Depends on your net worth. If you’ve got significantly more than 25x of your annual expenses, your sequence of returns risk (risk of portfolio crash shortly after retirement, getting you on a long-tern low return path) is pretty small. So I think you should be fine with as little as 10% non long-only stock/bond assets. Cheapest would probably be gold or commodities. Personally, I’ve come to like pure trend strategies due to their ability to go long or short on bonds, commodities and currencies. This makes them less path-dependent and able to opportunistically profit from both favourable and unfavourable market environments. They basically open up a second dimension to classic long-only investing: shorting. Disadvantage: It’s a relatively niche strategy with high costs. People don’t like it, because it can underperform for years (lots of small pain, then possibly big gains, aka positive skewness or right tail).
You could have a look at the SG trend index to check if you like the results. Important: Don’t look at the performance of trend alone, but how it enhances performance of your total portfolio (avoid line-item thinking). What matters is total portfolio CAGR and/or Sharpe, not single asset CAGR/Sharpe. Also: There’s a nice rebalancing premium to be gained in a total portfolio context, which does not show up when looking at single-asset performance.
You can’t directly invest in an index, but there are some relatively new ETFs you could have a look at: KMLM, DBMF and CTA. I prefer KMLM because it’s based on a passive index that’s been around since the 80ies. Also, it does not contain equities, which makes it a better diversifier to your long equity allocation.
For backtests with Portfolio Visualizer, you might want to use some of the long-standing (and more expensive) trend mutual funds, such as AMFAX, MFTFX etc.
I want to begin by thanking you for the information provided. Now on to more critical words:
They seem to be hard selling CTA Trend strategies. Especially the hypothetical All-Terain graph at the end - smooth as a baby’s bottom and with a CAGR double of 60/40 - reeks. They don’t happen to sell such products?
I don’t claim I understand what is happening here. I saw that AMFAX had high returns where stocks had losses and okeyish CAGR. MFTFX had bad CAGR.
It is important to note that producing uncorrelation or anti-correlation with stocks is not hard (just use cash or buy an inverse S&P500 etf). Doing so whilst having good returns is. So good that you can beat other portfolios in returns and risk (potentially by using some leverage).
Diversification for diversifications sake doesn’t bring much to the table. Tail risks that bring the MSCI World to zero should be hedged with ammunition. For everything else focusing too much on reducing risk destroys return. You can stomach bad years if the good years make it worth the wait.
They also provide monthly index data from 1988. (link to FAQ)
I didn’t have time to analyze it, but if someone wants to make some pretty graphs with comparison to other asset classes…
As far as I understood returns are generated by absorbing the price risks of others, market irregularities, and more. Of course someone must do this arbitrage. I’m just not sure how lucrative this is for an investor.
@oslasho Yes, I think you get my point, it’s modern portfolio theory. The question is: Will adding a certain asset improve overall portfolio CAGR and/or Sharpe. The beauty of trend is: It’s been very much uncorrelated to both stocks and bonds (more so than gold or commodities). And yes, it lowers total portfolio vol, which is great for decumulation.
@Helix Take MFTFX, add 10-20% to your favourite portfolio instead of bonds, and then tell me if you like the results
Of course, I don’t like anything but stocks, but that’s not the point here. I need diversifiers because I’m heading towards FIRE. And adding bonds alone to my equity is far too risky imo, there’s inflation and interest rate risk people tend to forget. And I understand why: bonds have had an unprecedented run since the 80ies, combined with deflation. Of course, you don’t need trend, gold or commodities might do just as well.
I do, but 10 years are not much for a backtest. Could simply be luck that it complements stocks nicely during the last decade. I mean longterm Treasuries are dubious in 40 year backtests. Interest rates have been going down since the early 80s, undeservedly skewing everything in their favor.
KMLM has longer data. Good looking one too. I might consider it after some further due diligence. Tracking error due to cost, and any strange risks (they are leveraged 3x), the profit of the strategy comes from absorbing risk during market panic.
Still, I’m very interested in how and why did you find this fund?
As you’re already financially independent the latter will help you improve thinking about spending levels (vs 4% rule heuristics) and the former will help build some mental scaffolding on failsafe ways to improve long-term growth
Also it amuses me you’re listening to Hoffstein, he’s a
Also, thanks for your reading suggestions. Do you think tail hedging makes sense long-term for unleveraged portfolios, given the costs? Especially compared to just holding multiple uncorrelated assets/strategies with positive expected returns?
Safe havens in one period of market volatility may react differently in another, so there is no consistent safe haven approach other than portfolio diversity, imo. The only reliable safe haven is buying puts, which is an expensive loser’s game long-term imo.
You can download the SG Trend index (not SG CTA index) and ask KMLM to send you the MLM index. Both go further back in time. MLM does not include costs.
Buying puts is not a loser’s game in the same way buying insurance isn’t – while it’s costly at the individual level it’s highly beneficial at the overall portfolio level!
One good mantra is “I don’t care about being right I care about making money”, so after you make a bundle on a strat all those debates fade into the background lol
As to Hoffstein, I think he’s both - do checkout episode S2E2 with Benn Eifert, he’s more of a quant and it’s super interesting
CHF hedging means you are trying to mitigate/negate the Swiss inflation. No bond nor fund that I know of does that.
You can mitigate the inflation happening in the countries using the currencies of the inflation linked bonds but if you are not spending in them, it does you little good and is more of a bet on unexpected inflation in those countries than a rightful protection.
Even then, @Compounding do you understand what inflation linked bonds are?
They do not protect against inflation, they’re used to bet for/against inflation predictions. They performed very well recently because actual inflation was above the predicted inflation, but in the future even with high inflation, it doesn’t mean they’re better than e.g. bond (inflation could for example stay high, but be below the predicted rate).
Real assets would cover commodities (among which gold), probably unleveraged real estate (so no REITs, that usually have a large exposure to debt instruments), maybe artwork and collectibles and anything non-perishable that you can buy and won’t go out of fashion. Those either have volatile prices, are illiquid or both so aren’t perfect inflation hedges.
The usual longer term hedge against inflation are usually considered to be equities. As Swiss investors, we don’t have, to my knowledge, reliable short term instruments to hedge inflation.
Arguably, human capital or AHV/IV (depending on your stage of life/situation) would be good hedges, as salaries are often indexed on inflation and AHV/IV is.
Edit: scratch my former reply to @nabalzbhf (deleted to replace by this): indeed, as inflation linked bonds bought on the secondary market are subject to market expectations, they are not directly linked to actual inflation, though they allow to make a prediction of the amount of real currencies that will be available when they mature.
I haven’t done active research on them so, no. I would actually be very surprised if real estate funds without the use of leverage existed, except maybe if they invested in agricultural land only.
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