Retirement portfolios 2012 performance (IVY, Permanent, 60/40)

All the year end results are in so its time to update the performance of the retirement portfolios that I track. I’ll quickly review 2012 performance for the IVY portfolios, the Permanent Portfolio, and the traditional 60% /40% stock-bond portfolio. Then I’ll put them in context of their long run performance which adds some key insights.

2012 was a great year for stocks so portfolios dominated by stocks did very well. The SP500 finished the year up 16% which lead to a great year for the 60/40 portfolio with a performance of 11.5%. The IVY buy and hold portfolio did even better with a 12.02% return driven by US stocks, Foreign Stocks, and Real Estate making up 60% of the allocation. Next up was the Permanent Portfolio with a steady return of 6.8%. Having only a 25% allocation to stocks hurts in bullish stock years. You can read about all the details of the Permanent Portfolio’s 2012 performance here. Finally, the IVY Timing Portfolio brought up the rear with a 1.95% return. Whoa! This all makes perfect sense except the discrepancy between the IVY buy and hold and timing portfolios. Lets dive into that in more detail.

The IVY timing portfolio is a trend following system based on long term moving averages. In order to work strong consistent trends need to be in place in the invested asset classes, whether those trends be up or down. There is also one very important point to note: the IVY timing model will never outperform the buy and hold version to the upside. Never. The best it can do is match upside performance. Its strength lies in avoiding downside performance. Now, lets look at the 2012 performance of each of the IVY portfolio asset classes in detail, buy and hold vs timing.

So, 2012 had strong trends in VNQ and IEF which caused IVY timing to be fully invested the entire year. But, there was a lot of thrashing in VEU and DBC, i.e a lot of false trend signals Look back at the 2012 charts for these ETFs vs the 200 day SMA to see what I’m talking about. Due to these false signals in these two ETFs the IVY timing under performed its buy and hold cousin by a lot. The important question now is does this matter in the long run? Here is where we need to put all these portfolio returns in a historical context.

First, lets look at updated dollar returns for these portfolios going back to 1973, the earliest year we have data for the IVY and Permanent portfolios. The chart below shows the dollar returns for the various portfolios, i.e. a $1 invested in each portfolio in 1973 is now worth X at the end of 2012.

Over the long term, IVY timing still dominates the total returns. IVY timing turned $1 invested in 1973 into $57 versus $45 for IVY buy and hold, $38 for the SP500, $36 for the Permanent Portfolio, and $28.90 for the 60/40 portfolio. The even more important point to remember is that out performance for any assets class is not consistent over time. Sometimes a strategy, even a long term superior one, can under perform for a certain number of years. Look at the chart below that shows rolling 3 year returns for the various strategies.

This chart clearly shows that a strategy’s performance varies quite a bit over time. You can see the under performance of the IVY timing portfolio over the last 3 years, maybe similar to the early 90s. This is all perfectly normal. Does anyone remember all the talk of the death of value investing in the late 90s? There has been quite a few articles recently, see here, on the potential death of trend following. This doesn’t mean that a certain strategy doesn’t work anymore. Actually, what tends to happen is that all this talk of the death of trend following sets the stage for the next out performance as people abandon the strategy. The key take away here is that you need to stay committed to a strategy for at least 5 years and do not just go with one strategy, pick at least two. This will diversify your portfolio and help you get through periods of under performance.

Lastly, below are the summary statistics from 1973 to 2012 for the various retirement portfolios.

As the table shows, the IVY portfolios and the Permanent portfolios are still the best for retirees. Higher returns at lower volatility increase safe withdrawal rates (SWR) and maybe more importantly increase the sleep factor (your ability to sleep at night with a certain investment allocation) and the odds you will stick with a certain strategy.