What caught my eye this week.
The first time you hear a permabear warning of an imminent stock market meltdown – if not of total economic ruin – you’re nervous, and yet also intrigued.
How lucky you were to come across this inside scoop from such an authority!
Perhaps you take even action on the back of it.
The second time you are (usually) somewhat wary. After all, the first time (nearly always) turned out to be a false alarm.
The third time you hear the same doomster warning of a market meltdown just before stocks leg up another 10%, you think: “This guy is an idiot”.
The tenth time you hear him repeat the warning – on CNBC and Bloomberg and in the FT no less – you find a grudging new respect: “He’s no Cassandra, but he’s clearly no idiot. He must know what he’s doing.”
The bare minimum
The persistent popularity and weight given to the views of high-profile permabears is by turns infuriating and confounding to those of us making our way in the slow and less-than-sensational lane.
Eventually we learn that bears get a lot of coverage because bad news always sounds smarter.1
But this still doesn’t explain how easily permabears are forgiven their dire records. However smart they sounded back then, they were still mostly wrong after all.
Well to that point, commentator Sam Ro did everyone a favour with a simple yet convincing insight this week. Writing on his blog TKer, Ro says:
I’ve noticed a pattern in how retail investors rationalize their financial performance after embracing an incorrect bearish view.
It goes something like this: “Well, at least I didn’t lose money.“
This is a simple but brilliant observation.
Retail investors don’t short the market when they get bearish like many pros. They just take risk-off. Either by selling everything or by selling a bit.
If the market goes down, they’re happier than if they took no action.
But if – as it usually does – the market goes up, then they are both ill-equipped and indisposed to calculate the opportunity cost of not maximising their gains by instead taking bear-inspired evasive action.
Ro sums it up with this graphic:
I am sure he’s on to something with this.
But I won’t steal any more of his thunder – please go read the full piece for Sam’s explanation.
Bear necessities
Seen through this lens, other aspects of permabear punditry tactics make more sense, too.
For instance, it explains why permabears are so consistently apocalyptic. They might as well be, because they win so long as their followers do not lose money.
(Remember, their followers are of course missing out on gains. This is huge over time! But our assumption here is it takes a long time – if ever – before the followers get wind of this).
For a bear, being occasionally nuanced about market hunches doesn’t cut much ice.
Firstly it’s only one step up from the most respectable position – which is of course that nobody knows anything, basically.
Hardly something to get you the label Dr Doom.
It’s also ineffective because it fails to cut through the noise. You won’t get labeled – let alone acclaimed – because you won’t be heard or remembered.
For instance, I was – modestly and waveringly – bearish in early 2022, to the extent that I discovered Monevator was being discussed as such on social media and in the comments of other blogs!
It even turned out (lucky me) that I happened to be right to be bearish.
But guess who remembers?
Nobody – most especially I’m sure not those who wrote those comments. (Not even the Monevator regular who memorably wrote elsewhere that were too depressed by reading Monevator at that time, so they had gone to that alternative blog for a cheery pick-up…)
Barely there
Of course I have no aspiration to become a permabear – or anything much more than mildly obsessed active investor with their own website with a few hundred truly wonderful supporters.
But if I was planning to give the permabears a run for their money, then my early 2022 experience was a valuable lesson.
If you going to say the sky is falling, you should really shout it loud that the sky is falling.
And make a diary note to shout it again next year.
And the year after that…
Have a great weekend!
From Monevator
Best bond funds and bond ETFs – Monevator
FIRE-side chat: investing to go – Monevator
From the archive-ator: The index investor’s road map for avoiding financial hazards – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
FCA finds no evidence of customers being debanked for their politics – Guardian
CPI inflation drops to 6.7%… – This Is Money
…and Bank of England holds the base rate at 5.25% – Which
UK rents rise at fastest pace in nine years – BBC
Landlords in Yorkshire abandon BTL over high interest rates – Guardian
Workplace pensions boost for 18-year olds – Which
Want to be happy in London? Just earn £79,524 according to new study – E.S.
