First, let me confess: I am a big fan of Mebane Faber. Faber is an investment advisor located in California, and the author of one of my favorite research papers of all time on the topic of investing. Anyone can download his paper, which was published in The Journal of Wealth Management, from this link on Social Science Research Network.
Second, let me disclose, that I am not associated with Faber in any way nor do I expect any financial or other benefit from posting this article. I do have a web site that makes it easy to follow Faber's investment strategy in your own portfolio, but you can access my web site for free, without providing your email or any personal info, and currently I don't have any advertisements on the site. I just love this stuff. Everyone should know about it.
The Good Stuff
Now, let's cut to the chase. I'll try to make this digestible for you. Here's a graph that shows a comparison of investment returns - which is what I'm going to talk about.
The Blue Line
If you held only a S&P 500 index fund in your portfolio from 2000-2010, you would have returns similar to the blue line, which shows how $10,000 in 2000 grew into about $11,000 over the subsequent 10 years.
The Gold Line
Next, if you held a diversified portfolio equally divided into S&P 500 index, GSCI commodities index, NAREIT real estate index, EAFE global equity index, and US 10-year Treasury bonds, you would have experienced a return like the gold or brown line - your $10,000 grew into about $17,500.
The Green Line
Lastly, if you had invested in the same diversified portfolio, but rather than holding your investments the whole time, you used Faber's simple buy/sell strategy, you would have experienced a return like the green line - growing your $10,000 into almost $25,000 over the last 10 years. The primary reason for this is that Faber's method avoided the losing markets of 2000-2002 and 2008.
How it Works
Now that I have your attention, what is this buy/sell strategy? It is very simple and mathematical - no subjective human judgment involved. At the end of each month, you evaluate the current price of each of the 5 investments against the 10-month (200-day) simple moving average for that investment. If the current price is above the average, we buy or keep that investment. If the current price is below the average, we sell or avoid that investment, and keep that "bucket" of money in cash or money market funds until the current price goes back above the 10-month average, then we buy back in.
It's that easy. Look at your investments once a month -- NOT more often -- and trade (if needed) based on the current price compared to the average price of the last 10 months. From 1973 through 2010, this strategy has only lost money in 1 year - 2008 - and it lost less than 1% in that year - one of the worst years on record for most markets. The average annual rate of return throughout those 37 years is north of 11%.
Why I Like It
One of the biggest reasons I like this strategy is that it provides a discipline for getting out of falling markets, protecting our assets, and preventing us from "buying and holding" all the way to the bottom like many people did in 2008. The other reason is that it's just easy. I'm sure there are other methods out there to make more money and limit risk. But this has got to be one of the easiest and least time-consuming. I like it because regular people can use it to feel confident about managing their own investments.
I invite discussion here on Texas Enterprise or on my blog, http://blog.pro-folio.net . May you sleep easy at night and spend less time worrying about your portfolio!