A hedge is always an investment which is negatively correlated to the main investment. When the main investment goes down, the hedge should go up and if the main investment goes up, then the hedge normally goes down. It is clear, that we like the first, which is to reduce the draw downs with a hedge, but not to reduce the gains. If you have a stock portfolio, then the main hedge possibilities are: A VIX ETF like VXX or a VIX Future. These have nearly a -1 correlation. An inverse ETF on a index like SH which is the inverse of the S&P 500 SPY ETF Precious metals like GLD or SLV Treasuries A lot of people use 1) and 2) to hedge their positions. This may probably make sense if you have a big stock portfolio, and you can not sell everything instantly in case of a market crash. These two must be perfectly timed. I do not think it makes sense to use them as a hedge for longer periods because the VXX ETF has an extremely strong down trend of about 5-10% per month. This is a very effective but also very expensive hedge. Such a hedge will ruin the performance of your portfolio if you keep it longer then one or two weeks. Same with SH. Because the S&P 500 has a long term up trend of about 8%, you will lose about these 8% per year if you use SH as a long term hedge. Precious metals 3) are much better. They are a safe haven investment. They normally have an inverse correlation to the stock market in times of trouble and on the longer term they should go up at least because of inflation. Gold and Silver are today priced about at their [...]
An analysis of Harry Browne´s Permanent Portfolio and further enhancements towards: A Permanent Portfolio ETF Rotation Strategy employing Momentum, Mean Reversion, and Volatility Targeting. It’s not just cars. It’s investment strategies like the permanent portfolio, too. Vintage "all-weather" investment strategies are often simple, easy to execute and give amble 'out-of-sample' data. In other words one can see how they performed in life years after they have been proposed. And like the VW bug, they are "safe" choices. Tried and true. Can you imagine a 1965 VW running in the Autobahn? Although the essence counts for a lot, for the car to survive at today's highway speeds the tech needs to be up to date. So let’s take my favourite oldie and bring it up to speed: Harry Browne’s Permanent Portfolio. The Permanent Portfolio by Harry Browne From Investopedia: … Browne believed that the four asset classes would thrive in one of the four possible macroeconomic scenarios that exist. Stocks would thrive during periods of economic prosperity. Bonds would do well in deflation and acceptably well during periods of prosperity. Gold during periods of high inflation would rapidly increase in value as the only true defence against a deteriorating currency. Cash would act as a buffer against losses during a routine recession or tight-money episode, and would act well in deflationary times. So let’s see how the original permanent portfolio Harry Browne first published has performed. The original rules of the All Weather Portfolio: 25% in a stock market Index ( S&P 500) 25% in Treasuries 25% in Gold. 25% in Cash or similar Not bad. Annual return is 7.1% and maximum draw-down comes in at 17.84% since 1992. For a far more detailed analysis of the so-called fail-save investment or permanent portfolio or "PP" you can see Gestaltu's excellent "PP Shakedown" [...]
This past Friday (3/6/2015) was a difficult day for most portfolios that are long any major asset excluding the dollar index and volatility. Stocks, bonds and gold ETF declined. SPY was down 1.4%, TLT fell 2.2%, GLD (Gold ETF) also down 2.7%. We got some reactions from some of our subscribers asking if the models are failing, especially regarding the Gold ETF. So let's put things in perspective. Is this common? As you can see this is an outlier. It has only happened a few times in over 12 years that all, including Gold ETF fell. Well, let's ask another question. Is it often that both SPY and TLT fall the same day? On the other hand, the SPY and TLT declining on the same day is not uncommon. Let's say we panic, we think everything is going down and short on the next open. We cover the next day close. Over time, we lose money...not a good idea. Top pane: Price of 20 year Treasury ETF: TLT. Lower pane: Bakctest results starting with 100k. Now let's do the opposite. We go against our instinct and actually buy both SPY and TLT at the next day open. We sell the next day at the close. We see that over time this is a better strategy. Top pane: Price of 20 year Treasury ETF: TLT. Lower pane: Bakctest results starting with 100k. So what does this mean? Co-movement between equities and bonds are not uncommon. It does not mean that the basic correlation between the two assets has fundamentally changed. History shows that thinking something is wrong and selling is counter-productive. The idea is to have a long term plan and to follow it while paying less attention to short term movements, news, hype and emotions. It is possible that a model stops working. In this case, that would mean the fundamentals [...]