State pension income tax warning: more will have to pay – Which
Apple and Goldman planned stock trading feature for iPhone until markets slid – CNBC
Wall Street has nothing to do – Semafor
Products and services
Nationwide launches £200 switching offer plus regular saver paying 8% – Which
As mortgage rates fall, should you choose a two or five-year fix? – Guardian
Open a SIPP with Interactive Investor and claim £100 to £3,000 in cashback. Terms apply – Interactive Investor
Monzo is offering cashback in new trial – Be Clever With Your Cash
Has Apple Pay made it too easy to spend money? – Vox
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
How AirBnB reduced partying by 55% in two years – CNBC
Arts and crafts homes for sale, in pictures – Guardian
Comment and opinion
Just being average – Humble Dollar
How to pay for long-term old age care [Search result] – FT
Should your borrow at 1% or let me your child do it at 7%? – This Is Money
How my allotment makes me a profit [Search result] – FT
How often to rebalance a portfolio [Fund tax costs bit is US-centric] – Oblivious Investor
Should you trust financial information from a ‘finfluencer’? – BBC
‘Sandwich generation’ footing bill for non-workers, says former BOE economist – T.I.M.
Lifetime ISA rules should be relaxed to “benefit the self-employed” – This Is Money
Rise of the Ronin – Humble Dollar
Mistakes that compound in the market – A Wealth of Common Sense
College-educated investors earn higher returns – Klement on Investing
Investment funds are now selling the rock songs they bought – The Honest Broker
Convertible bond ETFs are basically repackaged equity risk – Finominal
Naughty corner: Active antics
Fewer losers, or more winners? – Howard Marks
Why selling is so hard to do – Flyover Stocks
Could a falling personal savings rate actually be a good thing? – TKer
Goldman to enable more high net worths to buy into sports teams – Front Office Sports
What matters? – Behavioural Investment
Pump-and-dump manipulation in the crypto markets [Research] – Alpha Architect
Kindle book bargains
Quit: Knowing When To Walk Away by Annie Duke – £0.99 on Kindle
How to Read Numbers by Tom Chivers – £0.99 on Kindle
Freakonomics by Steven D. Levitt – £1.99 on Kindle
Creativity Inc. by Ed Catmull – £0.99 on Kindle
Environmental factors
Could Sunak’s green review threaten UK net zero? – BBC
Government is likely to face legal challenges over net zero U-turn – Guardian
Populism could derail the green transition [Search result] – FT
Farmers can contribute to a ‘hedge fund’ for nature at little cost – Guardian
Business people protest in London with queue for climate – BBC
South Africa’s missing sharks have been found – Hakai
Your laptop is a goldmine – BBC
Robot overlord roundup
The post-hype Golden Age for AI has arrived – ETF Trends
ChatGPT for you – Seth Godin
Sam Altman’s master plan – The Grand Re-design
Dr. Google meets its match in Dr. ChatGPT – NPR
The irony of automation – Dror Poleg
Off our beat
The ‘world’s happiest man’ on the secrets of a serene and satisfying life – Guardian
How to rewire your brain in six weeks – BBC
Is it better to be a big fish in a little pond? – Art of Manliness
Arthur Brooks: how to build the life you want – Next Big Idea Club
A few things I’m pretty sure about – Morgan Housel
What Ukraine knows about the future of war – The Atlantic via MSN
Sunak’s green pledge sparks ridicule on social media – Guardian
And finally…
“The lesson is that no amount of sophisticated statistical analysis is a match for the historical experience that ‘stuff happens’.”
– Mervyn King, The End Of Alchemy
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
- In my case I actually thought that I’d make that observation up myself here years ago. But it seems vanishingly unlikely in retrospect! [↩]
Investing is quite a problem for humanoids with their neurological systems still set up in survival mode for a large ape on the savannah
A success is short term fun and hopefully happens again soon ie finding food
One failure and you’re dead with no comebacks -the lion got you!
Investing is screwed by this neurological survival pathway in a number of ways
It’s pleasing to read about others failures-not nice but true especially if you are OK-you survived
The stockmarket is a human construct and therefore infinitely variable and mostly unpredictable-buying a good investment and holding it is a really tough position for human to maintain for any length of time
Certainly index investors who set an Asset Allocation and then maintain their position through thick and thin and forever are to be admired-its much easier to continually trade
For most of us the less we meddle the better we do but it’s so boring and very against our inner animal natures
xxd09
It’s inaccurate to say that risk-off makes nothing, when cash and short duration bond yield are over 5% now. Yes, there could be an opportunity cost, and over a period of several decades you’ll likely be better off regularly buying stocks, but remember Warren Buffett’s advice that if you aren’t prepared to hold for at least a decade then you shouldn’t be buying stocks in the first place.
