Home > About SMI > Meet The Team > Austin Pryor

Austin Pryor

Austin Pryor

Founder and Publisher

Austin leads SMI, the newsletter business he founded in 1990. With more than 38 years of experience in the investment business, Austin provides overall direction to the organization while continuing to author many articles for the SMI newsletter and web site. Before founding SMI, Austin started and ran his own investment management firm, which ranked in the top 5% of all investment advisers in the U.S. during its first five years of operations. 

He is the author of the Sound Mind Investing Handbook, A Step-By-Step Guide to Managing Your Money from a Biblical Perspective, which enjoys the endorsements of numerous respected Christian teachers and has sold more than 100,000 copies.

Austin was once on staff with Campus Crusade for Christ, working directly with founder Bill Bright, helping to develop the ministry’s approach to working with high-capacity donors. He was a founding board member of Pro Athletes Outreach, a Christian training ministry to pro athletes and coaches of many sports, and The Christian Embassy, an outreach ministry to government and diplomatic officials in Washington, D.C.

Austin received an undergraduate degree in Banking and Finance from the University of Kentucky. He and his wife, Susie, have three adult sons and 10 grandchildren, and live in Louisville, Ky.

Most Recent Articles

Now Available: Personal Portfolio Tracker & Fund Performance Rankings With Data Through 7-31-19

SMI's Personal Portfolio Tracker as well our monthly Fund Performance Rankings report are now available with mutual fund performance data updated through July 31, 2019.

The Portfolio Tracker: The online Tracker personalizes SMI's fund rankings to your specific situation, making it easier to apply our momentum-based Fund Upgrading strategy to your 401(k), 403(b), or other retirement plan.

Using the Tracker, you can filter the performance data of 20,000+ funds we follow to produce a concise report covering only the funds available in your plan(s). If you're new to the Tracker, watch the introductory video.

We update the Portfolio Tracker with the latest month-end data from the fund research firm Morningstar on the 8th of the new month (except when the 8th falls on a weekend). We wait until the 8th because Morningstar's database is subject to revisions during the first few days of the month. By the 8th, the previous month's performance numbers are reliable.

Fund Performance Rankings (FPR): The FPR report is a PDF file containing the latest performance data — along with SMI's momentum rankings — for more than 1,600 no-load traditional funds and ETFs.

The funds included in the FPR are selected on the basis of asset size, brand familiarity, and brokerage availability.

Check page 2 to learn how to use the FPR report. Page 3 includes an overview of the 70+ risk categories that will help you compare "apples to apples." Page 4 has explanations of the various data-column headings.

Continue Reading

An Upgrading Overview: Easy as 1-2-3

Why Upgrade?

SMI offers two primary investing strategies for “basic” members. They are different in philosophy, the amount of attention they require, and the rate of return expected from each. Our preferred investing strategy is called Fund Upgrading, and is based on the idea that if you are willing to regularly monitor your mutual-fund holdings and replace laggards periodically, you can improve your returns. While Upgrading is relatively low-maintenance, it does require you to check your fund holdings each month and replace funds occasionally. If you don’t wish to do this yourself, a professionally managed version of Upgrading is available.

SMI also offers an investing strategy based on index funds called Just-the-Basics (JtB). JtB requires attention only once per year. The returns expected from JtB are lower over time than what we expect (and have received) from Upgrading. JtB makes the most sense for those in 401(k) plans that lack a sufficient number of quality fund options to make successful Upgrading within the plan possible. Here are the funds and percentage allocations we recommend for our Just-the-Basics indexing strategy.

Continue Reading

Now Available: Personal Portfolio Tracker & Fund Performance Rankings With Data Through 6-30-19

SMI's Personal Portfolio Tracker as well our monthly Fund Performance Rankings report are now available with mutual fund performance data updated through June 30, 2019.

The Portfolio Tracker: The online Tracker personalizes SMI's fund rankings to your specific situation, making it easier to apply our momentum-based Fund Upgrading strategy to your 401(k), 403(b), or other retirement plan.

