September Client Update

Often, we dive deep into economic and market details without coming up for air. We study our framework: stock trends and valuations, the economy, and the Fed. We fret about interest rates, the war in Europe, and saber-rattling in the Pacific. And certainly, we focus on politics. Emotions run high. Did we miss the start of a new bull market? Or did we get pulled into a bull trap? 

At times like these, when financial emotions run high, I believe it is helpful to review your tests—allowing your research results to give you a sense of calm and trust in your system. 

Our decision-making is based on a simple set of thoroughly researched and tested rules. The beauty of a simple rule set is the known steps are easy to follow. The hard part is ignoring your emotions and following them!

Therefore, I want to show you two tests that a large part of our risk management is based upon:

• Our dividend growth stock sleeve screens for large-cap stocks paying increasing annual dividends over 25 years. Annually, we retest for the top 50 names by stock price growth. Additionally, we screen our top stocks through Inspire Insight to obtain our biblically responsible sleeve.[1] We offer our clients both traditional and BRI investing.
  • Our testing for this article showed that the S&P 500’s annual return dating to 1992 is 11.3%, with a max loss of 51%. In comparison, the results of our tested strategy were a yearly return equaling 10.8% with a max loss of 16%.[2] (Granted, pasted performance nor back-testing guarantees future results. Until we can predict the future, which we will never do, testing and researching are out best options.)

Our 200-day strategy gives up half a percentage point annually to avoid two-thirds of the losses. I believe this is a valuable trade-off.[3] 

• Next, let’s consider our bond strategy, dynamic fixed income. We rotate between high yield bonds, short-term US Treasuries, and 7–10-year US Treasuries based on their 3-month total returns, trading on Fridays, as often as weekly. Our goal is to invest in the position with the most momentum.
  
  Our testing for this article demonstrated that the Bloomberg US Aggregate Bond Index total return since January 2000 was 4.2%, with a maximum loss of 12%, while the results of our tested strategy were a return of 9.6% per year with a maximum loss of 7.5%. For comparison.[4]  (Again, pasted performance nor back-testing guarantees future results. Until we can predict the future, which we will never do, testing and researching are out best options.)

As you consider each investment sleeve, note that their returns compare favorably with the most common stock and bond indexes. However, trading in the way described in this article changes the behavior of these investments. They will no longer look like the market. So, watching the nightly news is not very helpful. 

Also, there will be times when you are out of position. There will be false alarms when you wish you had not traded. But even in these times, we must stick to our system. Because of research and testing, the rules-based system gives us a track to follow, allowing us to support your financial planning goals. 

If you have any questions, please call your Sound Financial advisor. We are here to serve you.

[1] https://inspireinsight.com/

[2] Bloomberg data. S&P 500 Index. December 31, 1991- July 29, 2022. An investor cannot buy or sell an Index. Fee and expenses are not included in this test. These results are for educational purposes only. 

[3] Our testing for this article used Bloomberg data and traded at the market closing price on the last trading day of the month. Buy or hold if the S&P 500 exceeded it 200-day simple moving average or SMA. In other words, the trailing 200-day price average. Sell if the Index was below its 200-day SMA. Fees and expenses are not included. 

[4] Our testing for this article used Bloomberg data and traded at the closing price weekly based on the highest three-month total return, rotating into a corporate high-yield bond index, short-term US Treasuries index, and the 7-10-year US Treasuries index. This is for testing, demonstration, and educational purposes only. Fees and expenses are not included. 

The opinions expressed are those of Sound. The opinions referenced are as of the date of publication and are subject to change without notice. This information is not a recommendation to buy or sell a particular security or to invest in any particular sector. Past performance is not indicative of future results. Forward-looking statements are not guaranteed.

Hypothetical performance results are for informational purposes only to show historical performance had the model portfolio been used over the relevant period of time without any limitations or restrictions. There is no guarantee that hypothetical results can be replicated. These hypothetical, back-tested returns were calculated on a monthly basis for the time periods indicated and presented net of Sound's anticipated management fee of 1.44% per year from the inception date listed to present Back-tested results are hypothetical (do not reflect trading in actual accounts) and are prepared with the benefit of hindsight.  

Sound is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Sound's investment advisory services and fees can be found in its Form ADV Part 2, which is available upon request. SFS-22-35.