I also have been enjoying the slow lane for eons!
One of the core principles of my investment approach is to maximise time in the market and another is accepting that you can’t time the market (at least if you are a retail investor). So the critical point for me is how to remain invested all the time and yet have a negligible probability of ruin to basically make sure that you can keep playing for a very long time.
The slow lane is an ideal place to implement this approach. Just last week, my total portfolio reached another all time peak 🙂
TKer permabear incentives: I fell for this in March 2008. Scared s****less by market doomster websites. Exited market. After missing falls of following year, went on to also miss all the gains way out to 2013, having to buy back in at higher prices. Do not make my lifetime worst financial mistake by a county mile. I kinda already knew it was a mistake as I was making it, but back then I’d yet to fully internalise that, even if the market is overvalued etc, if you simply own a global equity tracker eventually it will comeback and make you whole again – unless the world economy disappears, in which case we’re probably into a scenario with bigger problems than investment returns. OTOH if you choose to invest in individual companies, then that’s a different matter. Then permanent loss of capital is a real and constant risk – the smaller the company the bigger the risk. In those circumstances, you may need a stop loss. But if you’re just long the world market using trackers, it’s best not to even try to dodge the bullets of market misfortune. On the theme of opportunity cost, the AWOCs piece is, as Ben Carlson always is, most instructive.
Sam Altman Master Plan: it’s well worth reading Max Tegmark’s ‘Life 3.0’, which is referenced in the piece. On one level, I agree with the notion that, as intelligence is just a product of processes in ordinary matter obeying well understood laws of physics, then it has to be reproducible as AGI and perhaps even ASI. But these types of articles substantially underestimate the many and varied practically difficulties and, consequently, how long it will end up taking, if it ends up being achieved at all. For example, in a new paper Lukas Berglund and others, led by Owain Evans, asked a simple question of LLMs: can LLMs trained on ‘A is B’ infer that ‘B is A’. The surprise answer was, ‘No’. The state of the art in Machine Learning is still at the stage of ‘the lights are on but nobody’s home’ when it comes to actual cognition and real reasoning.
A very valuable question is asked by Morgan Housel. Are we dealing with an issue, system or problem which operates under Newtonian principles or according to Darwinian ones? One is very much more tractable than the other.
I take the view that most of the time I have no idea what will happen but on occasions I feel the consensus is wrong and I will make tactical adjustments. Not very often and my score is probably 1 correct move for every 2 that don’t pan out. ( you can be right about what will happen but then things don’t follow your theory…that still counts as wrong !)
However if you’re wrong and react accordingly and quickly I have found little harm caused, but if you’re right you can win big, because the good choice runs and runs.
@TBDW #3 it is possible to time the market, even for retail, it’s just that most are unable to
Those who say time in the market is better than timing the market are just as bad as those who say investing is gambling! It’s a lazy trope.
Pedantic typo alert. Farmers not Famers.
@TI:
Thanks for another great set of links.
Personally, I found The Honest Broker link interesting as I have always struggled to understand the Hipgnosis business proposition.
Surprised this from the front page of the FT today didn’t make the weekend news
“Hunt plans overhaul of ISA rules” to encourage investment in uk listed companies apparently
I’m old enough to remember when you could only invest your ISA equivalent in uk stocks
https://www.ft.com/content/5849ad2e-2c11-4294-a334-f7c480f7a1eb
@Neverland #9: Simplification and an additional ISA allowance would both be very welcome; but will this turn into the thin edge of the wedge?
It’ll be a backwards step if ‘UK only’ share investment is made mandatory. I’m all in favour of regulation/ protecting investors, but telling people where to invest a S&S ISA would be a really terrible idea. I’d struggle to ID twenty decent prospects in the whole FTSE 100.