Using the Tracker, you can filter the performance data of 20,000+ funds we follow to produce a concise report covering only the funds available in your plan(s). If you're new to the Tracker, watch the introductory video.

We update the Portfolio Tracker with month-end data from the fund research firm Morningstar on the 8th of the month (except when the 8th falls on a weekend). Morningstar's database is subject to revisions during the first few days of the month. By the 8th, the performance numbers are reliable.

Fund Performance Rankings (FPR): The FPR report is a PDF file containing month-end performance data — along with SMI's momentum rankings — for more than 1,600 no-load traditional funds and ETFs.

The funds included in the FPR are selected on the basis of asset size, brand familiarity, and brokerage availability.

Check page 2 to learn how to use the FPR report. Page 3 includes an overview of the 70+ risk categories that will help you compare "apples to apples." Page 4 has explanations of the various data-column headings.

Continue Reading

Earth Offers Opportunities That Heaven Doesn’t

One of the more popular worship songs of the early 2000s has a wonderful way of lifting us out of our present circumstances and transporting us to our future home.

I can only imagine what it will be like
When I walk by your side.
I can only imagine what my eyes will see
When Your face is before me.

Surrounded by Your glory, what will my heart feel?
Will I dance for you Jesus or in awe of you be still?
Will I stand in your presence or to my knees will I fall?
Will I sing Hallelujah? Will I be able to speak at all?

I can only imagine. I can only imagine.*

His face before us…surrounded by His glory…awestruck to see Him at long last. What wonderful images!

That moment may seem far off, but it will be upon you before you know it. Some in the SMI family might well experience it firsthand before the next issue is printed. You could be one of those people. I could be one of those people. Life is a vapor, “a mist that appears for a little while and then vanishes” (James 4:14).

As Jonathan Cahn reminds us in The Book of Mysteries, as a follower of Jesus you have opportunities to do things for God now that you won’t have in heaven.

Continue Reading

Giving That Delights the Father’s Heart

As part of SMI’s mission, we want to help you have more so you can give more. This assumes you’re already giving on one level, and we want to help you move up to a higher level. As you strengthen your financial foundation (the topic in this column each month), you will be in a better position to do that.

It’s common for Christians to hear that they should “tithe,” which literally means to give a tenth. That sounds a little ambitious to many new Christians, so they often begin their giving at more modest levels. Unfortunately, too many stay there. Studies have shown for years that the average American church-goer gives roughly 2.5%-3% of his or her income annually.

This stat is an annual disappointment for those who set the tithe as the biblical benchmark for giving. But in my experience, you’ll always be disappointed in the results whenever you challenge Christians beyond their level of maturity. This is true whether you’re talking about a person’s prayer life, willingness to share their faith, interest in Bible study...or giving.

So, rather than berate those whose giving seems meager, I suggest trying to help them mature in the area of managing their finances and their stewardship. They need encouragement in getting their financial houses in order, and also in seeing their Father in heaven as One who has promised — and can be trusted — to meet all their needs.

Continue Reading

Now Available: Personal Portfolio Tracker & Fund Performance Rankings With Data Through 5-31-19

SMI's Personal Portfolio Tracker and our monthly Fund Performance Rankings report are now available with mutual fund performance data through May 31, 2019.

The Portfolio Tracker: The online Tracker personalizes SMI's fund rankings to your specific situation, making it easier to apply our momentum-based Fund Upgrading strategy to your 401(k), 403(b), or other retirement plan.

Using the Tracker, you can filter the performance data of 20,000+ funds we follow to produce a concise report covering only the funds available in your plan(s).

If you're new to the Tracker, watch this introductory video:

Typically, we update the Portfolio Tracker with month-end data from the fund research firm Morningstar on the 8th of the new month (except when the 8th falls on a weekend, as is the case this month). Morningstar's database is subject to revisions during the first few days of the new month. By the 8th, the performance numbers are reliable.

