First of January 2018 after a fabulous year in the markets and hopefully also your account. What better time than to spend some hours on revisiting our portfolio allocation to be ready for whatever the new year will bring? As stated previously we update and re-optimize our fixed-weight portfolios in the Portfolio Builder about twice a year. To recap, why do we re-optimize portfolios periodically? Modern Portfolio Theory by Harry Markowitz uses past returns and covariances to construct portfolios which optimize the expected return and variance. While fundamental MPT aficionados would advise to stick to your allocation for several years, at Logical Invest we advocate for a more flexible approach with regular reviews which in our view ensure your portfolio allocation considers also recent market developments. 2017 has been marked by steadily increasing equities while subdued volatility is taking historical levels. SPY, our proxy for the S&P 500 has returned 21.7% while TLT, proxy for the 20+ year bond market has returned 9.2% . The “fear index” VIX, representing S&P 500 volatility, has seen readings in the lower tens most of the year, a historical low of 8.84 and only four spikes above 15, which is the 10 years average. How have our individual strategies performed so far? The strong run in equities coupled with low volatility has provided clear medium-term trends and therefore runs to our high-performing strategies. For example, the Maximum Yield strategy returned close to 65%, this thanks to being in average two thirds invested into ZIV, which alone represents around 48.0% of this return. How has this translated into our Markowitz optimized Portfolios? 2017 has been a mixed picture for the pre-configured portfolios. As some strategies like the Maximum Yield and 3x Universal Investment performed well at or above the historical levels, others performed below [...]
We’re delighted to be invited as exhibitor and speaker to the 2015 Annual Conference of the American Association of Individual Investors (AAII) from Nov 7-9, 2015 at Las Vegas. Frank and I will be attending the conference and we would love to meet you there. Our workshop on Monday, November 9 will have the following topics:
In the past 20 years I traded nearly everything you can trade, including commodities. Since about 10 years, I have gone from purely emotional trading to systematical rule-based trading. Today, I don't trade anything anymore, if I cannot reproduce a positive backtest of my trading strategies. Today I stopped trading commodities, because it is very difficult to get good results with backtested strategies. My core investment strategy is the "Global Market Rotation Strategy", which I presented in my first Seeking Alpha contribution. This is a very good and safe strategy and also this year the return is already 28.4%. The only commodity I trade at the time is Silver. With Silver it is different. There is no way to include silver in a successful rotation strategy. Silver is much too volatile and it is much too easy for big investors or banks to influence the price. However, one thing I still think I understand is the value of something. I do not like value investing with shares, because shares can go to 0. With commodities it is different. Today you can buy silver for $22/ounce and we know that production costs are between $25-$30. Even if there is no shortage of silver at the moment, I think for a longer term investment silver is extremely interesting. No commodity ever remained for long time below production cost. With such a constellation the downside risk of the silver price is much smaller than the possibility of higher prices. The other interesting argument for a silver investment is, that silver is extremely cheap to buy. I am using a broker (Saxo-Bank) in Switzerland which allows you to trade silver like a Forex currency. I can buy nearly every amount of silver with extremely tight spreads and no initial margin is required. With [...]
Intelligent Algorithms run two prallel sub-strategies. Meta- layer chooses between the two sub-strategies based on current market conditions. Variable allocation to Treasuries provides protection from large drawdowns. This strategy is a good fit for investors that want to invest intelligently in the U.S. equity market as well as for stock-pickers looking for a rules-based growth strategy. The strategy can also complement our existing strategies and can work well with our more conservative strategies like BRS (bond rotation), the BUG or with non-U.S. equity strategies like World Top 4.
Update January 2017: The recent performance of investing in volatility can be seen here. You are probably wondering how we could achieve yearly performances of more than 50% with some of our rotation strategies. The reason is that the Maximum Yield Rotation Strategy and the Global Market Rotation Enhanced Strategy are investing in inverse volatility. Invest in inverse Volatility So, here are now some facts to show you why I like inverse volatility so much. In this chart you see the performance of the ZIV mid-term inverse volatility ETF compared to some other global market ETF from our rotation strategy. The ZIV performance of 76% for the last 12 month was just incredible. In the next chart you see a comparison of the VIX volatility index compared to the ZIV performance. ZIV has a inverse relation to the VIX index. This means that ZIV goes down when volatility or VIX goes up. For the 1 year period VIX is more or less the same (+0.19%). The VIX index is now at 15.6%. So, why did ZIV go up so much, when the VIX index is unchanged? This is because of the strong contango of the VIX mid-term futures of which the ZIV ETF is composed. If I calculate, then I get an average monthly performance of 4.8% (=12. root of 1.76), during the last 12 month, due to the strong contango of the VIX futures which track volatility. At the moment the monthly "roll yield" of ZIV is a little bit lower, but it is still about 3% per month. Now, if you look at the ZIV performance you see that ZIV only made 0.69% since April 12. Why this??? If you look at the VIX Index, you see that during the same period, it went up by almost 30%. [...]
- The Gold-Currency strategy trades Gold vs 3 major currencies.
- It is based on the negative correlation between Gold and the U.S. dollar Index.
- It is an excellent addition to existing equity or bond portfolios as it holds very little correlation to either.
- It can be traded using ETFs, Futures or even low-margin/low-cost FX pairs.