Also wondering if an expanded ISA allowance, but with some strings attached, could herald limiting pension tax relief to the basic rate (i.e. soften up the public with the good news first).
As @ZX has said in another thread (IIRC), that sort of move might be unavoidable sooner or later but, regardless of whether it would be a net good or bad for the UK to do so, it would make things a lot trickier for both HR and AR investors.
@ Time like infinity. “It’ll be a backwards step if ‘UK only’ share investment is made mandatory”
Potentially pretty much catastrophic for me since I have very little of my portfolio in UK equities. And I wonder what would happen to all those world index trackers currently nicely tucked up in ISAs. One has to hope that Hunt is not nationalistic enough to actually do that.
Re ISA’s
Given the mess we are in as a country I can’t help but think an ISA allowance of max £5k+£5k (UK only) is a good idea (for new money).
Listening to our comments on here, many (inc me) want to avoid HRT tax in retirement and ISA has been the perfect tool. It’s a wealthy persons tax avoidance scheme and should be trimmed back Significantly (imo).
@TBDW #3 and @Kerry Balenthiran #6: you can both be right of course. As has been said a few times before on this blog, a lot of apparent differences of opinion are actually just people having different risk tolerances, timescales and objectives.
FWIW, like Kerry, I’m also interested in patterns and price continuation in the markets; be it Kondratieff, Schumpeter, Juglar, Mills, or Elliott Waves; or, indeed, Kerry’s own 17.6 year market cycles. My obsession is long only price momentum. So, I don’t want to give the impression of being a closed minded, global equities index tracking zealot. But whilst the on paper, gross of trading frictions, past performance of momentum (especially of the concentrated or multi asset relative momentum type) is massively better than a cap weighted global equity index tracker; the tremendous implementation difficulties, cumulative/compounding frictional trading costs and strategy size constraints (i.e. after discovery and publication) have meant that it’s a brute fact that it seems very few investors, especially small retail investors, have actually made significant additional monies from momentum to date. This will be true of other ‘active’ approaches too.
And the big psychological risk with any active DIY strategy based upon patterns or cycles or stock characteristics (i.e. Fama-French factors) is that it may, if followed, take you totally out of equities just as the market then goes higher, such that it’s then really hard to persuade oneself to bite the bullet and buy back in at the higher price. Real damage can be done, in terms of opportunity cost, doing this, as compared with simply staying the course and being invested at all times.
So, whilst on paper, it might make sense to try rules based market timing, the bar for doing so should be a very high one IMO, bearing in mind the simplicity and proven effectiveness of buy and hold trackers. It might not be the best of all possible strategies, but it’s so simple and easy that it might just be the ease-adjusted best strategy.
@Time like infinity – sounds like when Personal Equity Plans (the precursors to ISA’s) were launched in the 1980’s – tax free if you support UK investment!
https://en.wikipedia.org/wiki/Personal_equity_plan
My view is that the winners take care of themselves. Outperformance is most easily achieved by avoiding the big losers. Lose 30% in year one and it takes two +20% years to breakeven. Lose 50% and it’s two 42% years to get that back. If that results in my permabear tendencies, so be it.
Plus, while permabears may get a disproportionate amount of headlines, I find the market is very rarely actually positioned bearish on the back of that. So it’s often still cheap to buy convexity to offset the geometric return being an exponential average of the concave logs of the arithmetic returns.
Essentially, I’m happy to lose 1%/annum in the good times, to make money in the bad times. Making a positive return in 2008, meant I made more in 2009. Making a positive return in 2022 (from macro rates) forced me to buy Nasdaq to rebalance etc.
“So it’s often still cheap to buy convexity to offset the geometric return being an exponential average of the concave logs of the arithmetic returns”
Amen to that, brother. But really, will somebody explain what he is talking about, preferably in English?
I’d just like to echo what C said in comment no 2. I’m not selling out of equities to market time, but don’t tell people they are idiots for keeping large asset allocations to cash, short dated bonds, money market funds in this environment if they are getting a pretty much guaranteed 5-6%. The risk adjusted opportunity cost is pitifully low, especially when you look at things like S&P500 valuations if that was your alternative choice.
