Six recent asset allocation articles (tactical or otherwise) that you might have missed:
1. Right Now It’s KDA…Asset Allocation (QuantStrat TradeR)
Here Ilya shares a TAA strategy that combines elements of two popular strategies that we track: Keller & Keuning’s Defensive Asset Allocation and ReSolve’s Adaptive Asset Allocation. Expect to see a test of Ilya’s KDA coming to our site shortly.
2. No Pain, No Premium (Newfound Research)
Required knowledge for all investors, tactical or otherwise: without pain, there is no premium. I.e. “We cannot eliminate risk from a portfolio, without eliminating return as well. Therefore, we should seek to eliminate uncompensated risks while diversifying across compensated ones”. This post lays out this core idea behind Newfound’s work and you should read it now.
3. Two Risks That Ruin Long-Run Investing (Two Centuries Investments)
Key quote: “I define risk as anything that causes investors to take actions that destroy value of their portfolios”.
This spin on risk makes a lot of sense in the real world. We try to impress on readers the importance of looking at returns relative to volatility, drawdowns, etc. (ex. Sharpe Ratio and UPI) for exactly this reason: volatility and losses (regardless of long-term returns) cause investors to take precisely the wrong action at the wrong time, usually by selling low. Multi-decade backtests are great, but this 30,000 foot view doesn’t show the month in month out drama that makes investors abandon their best laid plans.
4. SPY TLT Rotation (Alvarez Quant Trading)
Cesar digs into the classic “SPY/TLT Rotation” strategy, where an investor overweights either the US stock market (SPY) or US Treasuries (TLT) based on recent strength. This concept is similar in spirit to a number of strategies that we track (Lewis Glenn’s Paired Switching comes to mind).
As Cesar discusses, caution is warranted as much of the success of these strategies is based on falling interest rates over the last four decades providing a strong tailwind for long-duration Treasuries like TLT. They are mathematically guaranteed not to fare so well in coming decades (read more). We model this risk for every strategy in our members area. A simple solution might be to provide a third option, cash or short-duration bonds, when both equites and Treasuries are showing weakness.
5. Tightening the Uncertain Payout of Trend-Following (Newfound Research)
An outside-the-box post from Newfound demonstrating the importance of mixing multiple trading strategies together, rather than selecting just a single “best” strategy (a task our site was specifically built to tackle).
A key quote: “A backtest of an individual trend-following model can look the best over a given time period, but there are many factors that play into whether that performance will be valid going forward. The assets have to behave similarly…and an investor has to hold the investment for a long enough time to weather short-term underperformance. A multi-model approach can address both of these.”
6. Drawdowns and Portfolio Longevity (Newfound Research)
The order of returns, or “sequence risk”, matters a lot when in the distribution (withdrawal) phase of our investing life. For the recently retired, significant drawdowns early in retirement can have a major impact on the probability of retirement success. Yet another reason to consider a multi-model approach (see #5).
Other recent links that you might have missed:
- Portfolio Construction Through Handcrafting: Empirical Tests (Rob Carver)
- Drawdown Control (Systemic Risk and Systematic Value)
- Trend: Convexity & Premium (Newfound Research)
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