how I invest my money and why

My Portfolio: What and Why

Stocks, bonds, returns, asset allocations; I love that stuff. I’m an active investor and a low level quant. Many people ask me what I invest in. So I’m putting it in writing. Everyone thinks it must be complicated, but it isn’t nearly as complex as most people think it would.

It’s actually rather simple. I tend to stick with simple. Simple works and I like it. While a lot of people will want to copy me, and simple enough to follow, my strategies aren’t for everyone. Most practitioners of modern portfolio theory would advise against them, and I don’t even tell my sister to invest in them (my strategies. More on that later. So I’m going attempt to explain the 2 strategies I invest in.

  1. Tax Advantaged Accounts

    The 13 ETF’s used in the strategy

    Global Momentum  Strategy.  For my tax advantaged accounts I invest in a quantitative global asset class momentum strategy. On the first of each month, I look at a diverse group of 13 asset classes, and I take the average of their 1m, 3m, 6m, 12m return and invest in the top 3 with the highest average (using etf’s that track each asset class). Each month, repeat. Thats it, 3 trades a month and many months it doesn’t trade as the top 3 remain consistent.

    You might notice pics I post of a stock app with a caption about momentum… this is it.

    Backtesting to 1/1/1973 the strategy returned 18.86% annually with a drawdown of 32.06%. Compare that with the S & P 500 total return of apprx 9.54% and drawdown of over 50%. You could use a different basket of asset classes or different momentum measure and get the similar results. A broad range of stability exists.

    Of course some will point out the obvious (for experienced investors):

    • There is no guarantee that those returns will continue (likewise passive investors, there is no guarantee that broad market always goes). Beating the market by double is nearly unheard of. It is just back test fitting. All of the above, possibly true, however even with a haircut, it still would’ve outperformed. Even in the worst scenario it is unlikely to do substantially worse than the market.
    • Taxes take a haircut. All the gains in this would be short term, and taxed at ordinary tax rates. That is why I trade it in a tax advantaged account. The strategy in an active ETF would also defer the taxes. There is an ETF doing something similar on the market. I believe that long term momentum trends in asset classes as captured by this strategy will persist, as will the limit of down side. The strategy avoids asset classes which are in a downtrend; most volatility and drawdown happens in a downtrend. The strategy is also very hard to arbitrage. With billions of dollar in these markets, the pool of assets in a global momentum strategies that it would take to arbitrage the strategy is incredibly high, and unlikely to occur with modern portfolio theory, and the rise of passive investing. That said, I don’t expect to see 18.86% returns for the next 40 years, but I do expect to outperform an 80/20 portfolio in total return and sharpe ratio.
  2. Taxable Accounts

    Obviously they are subject to the tax haircut I talk about above, so I keep trading to a minimum.

      • Trend​ ​Following​ ​The​ ​80/20​ ​Portfolio.​ ​ ​It’s real simple, if the total return of Vanguard’s Life
        Strategy 80/20 mutual fund (VASGX) is above its 10m total return, I am invested in it. If not I am
        invested in total bond market. That’s it, 1 rule.
        The strategy has returned 10.27% annually (since 96) with a drawdown of 12.82% and it smoothly avoided
        both bear markets of the 2000s.trend followingIn the nearly 22 year back test above, it changed positions 22 times, with most of the growth coming in at holding periods well over a year (aka long term capital gains). An assessment of the taxes, assuming 40% tax rate on short term capital gains and 15% long term, would lower the annual return by 1.7 – 1.9%. Even after the tax hair cut it still generates near market returns, with far lower volatility and drawdown.
      • Alpha​ ​Architect​ ​Value​ ​Momentum​ ​Trend​ ​ETF (VMOT).​ ​ This is recently launched active etf which takes value and momentum (on an individual stock basis) factors and applies a 12m simple moving average and time series filter to avoid drawdown. Here’s the cool part, ETF’s can defer capital gains taxes, so this strategy is super tax efficient. I’d expect actual performance to similar to my strategy above, just without the tax haircut.

    The ETF follows an SEC registered index, which is fully transparent, so the fund can’t be tinkered with — only simple the simple rules applies.

Why It Works For Me

What ever your investment strategy is, it needs to be simple, systematic (related: I don’t give a fuck because I’m a systematic investor), and work for your risk profile. I hate market drawdowns. I’ve never sat through a bad one like 08/09 where equities seen over 50% loss, but a 10-15% makes me uncomfortable enough to know I don’t want to go there. The empirical evidence behind the trend following strategies I invest in shows I will avoid these drawdown. I’m well aware their could be some black swan hidden out there, but trend following pleasantly avoided the 2 worst drawdowns on record (1929 and 08/09).

With trend following I know I will lose a bit on the upside when the markets are ripping up like they were in the dotcom bubble, and are today. That’s fine with me. I’m cool with some underperformance. I’m fine with losing out to the market, a little bit. I think of it like insurance. The momentum gives a me a good shot at outperformance which I believe is robust. Both the momentum and trend movements with the markets fill my craving to react to market
movements.

Most importantly, these strategies keep me nearly fully invested at all times and comfortable. I don’t fear investing at the wrong time. I don’t keep money on the sidelines, I don’t fear a permanent market crash. Afterall there is no set rule that markets always go up, yet nearly all investors bank on a market premium existing. If things go Japan (the Nikkei 225 crashed in the late 80s and to this day has never recovered), I’m confident I’ll avoid that drop… If not i’ll just be in the same boat as all the passive investors.

Now back to my sister, and telling her to invest with Betterment…. If you don’t want to study investing and markets to understand why you have tracking error; If you might have a hard time; sticking to the strategy; If you can’t fathom trading every month; you’re probably going to do better with a passive investing option like Betterment. Hell passive investing could outperform everything I mention here. It’s a perfectly good investment, just not for me.

Founder of a home service / specialty trade contracting company (think patio's and deck) with a focus on customer experience. Quantitative investor. Data driven marketer. Runner.

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