I’ve read so many articles telling people how such low risk assets fail to keep up with equities and longer dated bonds over multiple decades without any context given to current interest rates and yield curve inversion.
You can always reduce your cash and ultrashort bond allocation once rates and yields drop lower in relative terms.
@ Semipassive
I am with you there. There is a time for passive investing ideology and there is a time for common sense. The premium for taking equity risk looks very low in some major markets. I have a lurking suspicion that we are about to see a long-term compression in equities values in a “higher for longer” government yield environment. I would sooner lose some equities profit if that proves wrong than a long cold bath.
@ZX: yes, but can investors actually hedge for just 1% p.a.? If so, then how exactly? Fig’s I’d read for retail options (SG Cvr’d Warrants) were equiv. of 1.7% to 2% p.a. premia for 3 & 1 mth expiry deep out of money SP500 puts, which start coming into their own on a 20% fall. Quick falls like that aren’t quite as rare as hens’ teeth (Mar 2020 being a case in point), but they are rare. You could end up paying out for years with no return.
@Hospitaller & @Semipassive: agree with you that elevating passive (or indeed any) investment approach to the status of an ideology is ‘bad’, and that there’s a very respectable case for holding cash and short bonds when yields are meaningful, and if one’s investment horizons are shorter.
Charlie Munger (2007, USC School of Law commencement speech) put it in this way: “Another thing I think should be avoided is extremely intense ideology because it cabbages up one’s mind..I have what I call an iron prescription that helps me keep sane when I naturally drift toward preferring one ideology over another..
I say “I’m not entitled to have an opinion on this subject unless I can state the arguments against my position better than the people do who are supporting it.””
On the one hand, on the plus side for cash/short bonds:
1). Why take a risk to capital in arguably stretched markets when you can earn 5% p.a. more or less guaranteed?
2). 2023’s higher rates have a seemingly much less favourable valuation backdrop for equities than that which existed at the time of higher rate environments in previous bear to bull market transitions, e.g. say in 1981/2.
3). The 2009-21 bull market was long in the tooth when the falls of 2022 occurred. It’s more likely, therefore, that 2022 marks the start of a long secular bear market, rather than a short cyclical one.
4). If you’re in instant access accounts and ultra short duration bonds then you can switch into equities as and when needed.
5). The multiple expansion in US mega cap tech market leadership looks unlikely to be sustainable.
OTOH, on the minus side:
a). We only discover what the actual ERP was in retrospect.
b). Bull markets invariably follow bears.
c). One of the strongest bull markets of all time (1982-99) followed on from a supply shock, inflation surge (1979-81).
d). High rates are not popular with voters, and hence not politicians nor, ultimately, with central bankers. The bond vigilantes may rule for now, but the long term secular trend on rates looks to still be downward sloping.
e). Although bear markets may be more sudden than bulls, they also tend to a fair bit shorter.
I read a research study based on S&P 500 year-end closing prices that reduced volatility significantly but still achieved much of the gain. In summary (from memory) the theory is: If the year-end closing index is lower than the closing index 12 months earlier, then sell. If the closing index is higher than a year earlier, then buy. A development of this theory focuses on month-end closing prices, with comparable results.
I have tweaked this idea, focused on the month-end index, and back-tested it to 1880, and refined it a little. My ‘theory’ compares each month’s closing index with its equivalent: 12 months earlier; 11 months earlier; 10 months earlier; and so on to 2 months earlier, in percentage terms. This gives me a set of eleven percentages at the end of each month. If the eleven percentages are all negative, this is a sell ‘alert.’ If the eleven percentages at the end of the subsequent month are also negative, this is a sell ‘signal,’ and equity investments are sold on the next trading day. Conversely, if 6 (or more) of the eleven percentages are positive, this is a buy ‘alert’. If 7 (or more) of the percentages at the end of the subsequent month are positive, this is a buy ‘signal’ and the cash is reinvested in equities on the next trading day. My personal holdings are split between S&P 500 and global trackers.
As I am retired the whole point of this approach is to enable me to sleep at night during severe market downturns, rather than to enable me to maximise overall returns. In fact, upon a sell ‘signal’ I sell only half my holdings and leave the other half invested.
I have tabulated the results of my ‘theory’ if anyone is interested.
