Recent asset allocation articles (tactical or otherwise) that you might have missed:
When Simplicity Met Fragility (Newfound Research)
Yes, yes, yes. A must read. “Research suggests that simple heuristics are often far more robust than more complicated, theoretically optimal solutions. Taken too far, we believe simplicity can actually introduce significant fragility into an investment process.”
Lots of nuggets here, but I think the most important is where the Corey shows how an insignificant degree of noise in asset returns can lead to radically different results for simple TF strategies. This is a central concept behind our site and something we try to suss out or combat by: combining multiple strategies, showing results across alternate trading days, portfolio tranching, conforming strategies to a common set of assets, etc.
What is the Correct Benchmark for Trend-Following? (Alpha Architect)
We benchmark strategies on this site to the traditional 60/40. It’s a simple approach that investors are accustomed to seeing, but admittedly, it’s not as helpful as it could be. In this post Jack discusses instead benchmarking strategies to a static portfolio weighted by the strategy’s average asset allocation.
This approach isolates just the impact of market timing, and strips out any benefit from the particular assets chosen for the universe (a source of “outperformance” which may not hold in the future, and thus, should be discounted). We completely agree and have had this on our development list to add to the site. More to follow.
Is Math in Portfolio Construction Bad? (Investment Idiocy)
Great post from Rob in defense of portfolio optimization techniques (i.e. min var, risk parity, etc.) over simple techniques like equal-weighting. The message is similar in spirit to ReSolve’s recent post: it all boils down to understanding your data, and choosing the right optimization method for the unique characteristics of the universe traded.
P.S. Rob, we fixed your title. You’re welcome. =)
The Yield is Gravity (Newfound Research) [dead link]
Quants who take such an unbiased clinical look at their own periods of struggling performance immediately earn huge respect points in our book. We all go through rough patches. Most of us just don’t have the cajones to diagnose to them publicly.
Asset Diversification in a Flat World (Alpha Architect)
Good common sense post. We all know that correlations across the world are on the rise. In the short-term, that’s bad for protecting against market crashes. But in the long-term, there’s still plenty of variation across asset classes that benefits from diversification.
A very Larry Swedroe quote: “While the increase in global integration has somewhat reduced the benefits of global diversification, the benefits are still large. In other words, while it may not be a free, three-course lunch, it’s still a hearty meal. And because this lunch doesn’t come with any calories, the logical conclusion remains the same as it has always been: You should eat as much of it as you can.”
Missing the Best or Worst Market Days (Alvarez Quant Trading)
Good reminder why those ubiquitous “here’s what happens if you miss the best X days in the market” analyses make a poor argument for not timing the market. Cesar flips the question and looks at how an investor would have performed who missed the worst X days in the market. Naturally, it tells the opposite story: market timing is great. Cesar concludes: “At the end of the day both ideas should be dropped. They show you the obvious.”
Other recent links that you might have missed:
- Measuring the Benefit of Diversification (Newfound Research)
- A Carry-Trend-Hedge Approach to Duration Timing (Newfound Research)
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