This is one of my favorite takes of the last week. It was tweeted on Friday, which held two distinctions: (1) It capped off a helluva scary week, and (2) It just so happened to be month-end, when many TAA strategies trade by default.
The managers I envy the LEAST today are those who run monthly trend strategies with on/off signals today.
For many of them this decision has the potential to define their entire careers. And all on the roll of the dice on one day.
& every one praying for armageddon next week.
— Adam Butler (@GestaltU) February 28, 2020
I couldn’t agree more. Imagine making a single risk on/risk off decision with your entire portfolio in the face of Armageddon. That’s how a lot of strategies trade, including some we track. I shudder to think.
There are too many unknowns at this moment in time for anyone with a reasonably-sized portfolio to be 100% confident in either the short-term bull or bear case. That’s always true to some degree, but it’s doubly true now.
A portfolio should be thought of as being on a spectrum, moving back and forth between more or less risk depending on market conditions, but rarely if ever reaching the extremes.
The solution is simple:
- Diversify across strategies. By diversifying across strategies, we implicitly diversify across approaches, timeframes, and assets, and reduce the likelihood of extreme allocations.
- Diversify across trading days. Most TAA strategies trade once per month. By instead tranching across multiple days of the month, we reduce the importance of any single moment in time determining our entire portfolio allocation (read more).
- Blend tactical and buy & hold allocations to keep the potential for short-term underperformance to tolerable levels (read more).
- Our site was specifically built to solve for all three. An investor should never have to make do or die decisions with their wealth.
Pro tip: If you’re on Twitter and don’t follow @GestaltU (Adam Butler), do so now. He’s smart and you won’t regret it.
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