To the surprise of many, the post-election rally extended into the new year, with stocks rising mildly in January before pushing forcefully higher in February. While the market leveled out in March, the first quarter as a whole was solidly positive for equity investors who had the courage to stay invested.

SMI investors had plenty to celebrate in the first quarter, as several of SMI’s model portfolios reached new all-time highs. Not surprisingly, the strategies most closely aligned to the stock market’s gains were the ones setting new records: Just-the-Basics, Stock Upgrading, Sector Rotation, and our 50-40-10 portfolio.

It’s a far cry from a year ago, when investors emerged from the first quarter of 2016 battered and bruised from a -10% correction. Now, looking back over the past year, investors in most of SMI’s strategies have earned strong 12-month results that will help buffer any declines from the next market pullback.

It’s just the latest example of what SMI has long preached: it’s exceedingly difficult to predict what the market will do next, so staying invested with a well-diversified portfolio generally makes the most sense.

Just-the-Basics (JtB) & Stock Upgrading

For the first time in quite a while, both JtB and Stock Upgrading got a boost from their foreign stock holdings. Foreign markets were stronger than U.S. stocks, which hasn’t often been the case in recent years. Small-company stocks lagged large companies, which was a reversal from much of 2016. Technology stocks were the belles of the ball, with the technology-heavy NASDAQ index up +10.1% for the quarter. While Just-the-Basics finished slightly ahead of the broad market’s return, Stock Upgrading lagged a bit. As the table shows, Upgrading was helped by its foreign holdings, but both growth categories lagged. Still, while Stock Upgrading has struggled to keep up with the passive indexes during this bull market, it still gained +4.1% for the quarter and is up a solid +15.6% over the past year.

Bond Upgrading

The Federal Reserve hiked interest rates for the third time in March, which followed their second hike only four months prior (December 2016). Their guidance in March was that two additional hikes are likely in 2017. Despite these rate hikes, longer-term yields hardly budged during the first quarter, with the benchmark 10-year Treasury yield actually declining slightly from 2.45% to 2.40%. Given this backdrop, Bond Upgrading’s slight gain for the quarter feels like a win.

As the Fed has gradually shifted from stimulus to tightening (or “normalization,” if you prefer), the impact has been felt by fixed-income investors. Barclay’s U.S. Aggregate Bond Index, which is the broadest measure of the U.S. bond market, has returned a meager +0.3% over the past year. Bond Upgrading has been better, but its +1.6% gain over the past year is barely keeping pace with inflation. This is the downside of rock-bottom interest rates: eventually, bond investors are left with puny returns, and even those can be erased by capital losses if rates rise rapidly enough.

Dynamic Asset Allocation (DAA)

DAA performed exactly as we would have hoped during the first quarter, posting a solid gain of +4.9% that was slightly less than the stock market’s +5.6% gain. When the stock market is up strongly, we normally expect DAA to lag, but having DAA participate in the market’s upside to the extent that it did this quarter is great. Naturally, having two-thirds of DAA’s portfolio allocated to U.S. and Foreign Stocks throughout the quarter was the biggest reason for that stock-like performance.

DAA investors can potentially feel frustrated when they compare their returns to those of the stock market, particularly toward the end of a long bull market. However, it’s worth pointing out that the primary reason DAA was introduced was as a buffer against the type of bond market weakness discussed earlier. Yes, investors who shifted stock money to DAA from other strategies have underperformed recently (though this performance gap will certainly narrow during the next bear market). But those who shifted a portion of their bond money to DAA are starting to recognize the tangible benefit of DAA as bond returns languish.

Sector Rotation (SR)

As noted previously, technology stocks were the stock market’s strongest sector this quarter, and SR was perfectly positioned to capitalize on this trend. SR gained +11.6% in the first quarter, and is up more than +30% in the past 12 months. Perhaps even more shocking is that SR has sustained this type of pace for so long—its annualized rate of return over the past five years is 27.2%! That means a $10,000 investment in SR five years ago would have more than tripled to $33,300.

These types of returns aren’t unprecedented either. SMI’s backtested data on SR goes back more than a quarter-century to 1990, and over that entire period the strategy has averaged a +23% annualized gain. Since SMI launched it as a live monthly strategy nearly 13½ years ago, SR has averaged over +15% per year. We’re unaware of any other strategy that has provided those types of returns. That the system is so easy to understand and implement is icing on the cake.

SR pays for the cost of an SMI membership many times over each year. If you’re a Basic Member (or not an SMI member at all), gaining access to this single strategy more than justifies the cost of membership.


This portfolio refers to the specific blend of SMI strategies—50% DAA, 40% Upgrading, 10% Sector Rotation—detailed in our May 2014 cover article, Higher Returns With Less Risk: The Best Combinations of SMI’s Most Popular Strategies. It’s a great example of the type of diversified portfolio we encourage most SMI readers to consider. As we’ve seen repeatedly in recent years, the markets can shift suddenly between rewarding risk-taking and punishing it, so a blend of higher-risk and lower-risk strategies can help smooth your long-term path and promote the type of emotional stability that is so important to sustained investing success. (Blending multiple strategies adds complexity. Some members might want to use an automated approach.)

Given that half of this portfolio is allocated to the relatively conservative DAA strategy, it’s not surprising that a 50/40/10 portfolio would lag a bit when the stock market is up sharply. Still, to get a +5.2% return in this portfolio when the market is up +5.6% while also getting the downside risk protection that DAA provides is a great risk/return trade-off that we’d take every time in a rising market.

The 50/40/10 model portfolio stood at an all-time high as the first quarter ended. Better still, the diversified nature of this portfolio offers reasonable hope that it will withstand the declines of a sustained correction or bear market significantly better than the broader stock market or other equity-only strategies.

The performance of the three strategies included in the 50-40-10 portfolio will vary significantly over time, but diversifying among them in this way will smooth an investor’s journey considerably. Whether you’re using this specific 50/40/10 blend or a different allocation combination tailored to your specific risk preferences, we think most SMI readers can benefit from combining these strategies in some fashion.