Published: February 24, 2010
My friend Mebane Faber stumbled onto the ultimate system for
a volatile market.
- It only takes you two hours a year (10 minutes a month)
- It's only had one losing year since it started in 1973 (a
tiny 0.59% loss in 2008).
- And it's outperformed the stock market... with substantially
less volatility than stocks.
Meb has just updated his numbers for 2009. The results over
the last decade are downright extraordinary...
If you had invested $10,000 in Meb's simple system in 2000, you
would have gotten back nearly $26,000. Meanwhile, $10,000
invested in the stock market would have shrunk to less than
The secret, as you can see, is not losing money in the down
Just looking at the last decade, you can see how much less
volatile this system is than the overall stock market...
The stock market's annual return was about -1% per year. But the
actual returns were usually way higher or way lower than that.
Compare that to Meb's system, where the average annual return
was about 10% a year. You can see the annual returns were always
within about 10 percentage points of that average.
Here's how Meb's system works... There are only five holdings.
And there are two modes: in and out.
The five asset classes are: U.S. stocks, foreign stocks, bonds,
commodities, and real estate stocks. Your only decision each
month is whether you own a fund that tracks that investment, or
You want to be in when the asset is going up. And you want to be
out when the asset is going down. This idea could hardly be
dumber... But it actually works.
First, you divide your portfolio into five
pieces. You dedicate each piece to one of these five asset
classes... and you are either in or out of each fund every
month. So you might be only 40% invested one month, with the
rest in cash (earning interest at the bank).
To figure out whether you're in or out, you just have to do some
simple math. You can keep track of it by hand with a pencil and
paper. You don't need a computer -- or even a calculator.
Once a month, get the last 10 monthly closing prices of the five
funds. You can get them from a service like Yahoo Finance. Then
calculate the 10-month average.
If the fund is above its 10-month average, keep 20% of your
money in it. If the fund is below its 10-month average, sell the
fund and move to cash.
Repeat the next month, rebalancing existing positions back to
20% each if they're buys. Never put more than 20% in a fund. For
example, if only three are in buy mode, then you're 60% invested
with 40% in cash in.
Remember, with the exception of a tiny loss in 2008, Meb's
system has never lost money, and it has delivered double-digit
compound annual gains.
It's actually delivered the investment "holy grail"... higher
returns with lower volatility... all in a portfolio of just five
things that you only have to look at a dozen times a year.
-- Dr. Steve Sjuggerud
Note: This article originally appeared on