The ‘Bridesmaid Strategy’ Beats the Market by 4.8% Per Year

Stock-buyers would have been handsomely rewarded by following a simple strategy over the last 44 years.

I say “simple” because it really couldn’t be much easier to follow …

Look at the performance of seven different asset classes. Then, bet on the prior year’s No. 2 performer for the upcoming year.

It’s called “The Bridesmaid Strategy.” And history shows us time and again that the maid of honor is ready and waiting for her turn to shine as the stock market’s bride.

The approach from a portfolio perspective is to buy last year’s second-best performer (the “Bridesmaid”) — out of seven select asset classes — and hold it in expectation of some momentum carry-over during the next 12 months.

The seven asset classes are:

  Large-cap stocks (S&P 500)

  Small-cap stocks (Russell 2000)

  Foreign stocks (MSCI EAFE)

  Real Estate Investment Trusts or REITs (NAREIT Composite)

  Commodities (S&P/GS Commodity Index)

  Gold (Gold)

  U.S. Treasuries (U.S. 10-year Treasury Bonds).

My colleagues at The Leuthold Group crunched the numbers by measuring the performance of these seven asset classes since 1973.

Their research shows last year’s runner-up is the odds-on favorite to become the next year’s winner …

Source: The Leuthold Group

This Bridesmaid strategy has remarkably beaten the S&P 500 by 4.8% per annum since 1973.

So, which of the seven asset classes is the best bet for 2017?

According to 2016’s returns and Leuthold’s Bridesmaid Single Asset Strategy, the call is for a move into large-cap stocks (S&P 500) — 2016’s second-place finisher — in 2017.

Now, this momentum approach didn’t work last year. Treasuries (2015’s Bridesmaid) were the worst-performing asset class in 2016.

However, Treasuries still generated a positive return. And this preserved a streak of positive annual returns dating back to 2001. Meaning, the strategy dodged the following down years for the S&P 500: -11.9% (2001), -22.1% (2002) and -37% (2008)!

The important point is the long-term results have been impressive …

The Bridesmaid Single Asset Class Portfolio returned an annualized 15% over the last 44 years (vs. the S&P 500’s 10.2%). And the strategy also sported a nice win-rate.

It has matched or exceeded the S&P 500’s returns in 29 of the past 44 years, or 66% of the time.

By the way, this Bridesmaid Strategy also works with “sectors,” too …

Source: The Leuthold Group

Once again, last year’s second-place finisher is next year’s biggest winner over the length of the analysis.

What sector is ripe to outperform the S&P 500 in 2017?

Telecom is the sector Bridesmaid of choice for 2017.

Again, this strategy failed last year. The Health Care sector (2015’s Bridesmaid) was the worst performer of all 11 sectors.

But, it’s hard to argue with the long-term results of the Bridesmaid Sector Rotation Strategy, which shows a striking similarity to the “Single Asset Strategy” mentioned earlier …

A 26-year back-test of the sector strategy generated an annualized return of 13.8% vs. the S&P 500’s 9.9% (3.9% alpha).

It also managed a solid win-rate. The strategy has bested the S&P 500 in 16 of 26 years, or 62% of the time.

As this study shows, buying into an asset class or sector that’s trading near a recent high price — which is psychologically more difficult than buying into price weakness — has often led to better future returns.

ETFs offer an easy way to employ these strategies for 2017 …

For the Bridesmaid Single Asset Strategy, which suggests investing in the S&P 500

The Vanguard S&P 500 ETF (VOO), SPDR S&P 500 ETF (SPY) and iShares Core S&P 500 ETF (IVV) are solid options.

And for the Bridesmaid Sector Strategy, which advocates investing in telecom

The Vanguard Telecommunications Services ETF (VOX), Fidelity MSCI Telecommunication Services ETF (FCOM) and iShares U.S. Telecommunications ETF (IYZ) are sound selections.

Remember, when you’re rebalancing your investment portfolio each year, be sure to keep this “Bridesmaid Strategy” in mind!

Grant Wasylik

P.S. For those of you who haven’t heard of The Leuthold Group, they’re one of the top institutional research firms in the world (I’m honored to have access to their information). Leuthold uses proprietary data to do extensive research on financial markets. Individual investors, financial advisers and institutions can view the firm’s product offerings — mutual funds and separately managed accounts — here.

Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…