- 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.
Logical Invest Investment Outlook March 2016 Market comment: February was another high volatility month, however it now looks like the world markets are slowly recovering. Here is a Year-to-Date chart of the world markets together with the defensive TLT (long duration Treasury) and GLD (Gold) ETFs. Last year, the normal inverse correlation of both TLT and GLD to equities failed to materialize for quite a long time. We had several months where Equities, Treasuries and Gold went down simultaneously. This was a very unusual and difficult situation for our strategies. This uncommon situation, where correlations between safe heaven assets (Treasuries and Gold) and Equity did not work as expected was due to the rare occurence when the FED tries to change to a regime of rising rates after years of falling rates. By now, it seems that this transition may not materialize in the near future, at least not as originally planned. This is very good for both Treasuries and Gold. Looking at the market from this correlations-based point of view it seems that so far this year everything is back to normal again. The stock market went down and the defensive treasuries and Gold went up. This is all we want. It allows our strategies to profit and outperform even during market corrections. Year-to-Date, most Logical Invest strategies are doing quite well. Only the most aggressive equity momentum strategies are still slightly negative, but this can change very fast if the market recovers. The new Gold strategy did very well this year and we think that such a strategy provides excellent diversification because it profits from the worldwide trend of central banks to fight deflation by printing more and more money. Every country tries to weaken their currency more than the others, and the winner of this will be precious metals, because these cannot be artificially duplicated. So, all together we [...]
Logical Invest Investment Outlook April 2016 ETF strategies
Logical Invest Investment Outlook June 2016 Our top year-to-date strategies: The Leveraged Universal strategy with 17.1% return. The Maximum Yield strategy with 16% return. The Nasdaq 100 with 7.58% return. SPY, the S&P500 ETF, returned 3.46%, year-to-date. Market comment: This year, the old saying "sell in May and go away" seems to express many financial writers and investors. The March-April excitement has been replaced by fear and caution: A possible June rate hike by the Fed, the June 23rd British referendum over EU membership and a coming oil/commodities/foreign exchange correction are all quoted as market risks. The AAII sentiment survey shows that only 17.8% of individual investors expect the market to rise in the next 6 months. This reading is extraordinary: The last time so few investors had bullish expectations was not in 2009. It was in 2005. In this backdrop of sceptic writers and fearful investors, the S&P 500 index is once again reaching new heights defying various bear predictions. Bonds, having had an excellent 6 month run, have stayed flat for May as a future rate hike is being priced in. The expected Fed move is seen as dollar positive, which could explain the correction in commodities, foreign exchange and emerging market indices. Another argument for the bulls, is the fact that we are in the midst of an election year, which historically has been market positive. So far 2016 has been very bullish for most asset classes and it remains to be seen how this positive pre-election bias gets counteracted by what usually is a more volatile summer market. This past month (May 2016) our strategies followed the pattern of strong U.S. equity performance and an emerging market / commodity price correction. The Nasadaq 100 strategy returned 3.7%. The Maximum Yield strategy came in at 3.2% followed by the aggressive version of our Universal strategy at 3.5%. In the same period, [...]
Logical Invest Investment Outlook July 2016 Our top year-to-date strategies: The Leveraged Universal strategy with 29.4% return. The Maximum Yield strategy with 24.6% return. The World Top 4 with 12.6% return. SPY, the S&P500 ETF, returned 3.82%, year-to-date. Market comment: The big event for June was the British E.U. membership referendum. Contrary to widespread expectations, Britain's vote was in favour of leaving the Eurozone. Anyone trading on the 23rd experienced unprecedented volatility as the VIX first crashed on expectations of the "remain" camp winning and subsequently spiked up as the actual results came in. As of this writing the SP500 has almost recovered. Still, this provides an excellent opportunity to see how our strategies perform under a real and unprecedented market shock. Our core strategy, UIS saw a drawdown of barely -1.45%. Our BUG leveraged strategy, being 200% invested, lost no money and returned +7.4%, its majority allocation being in gold, treasuries and inflation protected treasuries (TIPS). Our year-to-date top performers, the UIS 3x and MYRS strategies, returned +10.4% and +7.4%, completely ignoring the 'black-swan' event. So let us take a closer look and see why our strategies remained robust in this type of risky environment. Most of our current subscribers are familiar with the fact that all our strategies are hedged using treasuries, some using gold as well. The idea is to participate in longer term growth through equity investment while hedging part of the portfolio in a leveraged treasury ETF. When a market negative event materializes, money flows to traditional safe heavens like treasuries or gold. Having a (variable) allocation to these will dampen the shock to the portfolio and sometimes even provide profit, especially if the shock to the system is temporary and the equity part recovers. Of course all this assumes that ETFs like SPY and TLT/GLD are inversely correlated, which is mostly the case. No wonder that most our strategies had a good June return: The two BUG strategies, being exposed to both TLT and [...]