Fund Performance Rankings (FPR): The FPR report is a PDF file containing month-end performance data — along with SMI's momentum rankings — for more than 1,600 no-load traditional funds and ETFs.

The funds included in the FPR are selected on the basis of asset size, brand familiarity, and brokerage availability.

Check page 2 to learn how to use the FPR report. Page 3 includes an overview of the 70+ risk categories that will help you compare "apples to apples." Page 4 has explanations of the various data-column headings.

Continue Reading

Having Time on Your Side Puts You in Control of Risk

Despite significant bear markets in 2000-2002 and 2008, the stock market has returned, on average, about 11% per year over the past 92 years. That’s for a portfolio that is one-half large company stocks and one-half small company stocks (using performance data that goes all the way back to 1926 as published by Ibbotson Associates — an industry leader in compiling market statistics).

This 11% average assumes all dividends were reinvested and ignores the unfortunate fact that in real life Uncle Sam steps in and confiscates a hefty portion of your gains. (If an 11% average is a bit higher than you’ve heard in the past, it’s because small-company stocks have averaged 1.8% per year more than the large-company’s 10.0% annual average.)

Of course, knowing the market has averaged gains of 11% annually since 1926 doesn’t tell you what the return will be this year. Such an average obscures some wild rides along the way (such as periods in the 1930s when 12-month losses were as horrifying as -69% and gains were as breathtaking as +240%). In fact, only about 4% of the time have stocks actually returned 11% (give or take 1%) in a 12-month period.

What the average does tell you, however, is that time is on the side of the long-term investor. The longer you are willing to keep your money in the market, the greater your likelihood of success. According to the Ibboston data, if you owned stocks during any random 12-month period from the past 92 years, you had a 75% chance of making money. How much money?

Study the historical evidence in the table below. The data show (see "Invest for 1 Year" column) you would have had about a 39% probability of earning 20% or more, a 21% chance of making 10%-20%, and a 15% chance of earning <1% up to 10%.

(Note: The figures in the table are based on "rolling periods." After looking at the results from holding periods that began January 1, we then “rolled” to the next month to look at the results if the holding period had begun on February 1. And so on through the year. This gives a better understanding of the extremes one might expect.)


(Click Table to Enlarge)

Notice that while stocks lost money in 25% of the one-year periods, only 11% of the five-year holding periods saw losses, and just 3% of the 10-year periods did. Clearly, the longer you are able to leave your money invested in stocks, the better your chances of ending up with a gain. The table shows that as the holding period increases, the very large gains and losses gradually disappear as the market moves closer to its long-term historical average.

More importantly, by the time you cross the five-year holding period and move out toward a 10-year period, any losses you experience are likely to be minor. While losses over 10-year holding periods have happened before, they’ve been rare — only 3% of the time. This is why SMI has long advised readers to invest in stocks only if they have at least a five-year time horizon, and preferably 10 years or more.

How can you apply this? By aligning your investment expectations accordingly. Begin judging your investment progress in terms of the market’s long-term average annual return (11%) and how much time remains before you will need to start selling your holdings. It may be that, on occasion, your stock portfolio will show far greater growth than 11% annually (as it did in 2017). Don’t expect this to continue indefinitely. Recognize it for what it is — one of those above-average results. Your additional profits will provide you with a cushion in case the market is not as kind another year.

On the other hand, if you finish a year with a loss (as happened last year), don’t despair. You would temporarily be “behind schedule” with respect to the 11% average, but as long as you still have many years remaining in your expected holding period, the odds are in your favor. Hang in there and wait for the stock market to do what it has always done in the past — reward the patient investor.

Some investors are nervous about continuing to invest today given that the end of this long bull market may be approaching. This is an appropriate concern, especially if you’ll need to withdraw money from your stock portfolio during the next 5-10 years. But if your time horizon is at least 10 years, take comfort from the experience of investors faced with the same dilemma at the last bull market peak in October 2007. An investment made then would have earned +7.9% annualized over the following decade, despite falling roughly -50% over the first year and a half! That’s a lower return than the market’s long-term average, but a fairly remarkable figure considering the rough start. (If you don’t have at least a 10-year time horizon, it’s imperative to prioritize risk management over maximizing return.)

