12% worse than the Russell 1000 buy and hold.] This would result in a maximum drawdown of 23.41% with an Ulcer Index of 8.22, this is a lower maximum drawdown than a 60/40 but a higher Ulcer Index. But of course, we're not having money sit idle when it isn't invested into the Russell 1000, it goes into the best performer based of either Short or Intermediate Term Treasuries, or Short Term Corporate Investment Grade Bonds. When we invest the idle funds in the best of the bonds instead of cash the return jumps up to 13.00% annualized returns, with the same maximum drawdown as with cash of 23.41%, and an even lower Ulcer Index of 6.84. This is far better returns that both a Balanced 60/40 and even a 100% Russell 1000 buy and hold portfolio with lower maximum drawdown and a good Ulcer Index.

But Triad has a goal of both a very low drawdown and a very low Ulcer Index paired with solid returns. The above results may be very attractive for some investors, but it is too volatile for what Triad was conceived to be.

The above example was putting 100% into the Russell 1000, or into the bonds. Now we look at the results of fully going into the Triad strategy. We split the portfolio into 1/3rds. The Russell 1000 and the Russell MidCap Value are both equity components and the ⅓ that goes into gold is intended to be a diversifier, a method of providing some returns when equities are not, and not being too heavily invested in equities which brings volatility and a higher Ulcer Index. By having up to 2/3rds of the portfolio equities, it roughly appromixates the equity allocation of a 60/40 portfolio.

When we use all three of the components, we results in an annualized return from 1980 through May 2021 of 11.70%, which a maximum drawdown of 17.88%, and a super low Ulcer Index of 3.27.

Mission Accomplished. The annualized returns handily beat a Balanced 60/40 portfolio 10.35% and in fact are only slightly lower than the buy and hold of the Russell 1000 which was 12.12%. The maximum drawdown is only 17.88% down from 32.33% for the 60/40 and 51.03% for the Russell 1000, and the Ulcer Index was reduced from 5.95 for the 60/40 and from 13.81 for the Russell 1000 to 3.27 for Triad. How large of a reduction in drawdowns is it going from an Ulcer Index of 5.95 or 13.81 to 3.27? The chart below shows it graphically, and it shows just how much more volatile not just the Russell 1000 but also a Balanced 60/40 portfolio are.

Pros/Cons
From 1980 to current Triad has returns which are very similar to market returns with far less volatility and drawdown - and it wasn't supposed to compete with the market indexes it was intended to compete with the 60/40. Looking ahead it should do even better than the 60/40 because the aggregate bond holdings of the 60/40 are not likely to provide the incredible benefit that they have for the last 50 years.

Triad is a terrific strategy to my eyes, it is not an eye popping high return strategy, but it has a terrific return for such low drawdown and volatility. This strategy certainly has a home in my personal allocations.

RETURNS and TAXES
The returns as calculated in my Triad model does a complete rebalance each and every month. In practice this is not how I actually invest in it. I don't want to needlessly rebalance and possibly incur a tax event if it is not necessary. Instead of making each invested component to be 1/3rd each month, I instead let a 1/3rd invested amount stay until it goes to bonds. For example, if for January the Russell 1000 is to be invested, I put 1/3rd in the Russell 1000, and I leave it alone until it gets the sell signal. I don't yet have the data on how this affects the returns, it certainly makes the taxes more long term gains than short term. It is seemingly simple but in practice rather complex to change the model for to track the investments how I am actually doing it. I may come back to this later, but for now I'm leaving the model with a fresh ⅓ adjustment every month (which would be fine in a tax deferred account).