@xxd09 – what if the era of acceptable wealth growth & preservation from the 60-40 (or other equity-bond mixes) is over ?
@Time like infinity: look up the JPM collar. A retail investor could copy their exact trades (the trades are so large that the strikes and expirations are deducible by the public). I don’t know what the overall cost has been historically, but the only time JPM lose out is if the market gains above their chosen short call strike price. JPM’s hedge fund quants aren’t idiots – if they believe this is the most effective way to hedge against a market drop then they’re probably right.
Regarding higher rates being not popular, there are some smart and well educated people who think that the world has hit an inflation inflection point. If they are right, then either rates stay high enough for long enough to bring inflation down, crushing asset prices in the process, or rates are kept low despite rising inflation, which over time leads to a currency devaluation spiral, with global investors dumping the currency and bonds of any central bank that goes this route, which ultimately crushes the economy anyway. Ray Dalio predicts the latter scenario will happen to the US/US$ in his latest book. Bill Ackman has said that he is hedging by shorting US 30 year bonds. Dalio and Ackman aren’t idiots, it might be worth understanding what their arguments are, even if you don’t agree.
@Algernond: wouldn’t one expect a 60/40 to perform far better with a higher rates starting point, like we now have? Rates fall = equities & bonds rise in price. Rates stay about same = equities & bonds stable prices, but with decent YTM for bonds & DY for shares. Rates rise = everything falls in price, but at least yields rise and the likelihood of this scenario is the least when starting yields are higher. The time to worry about the 60/40 was much more in a 2021 type low rate environment.
Hi @TLI.
Not sure if rates (or inflation) are going to fall that soon… and when they finally do, what impact the world bi-furication / de-dollarisation trend will mean for US treasuries and UK bonds in real value terms.
I’m still glad I dumped bonds as a fixed part of my asset allocation ~2 years ago. I will of course buy bond funds as part of my momentum allocation if the algos tell me to. And the Trend Following funds I’m in also go long or short in them depending on…… the trend.
@Algernond: It’s just impossible to know what rates (or inflation) will do next, yet alone after that. Howard Marks at Oaktree Capital nailed it in his September 2022 memo:
https://www.oaktreecapital.com/insights/memo/the-illusion-of-knowledge
Consequently, with stuff like this, I’m more into thinking now:
– about how many different, divergent types of possiblity branch lines for rates (i.e. up, down or on hold) are likely to give good outcomes for risk on assets, and how many bad; and,
– then just count the different types of branch lines that correspond to those outcomes;
-rather than trying to make an assessment of the potential frequency of each branch line type within the possibility landscape, which looks to be inherently unknowable.
It’s an extremely simplistic approach, but hopefully it’s also one that incorporates by design my own ignorance of the future.
Using it, I end up with 2 branch line types (rates down or on hold) looking either positive or neutral for risk on assets (equities here), 1 (rates up) looking negative for risk on assets, 2 (rates down or hold) looking positive for the biggest risk off asset (bonds) and 1 (rates up) looking positive for the next most important risk off asset (cash).
This very coarse grained counting method suggests that perhaps more positive opportunities exist in the future in equities and/or in bonds than do in cash.
Add in the historically very poor real return profile of cash as compared to bonds or (even more so) equities and it pushes me away from keeping too much dry powder in cash, even though it now has a decent nominal yield (interest) for the first time since 2009.
I’m definitely going to be adding both of your excellent ideas into my thinking from your comment #41 to @TA’s superb 1st August 2023 Investment Portfolio Examples piece: namely Winton Trend and Montlake Dunn UCITS.
I’m also looking into Flow Traders’ shares as a play on volatility, which tends to spike when equities go south, leading to a surge in volumes (and therefore also in trading fees and in profits) at FLOW.
Momentum and volatility are not only, IMO, potentially sources of returns in their own rights (and possibly one that’s negatively correlated with equities for volatility), but they could be a hedge in a world where long term global equities’ performance trails off (e.g. a zero growth, high rates, high inflation world, with inadequate business investment and productivity). In this regard, momentum may still work, to an extent, even in a range bound markets, whilst volatility will occur in any market, but is most extreme and prevalent in down markets.