That example illustrates why we believe most long-term investor portfolios should contain significant stock allocations. But it also illustrates why investors should take on the higher risks of owning stocks only if they need the higher long-term returns they offer. Because stocks can be so volatile over the short-term, you should invest at the lowest level of stock exposure consistent with achieving your growth and income goals.

Continue Reading

Now Available: Personal Portfolio Tracker & Fund Performance Rankings With Data Through 4-30-19

We've just updated SMI's Personal Portfolio Tracker and our monthly Fund Performance Rankings report with mutual-fund performance data through April 30, 2019.

The Portfolio Tracker: The online Tracker personalizes SMI's fund rankings to your specific situation, making it easier to apply our momentum-based Fund Upgrading strategy to your 401(k), 403(b), or other retirement plan.

The Personal Portfolio Tracker can filter the performance data of 20,000+ funds to produce a concise report covering only the funds available in your plan(s).

If you're new to the Tracker, watch this introductory video:

We update the Portfolio Tracker with month-end performance data from the fund-research firm Morningstar on the 8th of the new month (except when the 8th falls on a weekend). Morningstar's database is subject to revisions during the first few days of the new month. By the 8th, the performance numbers have solidified.

Fund Performance Rankings (FPR): The FPR report is a PDF file containing month-end performance data — along with SMI's momentum rankings — for more than 1,600 no-load traditional funds and ETFs.

The funds included in the FPR are selected on the basis of asset size, brand familiarity, and brokerage availability.

Check page 2 to learn how to use the FPR report. Page 3 includes an overview of the 70+ risk categories that will help you compare "apples to apples." Page 4 has explanations of the various data-column headings.

Continue Reading

The Crucial Role of Diversification in Reducing Risk

In team sports, it’s important to have players who complement each other’s skills. If a baseball team was stocked exclusively with relief pitchers, it would be unlikely to win a single game! The team’s risk of losing goes down as it adds strong starters, top-notch hitters, and solid fielders.
 
Investors would be better off if they built their portfolios the way managers assemble teams — with an eye toward diversifying their talent so they can compete effectively under a variety of conditions.

Sound Mind Investing enters its 30th year this summer, and over those three decades, we’ve seen a wide variety of market environments. We’ve watched the stock market soar in the dot-com bubble of the late-1990s and crumble in the -50% bear markets of 2000-2002 and 2007-2009. We’ve seen a real-estate bubble and subsequent bust. We’ve watched gold and other precious metals slumber for a decade at a time in the 1990s and 2010s, punctuated by a wild rally during the 2000s. And after watching bond returns pour in at a rapid clip as interest rates declined throughout the 1990s and 2000s, we’ve also watched investors starved for income as interest rates were dropped to historic lows and kept there for much of the past decade.

Throughout these ever-changing market conditions, the key to SMI’s success has been keeping our focus on three fundamentals: strategic selection of top-performing funds, broad diversification across many asset classes, and having the self-discipline to stay with our strategies through the market storms. We’ve written frequently in past years on the first and last of these factors; we think it is timely now to devote an article to the importance of the second.

Why timely? Because of the fact that the past decade has been “the worst of times” for diversified portfolios, at least relative to the S&P 500 stock-market index. Investors who have diversified into virtually anything else since this bull market began in 2009 have earned lower relative returns. Meanwhile, the ride higher has been smooth enough (with a few notable exceptions in 2011, 2015-16, and late last year) that investors heavily exposed to equities haven’t incurred much of the normal volatility “cost.”

Now, after a decade of seemingly getting a free ride in an exceptionally performing S&P 500, many investors understandably may be casting a skeptical eye toward diversification. This article is intended to go back to basics and re-establish the value of this crucial investment principle. Unfortunately, it’s those times (such as the present) when investors most need sound diversification that they’re most likely to abandon it.

