I mentioned in the monthly email with the release of the March 2022 reporting deck, subscribe here if you don't receive it - I mentioned that I have implemented Treasury Duration Limiter to all the strategies except the Triad Strategies, and MAX PAIN. The two Triad strategies don't need it, they inherently avoid duration risk. MAX PAIN - I was struggling what to do with this strategy. It does not deliver supercharged results (with supercharged volatility) without going into TMF and EDV which are 3X long duration, and extended duration treasuries. MAX PAIN is a strategy that has benefited from the bond bull market for all these many years, and I am quite concerned for it's performance in the years ahead. Do I leave it and know that MAX volatility and MAX drawdowns are just part of the game, or do I deprecate it and let LT Gain 3X which has stellar returns and stellar risk return metrics be the top dog.

Thoughts?

Welcome the new DMS strategy, Triad+. It is very simple to explain, because it is Triad with the addition of Smart Leverage the way the LT Gain strategies implement it, instead of using IWB, if there is a month end drawdown of 15% or greater, the next time the strategy would go into IWB, instead it goes into SSO. It will hold SSO for as long as Triad would be staying in IWB, if that time period exceeds 12 months, SSO is exited after 12 months to lock in long term gains and the strategy switches to IWB to de-leverage and de-risk the strategy.

The results are really great. No worse Maximum Draw Down from 1980 forward, and a nice improvement in the returns with a slight increase to the risk profile. I have been working on evidence based retirement withdrawal rates, and Triad+ is a mainstay in this model portfolio allocation, it is also a great addition to any portfolio, not just for retirement.

The FactSheet for Triad+, and Triad, are shown below through February 28, 2022.

I am leaving Triad as it is and adding Triad+, instead of replacing changing Triad to include Smart Leverage because I know there are people who will want nothing to do with leverage whatsoever, and that is why Triad remains. Do understand that the amount of leverage with Triad+ is very modest. In a "Fully Invested" allocation, Triad would be 1/6 Gold, 1/3 Russell 1000, 1/3 Russell Mid-Cap Value, and 1/6 in Bonds or Treasuries. By adding Smart Leverage, the 1/3rd position in the Russell 1000 would be 2/3rd via SSO instead of IWB. The "Fully Invested" allocation would then be 1/6, 2/3, 1/3, and 1/6. If we don't consider the Bonds/Treasuries, the equity allocation would max out at 116%. This makes a meaningful addition to the returns, but is a modest amount and does not induce too much volatility or risk to the strategy.

Allocate Smartly is a site that I follow their blog, they track over 60 Tactical Asset Allocation Strategies, I enjoy reading what they put out on the blog. They recently put out a post comparing the average of all the strategies that they follow over all bear markets and major market pullbacks and compare that average to the S&P 500 and a 60/40 allocation.

Note that Allocate Smartly does not track any strategies which use leverage, they are all unleveraged all of the time.

I had thought of doing a similar post before for the DMS strategies, so now seemed like the time.

The Allocate Smartly findings are not a surprise to somebody who has dug into TAA strategies, the end result is that the when looking at the shorter term pullbacks, the strategies may or may not do better than the broader market or 60/40, however, during the longer bear markets is were TAA really shines and saves an investor from major drawdowns.

Many DMS strategies incorporate limited use of leverage, and MAX PAIN is always 3X leveraged, and you can see the effects of this in the charts below.


The charts below are all logarithmic with a starting balance of $10,000.

It is easy to see why people like allocations that are rebalanced annual. Whether you invest in a 60/40 allocation, All Weather, Permanent Portfolio, Golden Butterfly or others - the appeal is near market returns over time without the highs and lows. We prefer technical asset allocation which generally may have a change of investment at the end of any given month. Are we rewarded for the more 'fiddling' with our investments than those who invest in an allocation that is only rebalanced annually? Let's take a look.

I ran results on PortfolioVisualizer for Golden Butterfly, 60/40, and Permanent Portfolio, results here. From 1992, as far back as I could get the results, through Jan 2022, Golden Butterfly has the best combination of returns and maximum drawdown. Because Golden Butterfly took the Gold out of these three, I will compare it to the DMS strategies which never use any leverage, that is Triad and The Russell OG. These two DMS strategies may have a change of investment at the end of every month, Golden Butterfly is a buy and hold that is rebalanced annually. How do they compare?

What a staggering difference in returns from May 1992 through January 2022. Both Triad and The Russell OG produce superior returns, and I also show a ½ Triad and ½ The Russell OG. For both DMS Strategies and the combination, the CAGR is higher, Sortino is higher, Drawdown for Triad is significantly lower, and only a bit higher for The Russell OG, Ulcer Index is lower for Triad and a noticeably higher for The Russell OG, Beta's are all similar, Alpha much higher for DMS. The stats on the Combo are pretty awesome.

While the convenience of a buy and hold strategies that is rebalanced every year sounds appealing, the superior results of these two never-leveraged strategies seems worth an extra few minutes per month to make any necessary trades.

The S&P is currently down just more than 4% mid month January 2022, that got me curious how often "big" negative months occur in the S&P 500 so I created two histogram charts to show the frequency of historical monthly total returns.

Looking at the first histogram from 1950 through January MTD 2022, you can see that there were 48 months with returns between -3.73% and -5.73%, out of a total of 865 months. If we look at this column and all of the ones to the left, there are a total of 48+26+18+4+1+1+1+1=100 months. 100/865=11.6% of months have had returns of -3.73% or worse.

When looking at the 1980 through January MTD 2022 we get almost identical results, 11.3% of months had returns of -3.73% or worse.

Roughly speaking, this size monthly negative return happens around 1 in every 10 months. January isn't finished and we don't know where it will end up - this was an exercise to see how often large negative months occur.

An investor in DMS strategies asked if I could quantify the effects more gains taxed as long term gains with LT Gain 2X compared to The Russell and the impacts over time.
This investor is saddled with 41% long term and 24% short term tax rates so I used those in the calculations.

• Looking at The Russell and LT Gain 2X, not accounting for any taxes, The Russell goes from 1980 through 2021 with a 5.2% higher ending balance than LT Gain 2X.
• If $1,000 had been invested in The Russell from 1980 through 2021 they would have $3,407,664 at the end. Taxes were taken out at the end of every December, including 2021.
• If $1,000 had been invested in LT Gain 2X from 1980 through 2021 they would have $4,914,314 at the end. An increase of 44% ending account balance due to the LT Gain 2X strategy having more long term gains.
• The 44% higher ending balance is over and above the 5.2% lower balance originally in looking at the untaxed strategy returns. Roughly 50% better returns because of the increased long term gains.

For this exercise, current tax rates were extended back in time, this would have been a research project if I tried to figure out what that long and short term tax rates were each year back to 1980, this is more to give an idea as to the benefit of having more gains realized as long term, not an exact calculation on what the actual taxes would have been.


CAGR:

• The Russell 20.44% untaxed
• LT Gain 2X 20.29% untaxed

• The Russell 14.89% taxed
• LT Gain 2X 15.90% taxed

• The Russell -27.15% Change in untaxed CAGR to taxed CAGR
• LT Gain 2X -21.63% Change in untaxed CAGR to taxed CAGR

The increased amount of gains realized as long term makes a profound difference in the ending account balance over time.

The first chart below is the baseline showing how The Russell and LT Gain 2X performed without accounting for any taxes.

This chart shows the impacts of the 41% short term and 24% long term tax rates.