I don’t think that such a world is anything more than a remote (~5%) risk presently, but it’s useful perhaps to think of some contingency options if it eventuates.
@TLI.
Totally agree with you (and the Marks article) on the impossibility of knowing what rates & inflation will do next. This is exactly the reason I decided to assign a significant chunk of my portfolio to my ETF momentum strategy.
I had actually considered adding FLOW as a non-ETF exception to my allowable ETF list for a volatility play as you say, but decided against it due to the unpalatable FX fees the broker I use for my MTM strategy charges (the only non-ETF is my list at the moment is YCA, which looks to be turning out well).
Although it’s only been ~11 months since fully implemented so far, my MTM strategy is not to stressful to maintain, and I’m beginning to think I should be increasing my allocation to it, and reducing my fixed allocations in other asset classes also.
Good to hear you are looking into the Winton & Montlake Dunn Trend funds. TBH, they are not ideal compared to the institutional offerings, but seem to be the best on offer in the UCITS universe.
@Warhammer Enthusiast #16: Amen indeed. I wonder if this helps at all?:
https://blogs.cfainstitute.org/investor/2018/07/25/the-myth-of-volatility-drag-part-2/
Also @ZX #6 & #11 here:
https://monevator.com/weekend-reading-rebalancing-portfolios/
is perhaps slightly along similar lines to the penultimate paragraph of @ZX #15 in this thread. As someone without a maths background I have to work hard to unpack this stuff, so my apologies to @ZX if I’ve gone and misunderstood the last but one para. of #15 above.
@David45: many thanks indeed for kindly sharing your system. It would be interesting to know the results/findings. I like the high bar to selling out of equities and the cap on sales at a half.
@xd99 You are right. I just watched a video about “classic cars” as an investment by a car enthusiast. Or rather why they were not likely to be. As you intimated, psychology plays a big part. The cars that we aspired to and can now afford will not hold the same appeal for a newer generation. So you don’t want to be last person holding this alternative investment.
For anyone interested here’s the link to an old car rant
https://m.youtube.com/watch?v=cQ7p2XvFmt8
Bad news keeps you coming back far more frequently than good news. With good news, you get on with your life and they lose your attention. That is why media reports bad news all the time.
@C @TLI I looked into the possibility of hedging with options, but unfortunately the conclusion is that it is not viable. Or at least any simplistic strategy that we can implement is not. Sure, sophisticated players can optimise their hedges and find ways to make money while staying long volatility, and I suppose this is what @ZX is referring to when saying that hedging is possible for just 1% p.a.
The biggest problem with options is cost. The other problem is that the timeframe needs to match the drawdown scenario. There are some stock market ETFs that include options hedging, that generally have done poorly in normal times and the supposed crash protection often disappointed because of the timing issue.
Ilmanen (“Investing amid low expected returns”) compared risk-mitigating strategies and concluded that put options were the costliest. I forgot how much, but it was for sure way more than 1%.
My conclusion is that the best way to manage stock market risk is to allocate a conservative proportion of the portfolio relative to the time horizon. And diversify with (hopefully) un- or anticorrelated things such as bonds, gold, commodities and hedge funds.
My industry is full of people who like to give the impression of having an inside line on what’s about to happen next. They dress up pure speculation as nailed-on fact and, if it comes to pass, they gleefully pat themselves on the back in front of their social media followers.
If it doesn’t come to pass… quietly delete.
Even a broken clock tells the correct time twice a day.
@Vilehackwriter — Assuming your pseudonym is a clue, I think regularly writing any sort of non-fiction punditry invites opportunities to make predictions, even if you’re sceptical of their value. I certainly do it all the time despite myself!
An under-sung benefit of blogs (both reading them and writing one I’d argue) is it helps to keep you accountable. Not least to yourself.
@TLI. I was being more generic than specific strategies such as selling equity puts. I’m mainly investing in a combination of trackers and hedge funds. Those hedge funds tend to lag in the good times, typically by anything from 1-3%/annum. They tend to outperform during the bad times.
For example, Millennium has a monthly correlation with the S&P of around 60-65% over the past 30y+. Not totally surprising given that 60% of the fund is basically invested in equities. That hides, however, the fact it’s beta is rather asymmetric. So in 2008, Millennium only lost 3.5% (a positive correlation of 0.1). Dodging bullets like that easily pays for smaller lags in more typical years.
