As you perhaps know I have invested all my money in my own strategies, and I and my family (the best wife of all and 4 nice children) are living from the return of these investments. So, I just cannot afford to lose much money in market corrections. Therefore I always try to improve the strategies to lower the risk of major losses through hedging. Timed Hedging The new "Timed hedging" is a major improvement of the rotation strategies. It increases the Return to Risk ratio of all strategies a lot. Timed hedging allows you to reduce the downside risk or the volatility of your investment by about 1/3rd without affecting the performance of the strategies. An excellent way to reduce the volatility or risk of your investment is hedging with Treasuries. Treasuries are most of the time negatively correlated to the stock market and still have a long term positive return. In my strategy emails, I will from now on always give an indication on how you can hedge the current strategy investment. There is a good possibility that 2014 will be a more choppy market than 2013. The 32% performance of the US stock market is just crying for some corrections, even if the economy outlook is still very positive. In a normal year like 2012 without tapering, the stock market (MDY – orange) and Treasuries (EDV – blue) have nearly perfectly mirrored charts. 2013 was a special year with extremely fast rising treasury yields during the summer period. This had the effect, that long duration ETFs like EDV lost up to 20% for the whole year. Since the beginning of 2014 treasuries show again a normal negative correlation of about -0.5 to the stock market (SPY). Since hedging with Treasuries is an extremely simple and effective [...]
The TMV ETF should stay in place for quite some long time, and it´s a great investment to harvest time decay and avoid drawdown. The big tapering drawdowns of 2013 are past history. You don't need to look daily at the TMV short hedge. Just keep it. The ETF TMV is a loser and if you stay short it will be a long term winner. It should return about 10-15% per year. How to minimize a market drawdown using the TMV ETF Here is a long term chart of the TMV ETF. As you see, it lost 80% of it's value in the last 4 years. So being long TMV is one of the best way to destroy money - and this is why we short it. This to benefit from the time decay, but also to avoid market drawdown in times of market corrections. Here is a 12 month comparison with EDV and TMF. While all treasuries had quite big losses of about -7% in 2013, a short TMV position was flat over the year. EDV -7.2% TMF -18.2% (divide by 2 because TMF=+2x EDV) -9.1% TMV 0.6% (divide by -2 because TMV=-2x EDV) = -0.3% Since 2009 the average return of the ETF TMV short is nearly 20%. With normal ETFs you only profit from Treasury yield (dividends). From this you have to substract mangagement fee and time decay of leveraged ETFs like TMF. With the TMV ETF you profit from Treasury yield (dividends) and because you are short TMV you profit also from mangagement fee and time decay. You can use this technique in several of our strategies. Instead of going long the TMF ETF you just short the same number of shares in TMV. Or instead of TLT just short 1/3 of the shares TMV, [...]
Introduction to the SPY-TLT Universal Investment Strategy (UIS) This paper discusses the simple but effective method of using adaptive allocations between stock market ETFs and Treasuries to assemble a simple yet smart Investment Strategy. This method has been developed to replace the 100% switching used in normal rotation strategies like the Maximum Yield Rotation and the Global Market Rotation strategies. The real world is just not a 100% “risk on” or “risk off” world. Most of the time, the best allocation is somewhere in between. The new method employed in this investment strategy can be adapted for nearly all types of rotation strategies and is significantly increasing the return to risk (Sharpe) ratio of such strategies. The SPY-TLT Universal Investment Strategy is very simple but also very effective. I am sure, such a simple investment strategy will nearly always perform better than any manual asset picking. The Universal Investment Strategy Probably the most basic rotation investment strategy, is the switching strategy between the S&P 500 US stock market (SPY) and long duration Treasuries (TLT). The SPY-TLT ETF pair is a very interesting investment strategy, because most of the time these two ETFs profit from an inverse correlation. If there is a real stock market correction, then Treasuries like TLT have always been the assets where money flows in, rewarding holders with nice profits. Now there are two possibilities to profit from this inverse correlation. The first is a switching strategy, which always switches to the ETF which had the best performance during the previous 3 months. This really simple switching strategy between TLT and SPY gave you a 14.8% return during the last 10 years, with twice the Sharpe ratio (return to risk) ratio of a simple SPY investment. Another strategy would be to invest 50% of your money in SPY [...]
Summary: -Aggressive leveraged version of our previously published Universal Investment Strategy -Variable SPY-TLT allocations dynamically adapted to the market conditions. -45% annual return with a Sharpe Ratio of 1.3 since 2002. Due to its simplicity and low correlation to the S&P 500, there is a continued interest in the UIS version that uses 3x leveraged ETFs: ETF SPXL (Direxion Daily S&P 500 Bull 3X Shares ETF) and TMF (Direxion Daily 30-Year Treasury Bull 3x Shares ETF). Following the suggested nomenclature by Al from AAII SV - and to honor their interest, we call this version “Hell on fire”, which alludes to the high risk/return profile of the strategy. We will show ways to blend this strategy in a well-balanced and risk-optimized portfolio as to overcome the generally negative perception of private investors towards leveraged ETF.
- 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.
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?