Logical Invest Investment Outlook August 2016 Our top year-to-date strategies: The Leveraged Universal strategy with 40.6% return. The Maximum Yield strategy with 34.3% return. The World Top 4 with 20.6% return. SPY, the S&P500 ETF, returned 7.6%, year-to-date. News: Our in-house software is available for licensing to professional clients. We are looking for registered investment advisers and wealth managers to partner with. Market comment: Sentiment across mainstream media remains cautious despite the S&P500 index breaking to a new all time high, on July 8th. Many investors continue to perceive both the S&P and Treasuries as overpriced and due for a correction. Increased geopolitical risk includes the recent coup attempt in Turkey and a highly unstable environment in Syria. Europe has somewhat recovered from the Brexit shock only to find itself in a new controversy over troubled Italian banks. The ECB is continuing the controversial path of negative rates policy and widespread corporate bond purchases. Increasingly low yields have many wealth advisors prepare their clients for an era of lower future returns while they issue warnings of increased volatility. Short term traders remain baffled at this somewhat 'unresponsive' market, where neither the Turkey failed coup or the news from Italy have managed to 'spike' the VIX, which has steadily crawled down to a low 11.8. And yet we are enjoying a wonderful year. Our top two strategies continue to provide handsome returns: 34% for MYRS and 40% for 3x UIS. Our average return of all our strategies is 15.8%. July was most kind to our Nasdaq 100 strategy as it recovered 9.5% from a recent correction. It is up 13.8% for the year. Our current leaders, the MYRS and 3x UIS strategies continue on to higher profits with July returning 8.6% and 7.8% respectfully. The World Top 4 strategy follows with 7.1%. The BUG leveraged added 3.7% and is up 15% for the year. Our core conservative UIS is at a respectable 12.9%. Looking at 3 month Sharpe ratios, we get a similar picture: The winners in risk adjusted performance [...]
Special Topic: IRA Investments using QuantTrader, our Backtest Software Logical Invest Investment Outlook November 2016 Our top year-to-date strategies: The Maximum Yield strategy with 32.61% return. The Leveraged Universal strategy with 21.42% return. The World Top 4 with 17.66% return. SPY, the S&P500 ETF, returned 5.87%, year-to-date. Market comment: Recent surveys show that fund managers have increased cash positions1 while outflows from equity funds are at historically high levels2. From a contrarian point of view this could be considered market positive. There are two bullish seasonal biases kicking in: The presidential year is nearing an end and we are walking into the traditional strongest months of the year. The beginning of the month may be volatile as markets react to elction results. It remains to be seen how and if these results will affect the rest of the year. All our strategies corrected during October. Our hedged Gold strategy was almost flat at +0.17% while our aggressive 3x UIS suffered a -11.02% correction. The World Top 4 lost -1.80% while most other strategies lost anywhere from -2 to -4%. This was partly due to a sudden correction in Treasuries, causing TLT to lose almost 5% for the month. SPY was down -1.73% and GLD -2.74%. This type of rise in cross-asset correlation was seen in 2015. In the graph below you can see how TLT an GLD correlations to SPY turned positive in October. Correlations of TLT and GLD become positive end of October. We have found this type fo behaviour to correlate to a strengthening dollar. UUP the ETF that tracks the dollar index is up 3% for the month, a fairly large move, causing the index to approach towards it's 2015 highs. We are taking this into consideration even though the environment is quite different this year. While commodities and foreign markets were crashed by the 2015 dollar move, selected markets are showing tremendous strength, namely coal (KOL:+69% [...]