My investment approach consists of 3 parts:
1. A long-only tactical strategy that invests in major asset classes via low cost liquid ETFs (“Tactical Strategy”);
3. A mean reversion strategy that uses margin of up to 80-100% of the account (“MR Strategy”); and
4. A discretionary trading strategy that uses margin of up to 20% of the account (“Discretionary Strategy”).
Tactical Strategy – 100% of Capital
The goal of the Tactical Strategy is to create a simple, low-cost, adaptive asset allocation strategy, which attempts to improve the risk-adjusted returns of an all equity portfolio.
It has broad asset diversification (global equities, US bonds, gold and cash) and strategy diversification (passive, trend following, momentum, relative strength and long/short). The Tactical Strategy reacts to market conditions to change asset allocations and adjust risk as necessary.
The principal goal of the Tactical Strategy is to limit large drawdowns, which must be avoided for two reasons: (1) for anyone in, or approaching, the withdrawal stage of his or her life, they can have a very damaging effect on the safe withdrawal rate and a portfolio’s survival; and (2) large drawdowns are psychologically very difficult to handle and often result in bad behavior like selling at market bottoms. Avoiding very large drawdowns limits the risk of doing anything irrational. Even if absolute compound returns are lower from employing risk mitigation strategies such as those included in the Tactical Strategy, the actual returns experienced by the individual may be higher due to the avoidance of poor behavior.
The appropriate benchmark for the Tactical Strategy is the ETF VT (global equities). The goal is to acheive long term returns comparable to VT, but with substantially less volatility and lower drawdowns.
MR Strategy – Traded with Margin of up to 80-100% of Capital
The MR Strategy trades large cap stocks on a short term basis (a few days). This strategy is complementary to the Tactical Strategy as it operates only during periods when the Tactical Strategy has reduced equity risk. This ensures that the overall portfolio risk remains reasonable, even though margin usage may be high.
Discretionary Strategy – Traded with Margin of up to 20% of Capital
Margin of up to 20% of the total account may be traded on a discretionary basis. Discretionary trades will focus on allocating capital (long/short) to asset classes that are trading at extremes from a sentiment and trend perspective and to trades that would not be correlated with the overall portfolio. Occasionally this may include positions contrary to the Tactical Strategy when sentiment and trend reach extremes, typically after corrections. Discretionary trades seek to add positive absolute returns to the overall portfolio, but not meaningfully increase the risk of the overall portfolio. These trades will typically be short-term (days to weeks).