I'm going to put a disclaimer here at the top of this article. What follows is a deep dive into the backtested data that informed the changes we made to Stock Upgrading at the beginning of 2021. We don't feel it's particularly important that SMI members dig through this information, but we've had some requests for it. So if you're curious, here it is. And if you're not, this is one post you have our permission to skip!

Over the past several years, one of the strongest arguments in favor of owning stocks — despite their soaring valuations — has been the TINA explanation: “There is no alternative.” In other words, in a world in which central bankers have pushed interest rates so low (and held them there), the only hope investors have had of earning reasonable returns has been to increase risk by owning more stocks.

The TINA rationale has been at the forefront of the huge surge in stock prices since last March’s lows. But two recent events have started to change the narrative:

1. The announcement of the COVID vaccines in November quickly convinced investors that higher economic growth (from extremely depressed lockdown levels) would be returning sooner than expected.
    
2. The election results put the new Democratic leadership in a position to follow through on their stated goals of expanding the Federal government’s borrow-and-spend policies.

These developments had an immediate and powerful impact on bond yields, sending longer-term interest rates markedly higher. The 10-year Treasury bond yield was just 0.78% on November 4, the day after Election Day. In just over three months, it has shot up to 1.50% and shows no signs of slowing its ascent. If anything, the pace of the increase has been accelerating.

SMI emphasizes the importance of having a long-term view when it comes to executing your investment strategy. We typically define that as having, at a minimum, a 10-year time frame in mind. Why 10 years? Because that’s long enough for the annual ups and downs in the market to settle out and allow the upward bias of the market (due to the strength of the U.S. economy) to assert itself.

(A five-year period is the minimum we would recommend for investing in the stock market at all. A 10-year period — or longer — is required, in our view, to consider oneself a long-term investor.)

To illustrate this for you, we’ve researched the results of a monthly dollar-cost-averaging (DCA) program over each of the 10-year periods starting with 1950-1959 and moving through the decades up through the end of last year. We’ll share those in a moment, but first a DCA primer for new readers.

Many investors find bonds to be puzzling, at least at first. Fortunately, a lot of bond “complexity” can be boiled down to this simple rule: Bond prices always move opposite to bond yields. This means that when yields (i.e., interest rates) are rising, bond prices fall — and vice versa.

As this month’s Editorial explains, expectations for future economic growth (along with potentially higher inflation) began rising following the positive vaccine news in November and the election results. Longer-term interest rates began moving higher immediately. The 10-year Treasury yield, for example, rose from 0.78% in November 2020 to 1.50% by the end of February 2021. That significant jump in a little over three months understandably has investors wondering how high will rates go?

There is one change to the DAA lineup for March. Read on for the full details.

DAA is a core portfolio strategy that is designed to help SMI readers share in some of a bull market’s gains while minimizing (or even preventing) losses during bear markets. The strategy involves using exchange-traded funds to rotate among six asset classes, holding three at any one time.

DAA is a defensive, low-volatility strategy that nonetheless has generated impressive back-tested results when evaluated over full market cycles, demonstrating the power of "winning by not losing."

The recommended categories/ETFs for March are:

There is no change to the official SR recommendation for March. Read on for the details.

Sector Rotation is a high-risk/high-volatility strategy. While its peaks and valleys have been more extreme than SMI's other strategies, it has generated especially impressive long-term returns, as discussed in Sector Rotation is Risky, But Highly Rewarding.

Every day brings new evidence of market exuberance. I mentioned a few of these examples in the February SMI newsletter editorial, The Wisdom to Show Restraint, but those are just the tip of the iceberg.

There are countless others we could point to: the incredible proliferation of "SPACs" (this generation's version of the IPO craze from the late-1990s), the huge volume of trading in the market's most speculative "penny" and "over-the-counter" stocks (those too small to be listed on the major stock exchanges), and so on.

As we explained in SMI's January cover article, Fund Upgrading Gets Upgraded: Adapting to an Ever-Changing Market Landscape, this flagship strategy got a bit of an overhaul going into 2021. Naturally we're all watching it closely to see how these changes are performing.