Performance Review
The table below shows performance figures for 2025 through last Friday (Dec 12) for two accounts following Focused 15 model portfolios, along with several alternative investments. The account following the Main model portfolio, shown in the gold box, returned 14.0 percent. A measure of risk, defined as the variability of weekly returns and indicated by the standard deviation, was 5.9 percent. The ratio of return to risk for the year to date is therefore 2.4.
Return indicates how your account grows over time, and higher is better. The 14.0 percent return is similar to that of the Dow Jones Industrial Average ETF, DIA, and the Schwab Balanced Fund with a 60 percent stock and 40 percent bond allocation, SWBGX. This result is generally consistent with expectations for the Main Focused 15 portfolio.
The variability of returns indicates how smoothly the account grows over time. Lower variability is better. Although variability is more abstract than return, it is useful for comparisons across investments. The 5.9 percent variability for the Main model portfolio is less than half that of the DJIA ETF and slightly lower than that of the most conservative Schwab fund, which has a 40 percent stock and 60 percent bond mix, SWCGX. It is lower than all of the alternative investments shown.
|
Year to
date through December 12, 2025 |
Return |
Variability (standard deviation of returns) |
Return / Variability |
|
Main
Model portfolio |
14.0% |
5.9% |
2.4 |
|
Main +1
Model Portfolio |
15.6% |
na |
na |
|
DJIA ETF
“DIA” |
14.1% |
16.2% |
0.9 |
|
SP500
ETF “IVV” |
16.4% |
17.3% |
0.9 |
|
NASDAQ
ET “QQQ” |
20.0% |
21.9% |
0.9 |
|
40%
Stock / 60% Bond Mix “SWCGX” |
9.9% |
6.7% |
1.5 |
|
60%
Stock / 40% Bond Mix “SWBGX” |
14.4% |
8.5% |
1.7 |
|
80%
Stock / 20% Bond Mix “SWCHGX” |
17.1% |
10.0% |
1.7 |
The combination of strong returns and low variability results in a high return-to-variability ratio of 2.4, which is significantly higher than the alternatives listed. This indicates that the Focused 15 portfolios have delivered high returns for the level of variability incurred.
This information is useful for several reasons. First,
it suggests that the portfolios have been successful in avoiding losses while
participating in stock market gains, which is the objective of the trading
process.
Second, the high ratio suggests that the investment
process may continue to reduce losses going forward.
Third, the lower level of variability allows investors
to more comfortably use a more aggressive model portfolio than they otherwise
would. By following a more aggressive Focused 15 model portfolio one can get
higher returns and still have a level of variability that is comparable to the
Schwab balanced funds, which are often used for retirement accounts.
One account I monitor uses a model portfolio that is always
one step more aggressive than whatever model portfolio is designated as the Main
portfolio. The aggressiveness of this account can be described as “Main +1.” That
account returned 15.6 percent for the year-to-date period, which gives it
higher returns than the fund “SWBGX.” Unfortunately, comparable variability-related
data are not available for this account.
Selecting a Level of Aggressiveness
For those with a relatively short investment horizon,
the Main model portfolio, which I personally use, may be appropriate. For those
with longer investment horizons, such as investors in their 20s and 30s, more
aggressive portfolios that are always one or two steps more aggressive than the
Main model portfolio may be appropriate. See page 3 of the weekly report for return
and variability information for the full range of model portfolios.
Over the course of 2026, the gold box representing the
Main model portfolio may shift to take advantage of the market dynamics
described below. You only need to remember how many steps above or below the
Main model portfolio you have selected as your long-term position.
2026 Outlook
I do not usually provide a 12-month outlook, but 2026
is likely to be unusual. The information below does not require you to change
anything about how your account is managed, other than continuing to follow
your selected level of aggressiveness (e.g., Main +1, or Main +2).
If historical precedents over the past 100 years
continue to apply, the stock market is likely to experience a boom-and-bust
pattern over the next 12 months. There have been 13 such episodes since 1935,
with the most recent occurring in 2017 and 2018. One of the largest episodes in
recent memory was in 1987. The DJIA peaked in August of 1987 following a 54
percent gain over the prior 12 months. After this market boom, the DJIA experienced
a 35 percent loss over the following four months.
The next boom is likely to begin over the next several
weeks and will reach its peak in approximately May of 2026. Depending on the
strength of the boom, I may shift the Main model portfolio to a more aggressive
model portfolio.
Research on Physics-based Drivers of Investor Sentiment
The forecast above is based on over 90 years of long-term
cycles in stock market performance and their relationship to solar energy
variation. A paper describing this research is available on a preprint service
at the following location.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5482086
Feel free to download the report and to forward the
link to anyone who might find the information useful.
To date, I have not changed the investment process
based on this research. The research findings however, make implementing the
target weights less stressful. They help us identify when the market is
performing as expected and when it may be vulnerable to declines if economic
conditions require a rapid adjustment in stock prices. At times, these periods
of naturally occurring vulnerability can be anticipated several months in
advance. The potential 2026 boom-and-bust episode is one such case.
Historically, the Focused 15 algorithms have been
successful in participating in market booms. Busts, however, tend to begin
abruptly, and the algorithms typically take a few weeks to adapt to the rapid
shift toward negative investor sentiment. At this time, we cannot know how
strong the boom might be or how severe a subsequent bust could become. The
magnitude depends on economic and market conditions at the time. The timing of
periods of vulnerability, however, is driven by naturally occurring cycles of
investor sentiment described in the paper. As a result, we have a reasonably
good sense of when the market is most vulnerable to a downturn.
We will not make a change based only on this research.
Any boom will need to be identified and confirmed by the Market Resilience Indexes
(MRI). As of this writing, the Macro MRI is shifting to a more positive trend,
which could indicate the beginning of the boom.
If historical precedents hold, market returns are
likely to strengthen in January or February and continue through the spring,
with a potential peak in late May or early June. June and July are likely to be
periods of heightened vulnerability to a market decline. If economic conditions
remain positive, the market may recover quickly, followed by a final vulnerable
period toward the end of the year.
With this perspective, I currently expect to make these
changes once it is clear that the boom period has begun:
1.
Increase aggressiveness of accounts for the several
months prior to the peak, beginning at the end of 2025 or early 2026.
2.
End that period of aggressiveness just before the
expected peak of naturally occurring resilience, roughly mid-May.
3.
Increase aggressiveness in July.
4.
Decrease in late December or early January 2027
You do not need to take any unusual action during these
shifts. Simply continue to follow your selected level of aggressiveness relative
to the Main model portfolio (e.g., Main +1, Main +2). Also watch for a change in
the Box #2 Cash level, which may change if the markets appear to be making an
abrupt decline close to an expected period of naturally occurring vulnerability.
Again, please let me know if you would like to have a
call to discuss these issues.
The table below shows the 13 boom-and-bust episodes since
1935.
