Core Wealth Management
Since launching MarketSci in 2006, I’ve always been successful building active strategies for generating outsized volatile returns (see what I’m trading today).
But I often struggled with more conservative strategies for the core of my wealth, the types of strategies that produce more than equity-like returns with less than bond-like volatility, and minimize exposure to market shocks and other risks.
For the last few years, my core wealth management solution has been Tactical Asset Allocation, trading from a diversified basket of asset classes once per month.
My model, like most similar models (1), has been subpar in recent history; such is the ebb and flow of such long-term approaches. I’m confident that over long time horizons, TAA will provide value because these models are based on concepts that have endured for as long as modern markets have existed (trend-following, momentum, diversification of risk, etc.)
But I’ve grown less happy with TAA as the solution for managing my core wealth. Admittedly, part of that unhappiness is the lackluster performance of the last 18 months. But if that were the only problem I would stay the course; an advantage of taking a quantitative approach to the markets is justifiable conviction during lean times.
The bigger issue for me is the one-two-three-punch of (a) middling returns, (b) long hold times (i.e. holding trades for months at a time), and (c) the limited upside remaining in Treasuries.
Bad days trading are inevitable. But having a bad day without being able to get right back into the fight with a real chance of making up losses is hard to stomach.
Yes, you could design your TAA model to be more active, jumping in and out of asset classes more quickly, but I think you lose a lot of the benefits of those long-term concepts that make TAA so powerful (and increase trade frictions as well).
Add to this the limited upside remaining in Treasuries, one of only a few major asset classes remaining without a strong positive correlation to equities. With Treasuries, all of these asset allocation models are going to suffer in terms of return. Without Treasuries, they will all suffer in terms of volatility. It’s just math (read more and more).
The question then is how best to build a strategy that generates consistent solid returns and minimizes beta risk, but is also much more active, and doesn’t rely on Treasuries as a major component.
I’ve been trading a big portion of my wealth with my own solution to that problem since late last year.
Readers know I don’t talk about a program unless I can show real-time, verifiable trading results (because backtests are worthless (2)), so starting this month I set up a small tracking account with IB to track performance just like all of our strategies.
More thoughts to follow. This is meant to be a conceptual post, my mea culpa if you will, explaining why I’ve begun to fall out of love with TAA (and yes I appreciate the irony of falling out of love with TAA as the rest of the blogosphere is falling head over heels).
And just to be clear, even though I never sold the TAA model, it’s something I’ve traded and talked about extensively in the past, and something I’ll continue to trade with a portion of my portfolio in the future. Readers know I abhor cherry-picking returns, so even if one day I stop trading the TAA model altogether, I’ll continue to carry results of the TAA model here at the blog and at MarketSci.com indefinitely.
(1) Of course, I’m referring to real-time, out-of-sample TAA models (i.e. the only kind that really matter), not the backtested variety burning up the blogosphere.
(2) To clarify, as a research tool, as a way to share and discuss ideas, backtests are super duper. But as a way to judge the efficacy of a black box, they are worthless.
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Filed under: Tactical Asset Allocation | 21 Comments