Portfolio , TAA Investing


I’ve been asked the question in the title of this post quite a bit lately – why have the IVY timing portfolios been under performing lately? Here I will show the performance of the various portfolios I track over different investment periods and discuss their recent performance.

The table below shows the performance of the various portfolios I track, which I introduced in this post , over different investment periods.

IVY Portfolio sub period returns aug 2013

The question about recent poor performance with regard to the IVY timing models refers to the recent period of the last 4 years, 2009 to 2012. During the last 4 years, definitely a very good bull market period, the IVY timing portfolios have under performed their buy and hold counter parts. Also, note that this only refers to the timing models, the IVY buy and hold portfolios have performed really well over this period. I hope for most of you this comparison of performance only in a bull market period seems misleading. But the nature of markets and many investors today is to focus on very short term horizons to make investment decisions. Humans have always suffered from what is called recency bias but it has become worse in the age of constant financial and social media bombardment. Even 4 years seems like an eternity to some.  And we’re headed to year 5 of under performance. If you can focus on longer time periods you will be way ahead of the majority of investors.

The other common frustration or complaint with the IVY timing models is the generation of false buy and sell signals. This year with the IVY timing 5 asset class portfolio that I track on the blog there have been several false signals, in DBC and VEU in particular, where the model signaled buy or sell in one month, and the very next month signaled the opposite. This usually leads to losses, albeit small, in the overall portfolio. This happens with the model which is meant to capture big moves over long periods of time. For example, the latest buy signals in VTI and IYR have sure lasted a while and have captured most of the bull market in those ETFs. Again, focusing on the long term will put you way ahead of most investors.

When comparing investment strategies and portfolios, at the minimum, we should use a period that encompasses at least one bear market. Looking at the table again you can see that using any period from 5 years and greater, the IVY timing portfolios stack up extremely well.   The 5 year period encompasses the year 2008 bear market. And of course this says nothing about your likely hood of sticking with an investment strategy. For many investors having an automatic risk management strategy, which is what the IVY timing models do,  is the key to sticking with an investment strategy over the long term.

For retirees, who are withdrawing from portfolios every year, protecting against negative returns, i.e. using the IVY timing models, allows the use of higher safe withdrawal rates over what buy and hold would allow. And more importantly those withdrawal rates are standing up better even for the potential worst case year 2000 retiree who has suffered two bear markets since retirement. More on this in a future post.

Now, is it possible that the IVY timing models have become so popular that they have stopped working? I guess I have to say its possible but highly unlikely. Trend following and momentum have proven themselves over long periods across many asset classes. But we won’t really know until the next bear market. That’s when the models really shine and it is what they are built for, risk reduction. So, I’ll reserve further judgement until that time. I also think this is a good reason to have multiple strategies in your portfolio. Maybe use IVY buy and hold and one of the IVY timing models in your asset allocation. Or one of the IVY models in combination with a quantitative strategy or an individual stock picking strategy.

In short, the recent bull market since 2009 is way too short a time period to judge the recent under performance of the IVY timing models. We need to see performance through a full market cycle, bull and bear, to make a fair judgement on the timing models.

P.S. Below I have included two charts from JP Morgan on asset class performance over the last 10 years. Compare the portfolios I track to the Asset Allocation portfolio in the chart which the most representative of a well diversified portfolio.

JPM 10yr equity asset class returns aug 2013

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4 thoughts on “ What’s up with the recent poor performance of IVY?

  1. Paul,

    When the IVY portfolio refers to equally weighting the month’s invested ETFs, is this by value or by number of shares?

    Thanks, Jeff

  2. I am not an expert in the IVY logic, but the equal weighting seems to put more than a realistic weight on commodities (DBC) and real estate (VNQ) and less on stocks (VTI) than the real world. Even when you count VNQ as stocks, it seems to over represent this group.

    I have always liked the logic. It’s the simplistic equal weighting that I don’t like.


    1. Don, I understand your points. The IVY portfolio was designed to replicate the allocations of the big endowment funds, like Harvard and Yale. One of the basic premises of those portfolios was to have broader allocations to ‘real assets’ like real estate and commodities. The allocation is basically 40% stocks, 20% real estate, and 20% commodities.

      Personally, investing in commodities for me is like jabbing myself with a small knife. Its very unpleasant. The only thing I dislike worse is investing in gold. I’ve even blogged about while I’ll never invest in commodities again. This is one reason I have not expanded the IVY beyond my IRA accounts. I’m now wrestling with going with the broader IVY 13 portfolio or changing the weightings of the allocations to more reflect what works for me.

      Whatever allocation we choose, whether it be the IVY one, or some other, it needs to fit with our personalities. As you say, you can like the logic but not agree with the weighting. And that’s OK. You can tweak the weighting to fit your convictions.


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