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Re: Thoughts On

I am agnostic on this.

Personally, at a minimum, a portion of my portfolio is fixed. So I am not ever completely out of a given asset class. If adaptive allocation does work (and I am not saying it does) it may be slow and it may not work every time.

On the other hand, some portion of my portfolio is in adaptive allocation model. I do not want to constantly be rebalancing into an asset that consistently underperforms. Year after year after year after………...

AND, some portion of my portfolio is in a port that is not rebalanced with the rest of my portfolio. Maybe I will be rewarded for the risk I take as even the people who believe in the efficient market hypothesis tell me could happen.

But I wonder if anyone will be willing to clarify Marc’s position on what port should be invested in according to the DDM (dividend discount model). Maybe I am wrong but I was pretty sure that he has told us the DDM can be used to determine which ports we should be in.

It seems that Mark (mv388158) is not the only one who has explicitly or implicitly endorsed a changing allocation of assets.

I actually like the DDM for explaining things that have happened, even knowing that I am not capable of using it to predict the market going forward. That is not to say that others are not capable of doing this.

Maybe Marc Gerstein has the only possible way to do this but discretionary allocation of assets is something that almost everyone at P123 has stated strong agreement with at some point.

Me, I do not use much discretion. At one point P123 was for "cold-blooded investing" and I am forced to stick with this philosophy as I am no-good at discretionary trading.

I have a little trouble keeping up with what the agreed-upon methods at P123 are today. But I do some of what Mark does. And what Kurtis recommends too if he was not just being nice in his Seeking Alpha article. It may be a way to prevent me from constantly rebalancing into a consistently underperforming asset going forward.

I will stop doing that when Marc or anyone else can tell me for sure how much I should put into TLT, or Gold or commodities or REITs going forward in a constant-weight diversified strategy (and I believe them). But I do not think Marc will do this. I do not even think that it is his position that this can be done.


From time to time you will encounter Luddites, who are beyond redemption.
--de Prado, Marcos López on the topic of machine learning for financial applications

Feb 19, 2021 9:58:17 AM       
Edit 14 times, last edit by Jrinne at Feb 19, 2021 11:25:40 AM
Re: Thoughts On

I can't recall all the details but the thrust of my criticism of the approach from Resolve is that they use up to 3x leverage when volatility is low and drop leverage when volatility increases. In a market shock, you could drop 60% in your equity allocation in a single month while the market went down 20%. Then you quit using leverage as the market rebounds. Down 60% and up 20%.

What got me onto this was someone who noticed Resolve having 42% returns in 2017 using just ETFs. But looking deeper, the leverage component really scared me.

And the real world performance of that 16% target volatility adaptive asset fund has not been great. Higher drawdown than market. Standard Deviation is 19% vs 11.26% of market. Annualized returns over past 3 years is -1.64% vs. 6.87% of market.

They had 1 good year in 2017 due to 3x leverage and low volatility / high return markets.

I am not against changing allocations to assets (tactical). We probably all do this somewhat (e.g. if gold ever gets under $500 bucks again I will increase my 5% allocation to 10%). Or even having a static strategic allocation (set allocations that are varied but do not change such as 50% equity 25% government bonds 15% REITS 10% gold) versus the equal-weight Harry Browne permanent portfolio (25% equally in gold cash stock bonds).

But I personally do not encourage using leverage and just mixing and matching correlations so that trailing volatility looks low and thinking that you won't get burned.

Feb 19, 2021 1:16:41 PM       
Re: Thoughts On

But what does impress me is Brad Lamensdorf's returns (activealts) with a non-leveraged fund of large cap momentum stocks. It had almost 80% return for 2020 and was only 75% invested on average last year.

I have been grilling him on his approach and he explained it in great detail to me. That doesn't mean I can replicate it though. Reading how to do ballet doesn't mean I can dance. Part of the process involves tracking companies for years as they undergo some material change, multi-year consolidations, buying within days of the right triggers after years of watching, tracking market breadth and sentiment gauges to determine how much market exposure is warranted...

The biggest thing I took out of this was to look for leading indicators instead of a lagging ones. The goal is to isolate and buy stocks before they technically become momentum stocks with 12 months of excess returns. At least it is inspiring me to do a whole lot more research in certain fields.

Feb 19, 2021 1:31:52 PM       
Edit 1 times, last edit by hemmerling at Feb 19, 2021 1:32:55 PM
Re: Thoughts On

I've been using LI for almost 2 years now results are very close to what is posted and my own models are doing great. If you sign up and try the models I would love hear what your complaint was? The risk is uncorrelated assets start to correlate for long periods of time. Has not happened yet. GLD and TLT are down but the growth stocks are up even better the models are switching the book into global equities and commodities over the last six months. The switching is key its what Dynamic allocation is built on. Building my own models I can use vehicles like TAIL and IVOL both have added to the diversification of my portfolio. Dynamic allocation and diversity is what I seek. I have a hypothesis that Technology will rule but there will be massive volatility over the next 10 years. For example currency wars will be on my worry list and inflation. Managing the volatility of my portfolio is key to my personal trading strategy. What really interests me now is my models are profitable but I want to manage tail risk. Options is the only way. Using a dynamic allocation model with options is my current objective. LI has published articles on how to do this. I also have partnered with professional options traders who know how to apply options to a diversified portfolio with dynamic allocation. I really wish I had studied options years ago what a fascinating vehicle to control volatility and risk and oh yes go broke in an instance if you screw up. Thank you P123 for a great forum where passionate investors can exchange ideas and make money.

Mark V.

Feb 19, 2021 10:19:13 PM       
Re: Thoughts On

Adaptive asset allocation is a simple and effective way to minimize fat tail risk (assuming no leveraged ETFs). But it usually under-performs for years while waiting for that fat tail. It's also too easy to confuse backtests with real out of sample performance.

I suspect that with additional indicators (such as economic data, other technicals, etc.) we can to much better (sort of what ETFOptimize is doing).

It's a pity. We have the data, but the tools are not built for it. For example, there is no way to vary both the number and weights of multiple asset classes. Furthermore, asset class histories here only go back to 1999; which is far too short to encapsulate a variety of macro environments.

I would love to see more focus on building adaptive asset allocations. The market for ETFs is huge; many many times larger than the market for high turnover small cap stock picking systems.

Feb 21, 2021 4:46:46 PM       
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