In this paper I want to explain the readers how the Maximum Yield Rotation Strategy of www.logical-invest.com is built. This strategy harvests the so called Contango. Harvesting Contango by investing in inverse volatility This Strategy harvests contango and achieves very high returns investing in inverse volatility. From 2011 to today the annual performance was more than 70% per year. Year to date the performance is 40.9%. The Sharpe Ratio (Return/Risk) of 2.12 is a "DREAM VALUE" and I doubt that someone can show me a strategy with a higher ratio. The strategy invests in 4 different ETFs and harvests the contango: US Market (MDY - S&P MidCap 400 SPDRs) U.S. Treasury Bonds - (EDV Vanguard Extended Duration Treasury 25+yr) Volatility - (ZIV VelocityShares Inverse VIX Medium-Term) cash - (SHY Barclays Low Duration Treasury) only if Treasury correlation to SPY > -0.25 The Maximum Yield Strategy switches semi-monthly between these 4 ETFs. For the switching I use a ranking system like the one I explained in my SeekingAlpha article of the Global Market Rotation Strategy. The ranking system is also using 3 month historical performance and 20 day volatility. Using also volatility is quite important for harvesting contango, because it reduces the ranking of high volatile ETFs like ZIV. However, if you want to play such a rotation strategy by yourself, then you can also just look at the 3 month historical performance to benefit from contango. In this strategy the ZIV ETF is the most important performance driver. ZIV can only be backtested since 2011, so that I cannot present a longer backtest for the whole strategy, but the way the strategy is built, you can backtest parts of it for more than 10 years. Benefit from Contango The Maximum Yield Rotation Strategy is composed by several smaller sub-rotation strategies. Here is an overview of [...]
It has been now 18 months since our post on “The power of diversification: Portfolios of Logical Invest Strategies”. Back then our main argument for diversification using a robust portfolio of several of our strategies was that “diversification is ‘a rare free lunch’, it is well accepted part of modern financial portfolios, and to stay financially healthy it is important not to skip lunch”. Several new strategies have been published since then, among them the “NASDAQ 100” strategy, the “Gold-Currency” strategy and our “Hell on Fire”, the 3x leveraged Universal Investment strategy. At the same time, we went through the bumpy start into 2016 and most recently the waves created by the BREXIT referendum. Does our stated hypothesis of formerly presented portfolios still hold true? How have the individual components performed, and most importantly, have they added value through low correlation? Have new optimum portfolios emerged since then?
Several times I have been asked why we invest in ZIV (inverse mid-term volatility) and not in XIV (inverse front month volatility) in our Maximum Yield Rotation Strategy and in the "Global Market Rotation Enhanced Strategy" to harvest the volatility premium. Harvest Volatility Premium smartly After all, front month VIX Future contango is about 2-3x bigger then medium term contango. At the moment XIV profits from nearly 9% monthly VIX Futures contango. ZIV profits from about 3% monthly VIX Futures contango, or volatility premium Normally you would think that XIV should have a far better performance than ZIV, but now look at this chart of the 1 year performance. ZIV has performed very well. With 64% annual performance it performs nearly 4% better than XIV and this with much less volatility - thus allows better to harvest the volatility premium. The main problem is that both of the ETFs are inverse ETFs. This means that underlying they are constructed by shorting VIX futures. These ETFs are rebalanced every day and this results in a quite big time decay. XIV has a very high volatility of about 55% compared to only 25% for ZIV. Higher volatility means also bigger time decay losses. The 25% volatility of ZIV fits very well to the volatilities of our global market ETFs (MDY, FEZ, EEM, EPP, ILF). Rotation strategies work better, if the ETFs have more or less the same volatility. Rotation Strategy backtests - all to benefit from volatility premium If I backtest our Maximum Yield Rotation Strategy with XIV instead of ZIV, then I only get an annual performance of 31% with a volatility of 48% since 2011. With ZIV, I get 70% annual performance with only 27% volatility. This is a huge difference, which shows you, how important it is, that the ETFs [...]
Logical Invest's QuantTrader Software A QuantTrader subscription is our state-of-the-art solution for professional investors. You can run our QuantTrader software right on your PC. Logical Invest QuantTrader QuantTrader is C++ based proprietary software used to calculate and backtest the Logical Invest investment strategies. All Logical-Invest strategies are included. The user has the ability to tweak the parameters of the strategies to their needs. They can perform full backtests of a strategy for as far back as data is available. They can instantly generate updated trading signals (rebalancing instructions) on any day of the month. Logical Invest QuantTrader detail 1 For larger multi-strategy accounts, a professional trader can use QT to create dynamic "META-strategies" that pick and allocate across existing Logical-Invest strategies. These 'META-strategies' can be tweaked to desired risk levels. They can be backtested as well as run in 'real-time' to create both strategy level and ETF level re-balancing instructions. Logical Invest QuantTrader Meta Strategy Access to QuantTrader gives professional investors several advantages over the monthly Logical Invest strategy emails: QuantTrader Highlights: Daily automatic download of the ETF/Stock closing prices Daily updated strategy performance visible. The software shows performance charts and detailed statistical information Performance logs and ranking logs can be exported in excel format. Like this it can be included easily in reports. Every day the optimum allocation is indicated. This allows strategy rebalancing whenever you want. This way, you can for example rebalance before the official end of month rebalancing. It is very simple to change strategy parameters. This way an investor can fine-tune its risk return profile. It is for example simple to limit volatility of a strategy to a certain level (for example 5%) All Logical-Invest strategies and many more strategies are included in the license. New strategies can be easily built and tested. You [...]