Investing during market turmoil

Maybe the best thing about quant or automatic investing is the peace of mind it provides during times of market turmoil. While I would by no means characterize the recent market action as ‘turmoil’, many investors seem to think it is. It always amazes me how short term the investor memory is. Has everyone forgotten the corrections of 2010 (16%) and 2011 (19%)? Of course, in theory, the buy and hold investor should be in a state of peace, confident in the long term, and ignoring the short term fluctuations of the market. But as that wise man, Yogi Berra said, “In theory there is no difference between theory and practice. In practice there is.” As evidenced by the abysmal historical record of the average investor. This is where automatic or quant portfolios shine by having built in automatic decisions and risk management. So, lets look at some examples of what quant investors are doing today.

First, I’ll start out with the automatic diversified ETF portfolios like the IVY varieties. This also includes the Permanent Portfolio and many others but I’ll focus on the IVY versions. Below are some screenshots of what and investor in these portfolios would be doing today. Lets start with the basic IVY portfolios. The status of the GTAA5 and GTAA13 portfolios is shown below. I keep spreadsheets for these portfolios that update automatically which you can access here and here.

A GTAA5 investor would be 60% invested and 40% cash right now. A GTAA13 investor would be 55% invested and 35% in cash. Due to the recent market pull back some of the riskier assets have triggered their risk management provisions and commodities have been in cash mode for a while. No thinking required, automatic decision making once a month. Now for the more aggressive portfolios, GTAA AGG3 and AGG6. Their status is shown below.

Both GTAA AGG3 and AGG6 are still fully invested. Notice how the GTAA AGG portfolios have shifted more to risk off assets (bonds) during the recent turmoil. In general, the AGG portfolios stay more invested than the basic GTAA portfolios because they always seek the assets classes that are moving higher the fastest. It is quite quite rare for these portfolios to move completely to cash. In fact, in the last 10 years these portfolios only spent 3 months at 100% cash. Again, automatic decision making.

The IVY portfolios are just a few examples of the many types of diversified portfolios out there. The same risk management, automatic decisions can be applied to other portfolios as well. Below are some of the other portfolio choices out there (from Meb Faber). By the way, if you are a die hard buy and holder then the Permanent Portfolio is the easiest to implement and due to its low volatility and drawdowns has shown that is probably the easiest portfolio to stick with.

Now what about the individual stock quant portfolios that I’ve presented here? Those quant portfolios are buy and hold portfolios with a holding and re-balancing period of 1 year. As I detailed here you can then use a bond allocation to manage risk and drawdowns. For example, you can target a max drawdown of less than 10% by choosing a 30% quant stock portfolio with a 70% bond portfolio. Otherwise, there are methods to implement automatic risk management into individual quant stock portfolios. It is something I’m using myself and will have some posts on the topic in the future.

In summary, it’s times like these where automatic investing really shines. Having a systemtatic investing process takes much of the worry out of wildly gyrating markets and the investor uncertainty that comes with it.