Our collective memory of horror stories about people who saw their retirement and other investment accounts shrink by 50%, 60%, or more during the past two bear markets is fading. But if you could examine those portfolios, we suspect you’d find that somewhere along the way those investors stopped spreading their risk through diversification and began concentrating their holdings too narrowly. When the market turned, they had no exit strategy and rode their investments down.

Diversification is a key biblical investing principle

We believe that, ultimately, it’s impossible to self-destruct financially if you follow God’s time-tested principles for stewardship. One of those principles is that, to protect against the uncertainties of the future, your investments should be broadly diversified: “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land” (Ecclesiastes 11:2). To diversify is to be honest with yourself and say, “Not only do I not know what the future holds, none of the experts do either.” Since you don’t (and can’t) know the future, you can never know with certainty which investments will turn out most profitably. That’s the rationale for diversifying — spreading out your portfolio into various areas so you won’t be overinvested in any hard-hit areas and you’ll have at least some investments in the most rewarding areas.

What we’re going to do in this article is build a portfolio, piece by piece, and illustrate the effects that diversification has on risk and return. The idea is to pick investments that “march to different drummers.” This means your strategy involves owning a mix of investments, a variety of holdings that tend to respond in different ways to economic events. You will see that as we add various kinds of assets into the mix, the volatility of the portfolio is gradually reduced. Surprisingly, it’s possible to assemble some lower-risk investment combinations that give similar returns over time as higher-risk ones! Such a mix of investments is said to be more “efficient” because it accomplishes the same investment result while taking less risk.

The portfolio we’re constructing here is being built for the sole purpose of illustrating the impact of diversification. Don’t be confused by the fact that it doesn’t precisely match any of SMI’s specific investing strategies. If you follow the SMI strategies, you’ll be getting a healthy dose of diversification, the level of which will vary depending on which (and how many) strategies you include in your portfolio. (For a view of the impact of diversification among specific SMI strategies, see Higher Returns With Less Risk, Re-Examined.)

Building a model diversified portfolio step by step

We’ll launch our imaginary portfolio at the beginning of 1989 (30 years ago) and initially put all our money in mutual funds that invest in small companies experiencing rapid growth. The idea here is that these companies have the best growth prospects, so an investor might reasonably assume they are likely to earn the highest returns.

Our initial portfolio looks like the one shown above. (Note: All returns in this article are based on the average returns of all mutual funds in a given category.) Small-cap-growth funds as a group returned 10.23% annually, on average, during the 30-year period that ended 12/31/18. This is slightly better than the 9.93% turned in by the overall market (as measured by the Wilshire 5000 index) during that period. However, the above-average returns come at a cost: the “relative risk” score is 1.38, meaning that the month-to-month volatility of the portfolio is 38% greater than that of the market taken as a whole. (By definition, the market’s volatility in this calculation is 1.00.)

To reduce our risk, let’s move one-half of our money into growth funds that invest in larger companies such as those found in the S&P 500 stock index (Portfolio B). The average large-growth fund returned 9.09% during the test period. The lower return is not surprising. Since the growth prospects for large companies aren’t as great as smaller companies, we would expect to earn a somewhat lower return as a result.

This change causes the average annual return of our portfolio to fall to 9.76%. (Note: Because portfolios are rebalanced regularly, the 30-year results are not the same as simply averaging the various components.) What we gain, however, is more stability — now the portfolio is only 21% more volatile than the market (relative risk of 1.21). But we can improve on that.

So far, we’ve been concentrating our money in growth-oriented funds. There’s a more conservative approach to picking stocks called “value investing,” and many mutual funds specialize in that area. Value investors are bargain hunters, seeking out companies whose stock is underpriced due to (hopefully) temporary factors. During the 30-year test period, small-company value funds returned 9.95% and large-company value funds returned 8.50%. Further dividing our portfolio so as to include equal allocations to these value-oriented funds (Portfolio C) is a win/win tactic.