To be fair, it’s not easy to manage. The correlations are unstable. In 2022, my portfolio made +25%. Bluecrest, Citadel, Brevan, Universa, Millennium all made more than I expected. Completely outweighing my losses in tech stocks etc. Now, the rates move in 2022 was very cheap to position for in late 2021, so it’s arguable that such outperformance is understandable. Nonetheless, I think it might represent a problem. After 5 good years for macro, these funds are much bigger, volatility is more expensive to buy, they may be more biased to be “bearish”. Frankly, there are fewer cheap hedges to buy than in 18, 20 or 22.
I’m an active trader though. I might not ever take a view on which way the stock market goes next (who knows). Instead, I’m happy to take a view on volatility and correlations, or what trading strategies might be good/bad over the next year. So personally, I sold some of these funds down in late 22 to buy Nasdaq or go to cash. Professionally I decided to lock in 125% of 2021 and 2022 compensation and take most of the year off! I took the view 2023 might be a sub-optimal year to be in a macro or volatility fund. Looking at the performance in 23, most are up but they are lagging more than normal.
@Sparschwein #30 and @ZX #33: thanks for your thoughts/observations. Apols it’s taken a little while to reply.
Eventually, and based significantly upon points made by @ZX and others in various different threads, I’ve come to a view that the overall optimum but entirely theoretical portfolio (i.e. not, for by far and away the greatest part, one that’s actually available to any retail investors like me or, for much of it, available to any outside investors at all) would compromise:
1. a chunky allocation to the most proven market neutral macro trading and multi strategy hedge funds (e.g. BlueCrest CM, Citadel Wellington, Millennium, Brevan);
2. a small allocation to tail risk hedging strategy funds (e.g. Universa);
3. the core holding in whatever it is that Simons / RenTech puts into the financial black box that is Medallion;
4. a large chunk into multi asset trend following momentum (which, unlike any of the above, actually is available to retail, e.g. through Winton, and potentially can be DIY’d);
5. a small piece into liquidity provision via a volatility play like Flow Traders;
6. the rest into long term mean reversion by just buying what’s cheap relative to both its history and peer assets;
all the while using modest leverage for those elements of such a portfolio which have the lowest volatility, and only where borrowing is cheap (unlike now). But this is a fantasy portfolio (at least for the likes of me), and not even remotely practical / doable:
– Funds like BlueCrest and Medallion are run, in effect, as family offices / private investment vehicles. FAPP there are no remaining outside investors.
– Those that are still open to investment usually have stupendously out of reach minimums ($50 mm for new investment into Universa, and $10 mm for Citadel), or instead either require you to work / have worked for the fund or to be investing via another hedge fund, which has similarly outrageously out of reach minimums.
@TLI. While it’s still out of reach for the majority, those minimums you quote are institutional level amounts. Most private banks will have access at that size. That’s for all their clients though. Individual client amounts may often be more five/six/seven figures. I’ve haven’t got eight figures in any one of them. People seem to hate private banks these days but I’ve found the wider access they provide to funds/products plus the much better transactional capability (far lower bid/offer costs), easily offsets the fixed 40bp/annum I pay to them on a proportion of my capital. My biggest problem with them is avoiding the phone calls, or (worse) offers to meet me for lunch. I can’t abide extroverts …
@ZX #35: don’t you worry at all about the principal/agent paradox with private banking, i.e. that they’ll see you as the product? HL’s spent 10 of 15 yrs I’ve been with them trying and failing to get me to have one of their ‘no obligation financial consultations’. Translation: selling me their under performing, high fee, in-house multi-manager funds, and my paying for the privilege of being sold to. So it’s an immediate delete to those emails (I can only imagine what it must be like for unlucky punters in line of sight for SJP’s sales teams). I kind of envisaged private and investment bankers to be somewhat in this mould, i.e trying to flog over priced private placements, SPACs and De-SPACs; but with much more flair, charm and persuasion than their retail banking / investment platform / IFA equivalents can muster. Maybe I’ve been over cynical?