Some who use the Designer Models might want to know which ones to rotate in and out of. Buying and holding a basket of Designer Models may or may not be the optimal strategy.
I propose a simple method of adjusting the weights of Designer Models first proposed by Steve (sthorson) in this forum.
One might select all free models (41). P123 (or an individual member) might then select their favorite momentum period (i.e., 3 months, 6 months). Let’s assume we pick a shorter period like 3 months. We are assuming the returns, the volatility and correlation of the models that has occurred for the last 3 months will continue for the next rebalance period (on average).
If P123 did it they would just plug the data for the free models (41) into something that determined the Tangency Portfolio. Using the data for the last 3 months. Steve uses solver. I think pyportfiolioopt will do this with just the last 3 months of price data for each model. The weights of each model (determined by the Tangency Portfolio) would be entered into a Book before rebalancing the Book.
This could work for 2 reasons. First, it will work if the models have momentum. But is will also put less weight on models that are are not as good (on average over an extended period).
This may be attractive to some because it is a quant method that has support in the established financial community. This and the fact that there is math involved would probably be a negative here at P123 but there may be some people that appreciate this.
Steve likes it and I do. Maybe others will like it. It did win a Nobel Prize. And time-wise it is up to date with many of the other quantitative methods used a P123. I think it is only some people’s bias against any math that will spur much argument against this. That is not to say it is the best idea possible or that P123 should adopt this. It is just an idea. Not the worst idea I have heard of from a RoboAdvisor, BTW.
Some may want to buy and hold Designer Models. This may attract some who are not attracted to the buy-and-hold approach.
And, it is not impossible that it might even work. I do think it is a given that it will help control risk. Give good returns?—I do not know. But if it does not work for this it may say as much about the Designer Models (and our momentum theories) as it does about Modern Portfolio Theory (MPT)
Thanks Steve, great idea. Great idea in general. I cannot speak for him on what he thinks of this application of MPT.
Correct me if I’m wrong, but MPT is about capitalizing on the low(er) correlation between asset classes, not on momentum-based trading. Your idea is interesting but needs to be flushed out more to prevent buying into several highly correlated strategies at the same time. What is needed is a set of trading rules similar to what ports already have. In fact, if P123 implemented some port and screen functions on a historical basis that they already offer on a current basis then we would already have that functionality.
SteveA
P.S. Please call me SteveA in the future. And perhaps the other Steve could be referred to as SteveT or another name of his choosing. There is too much confusion now.
Correlation is important as well as what you plug in as far as expected returns. There can be no doubt about the expected returns being part of the equation.
One can find infinite examples of what I suggest on the web from Financial Analysts. Examples that just plug in historical returns expecting them to continue. Nothing new or controversial about his—except at P123.
SteveT, or I at least, would use a predictive model for the expected returns. My proposal here does the same by assuming recent momentum gives an improved idea regarding the expected returns. Not an entirely new idea here either.
Here comes the P123 committee reinventing an idea from 1952 (MPT). It is amazing how much of the wheel we have managed to reinvent here at P123. We have some geniuses here and I truly mean it. Not everyone can reinvent the wheel. Time 'till we enter the jet-age………? Not likely. The Space Age? Forget about it. Even so, there will the equivalent of some Challenger Disasters since we know no history.