For one thing, we further reduce our portfolio’s relative risk — it drops to 1.06, only a little higher than the market overall. We would expect this, since we’re now equally divided among the four primary asset classes that make up the U.S. market. Second, our average annual returns decline only slightly, despite the fact that value funds have lagged growth by a wide margin over the past five years. Over longer periods, value managers have a history of slightly outperforming their growth-oriented rivals, so we’d caution against reading too much into the slight performance decline in this recent period.

The bigger takeaway regarding growth vs. value funds is this: there are periods when growth funds dramatically outdistance value funds and vice versa. We’ve written about some of the similarities between the current market and that of the late 1990s. This is another: just as growth has outperformed value the past five years, the performance gap was even more striking in 1998-1999 when it was +76% for growth funds versus a meager +7% for value funds! Since you can’t know with any degree of certainty when these episodes will occur, the safest (and easiest) thing to do is always be invested in both groups.

Now that we’ve covered the U.S. market, let’s consider adding a foreign flavor. International diversification was long viewed as a strong diversification move, as other country’s economies and markets often moved out of sync with the U.S. However, as the global economy has become more thoroughly integrated, world markets now seem to rise and fall almost in lock-step with ours.

As can be seen in the Portfolio D table, adding a 12% allocation to foreign funds did little to dampen our portfolio’s volatility — the relative risk score barely moved, dropping from 1.06 to 1.04. But, because foreign markets trailed the U.S. in 18 of the 30 years, performance in our portfolio took a slight hit, falling from 9.63% annually to 9.33%. Still, SMI continues to think foreign diversification makes sense and still includes foreign components in most of our main strategies.

In terms of stock-market diversification, SMI’s two original model portfolios (Just-the-Basics and Fund Upgrading) stop here, with a mix of domestic and foreign stock funds. But SMI’s primary defensive strategy, Dynamic Asset Allocation (DAA) includes two additional asset classes: real estate and precious metals.

Looking first at U.S. real estate, it’s worth noting that this asset class has a track record of occasionally zigging when the stock market zags. The Wilshire 5000 index outperformed real estate over the full 30-year period, but real estate was actually the better performer in 17 of the 30 years. Allocating 8% to real-estate funds as shown in Portfolio E resulted in a slight decrease to our risk score and increase to annual performance vs. Portfolio D.

Adding a precious-metals component to our portfolio (see Portfolio F) lowered both risk and returns slightly. Precious metals funds performed rather poorly over the 30-year period as a whole (the period from 2001-2010 was great, but the remaining years not so much). Based purely on past performance, it’s hard to argue that metals are worth adding, at least on a permanent buy-and-hold basis, which is why for many years SMI advised not to bother. But they can be a valuable addition in certain circumstances, which makes them a great addition to DAA where we can own them some of the time without being committed to them all of the time.

We’ve included them here to show that a modest allocation to metals hasn’t been a significant detriment, even during a period that wasn’t especially favorable to them on the whole.

There’s still more that can be done to lower risk, and that involves the most significant diversification move yet — moving some of our money out of invest-by-owning types of mutual funds (the higher-risk kind) into invest-by-lending types of funds (the lower-risk kind).

Portfolio G shows the effects of making slight reductions in each of the equity allocations in order to carve out a 20% position in intermediate-term bonds. Making this change reduces the volatility of our portfolio by about 1/5th (by lowering our relative risk score from 1.01 in Portfolio F to 0.82) while reducing our return only about 1/16th (from 9.32% to 8.72%).

With bonds, it’s always a question of balancing your need for income (longer-term bond funds typically yield more) with your desire for safety (shorter-term bond funds are more stable). SMI’s Bond Upgrading strategy uses a variety of bond types, but for our purposes in this article, using intermediate-term bonds makes sense. Choosing intermediate-term funds is a middle-of-the-road solution that presents something of a “best of both worlds” dynamic. Historically, intermediate-term bonds have been the sweet spot of the bond market, offering most of the extra return provided by longer maturities with only a modest increase in risk.

Review and conclusion

Let’s review. We began our journey with a go-go portfolio made up solely of small-company growth stocks (Portfolio A). Now, we’ve diversified into large companies, value strategies, real estate, precious metals, and bonds (Portfolio G). As a result of these changes, our annual return has declined just under 15% (from 10.2% to 8.7%). But more importantly, our measure of risk has fallen by more than 40% (from 1.38 down to 0.82). The graphs that follow illustrate why, for most investors, that’s a good tradeoff to make.

The first graph (above) shows how a dollar invested in the U.S. market (Wilshire 5000) at the beginning of 1989 would have grown to be worth $17.13 by the end of 2018. The shaded area of the chart shows what the path would have looked like if the portfolio had eliminated all volatility and simply showed the same consistent return, month after month, as it moved toward the $17.13 mark. That’s the ideal — the path we’re trying to move toward with our diversification efforts. That is the path that offers the least volatility, and accordingly, the least emotional stress.

Obviously, the U.S. stock market wasn’t close to that ideal, racing out ahead of the mark during the three major bull markets, then falling dramatically during the two major bears. It’s completely reasonable to expect a third repetition of this dynamic, likely not too many years in the future.

Portfolio A (shown above), with its emphasis on higher returns with small-growth stocks, had an even wilder ride than the overall market. But as we added asset classes on our way to Portfolio G (see series of graphs below), the path gradually moved toward the “ideal” of the smooth line. Yes, the bull and bear markets remained clearly visible, but their impact was less dramatic.

 

By the time we reached our most diversified portfolio (final graph above), we had done a reasonably good job — our total gains were lower than the overall market (as one would expect from a portfolio with a 20% bond allocation), but not by a huge amount. More importantly, the volatility in this portfolio was reduced to a level most investors could live with.

It’s important to note the stock market is likely nearing the end of the current bull cycle. So the smooth line may be at a “high ebb” — the stock market’s average long-term returns rarely have been as strong as they are today. Following the next bear market, it’s probable the smooth line will retreat more than the diversified portfolios shown in each chart.

Again, please understand that we’re not suggesting you should adopt the “one size fits all” allocation scheme shown in Portfolio G. The process of building the retroactive portfolios in this article was done for the specific purpose of illustrating diversification tradeoffs step-by-step.

For real-world investing, we encourage blending the SMI strategies to whatever degree you’re willing to implement them. Because each SMI strategy is unique in how it chooses investments and diversifies against risk, there’s an additional diversification benefit to be gained by adding more strategies to your portfolio.

However, this needs to be balanced against the fact that implementing more strategies requires more effort. So add only what you’re willing to keep up with and implement well. That said, if we were implementing the strategies for you, all of the SMI strategies would be represented in the portfolio, as they all bring something different — and valuable — to the table.

The main point of this exercise is to drive home the point that maintaining a healthy level of diversification in your portfolio can lower risk without substantially hurting your returns. Many investors who suffered grievous losses in past bear markets lost sight of this; many shifted to a “Portfolio A” mentality in pursuit of greater gains and had no safety net when bear markets took them by surprise. Similarly, many investors today are being seduced by the S&P 500’s strong recent returns and are ridding their portfolio of other investments in pursuit of those higher gains.

Mark Twain is often credited with the saying, “History doesn’t repeat itself, but it often rhymes.” We believe the current market is “rhyming” pretty strongly with the late 1990s bull market, and we know how that story ended. To avoid a similar fate, we encourage you to keep your eye on the big picture: How much money do you have invested in each strategy, and by extension, in each of the various asset classes? A well-diversified portfolio is the best defense against future market storms.

Continue Reading

“A Game of Recovery”

In the 2004 film Bobby Jones, Stroke of Genius, there’s a scene in which a young Bobby Jones is pitted against U. S. Open champion Walter Hagen. Although Hagen has an erratic swing and seems error prone, he runs away with the match. Afterward, Hagen confides in Jones: “I don’t always hit the ball straight, but you know what I’ve learned? Three bad shots and one good one still make par. Golf is a game of recovery.”

Continue Reading