SPY/GLD/TLT optimized portfolio balance

[Daal]

Good info to keep in mind. Yeah, this exponential debt / rate suppression regime will probably last for awhile yet and it's what's really driving the prices up in this study, but it could change. I've researched the "debt super cycle" and I am a bit afraid how it will conclude, but other than creating more monetary units to soft default what can all these countries do?

Do you happen to know good ETFs for global exposure? I am not familiar but from what I understand equities in general will behave the same way for portfolio purposes; it provides at least some diversification value (in the equities component). US appears to be the better of the bunch, but not if we keep being irresponsible, so I get what you are saying. However, when it blows it's probably going to be global anyway...

I'm still in the 12% tax bracket and I get certain write-offs such that I'm not (yet) concerned with tax impact. I can thus realize gains each year from rebalancing the portfolio as opposed to trying to defer unrealized gains. I'll worry about it when it becomes more significant.

Yes, in some tests I can run 25-30% stock instead of 20% and it does well; diversified global index may make the difference and also you ran longer time frames so I'll consider that (I didn't have data back that far since I was using ETF history).

So, any reasons you would recommend ETF, ETF options (I can't get less than 2x leverage on TLT so I just kind of standardized them all to 2.2x in my testing; you get optionality in a crash but it won't really save you), or futures as the vehicle?

VT is probably a good global ETF, its still US heavy but at least half of it isn't. But as far as leverage is concerned, I still dont like the idea.

I just have seen this stuff blow up in too many countries to be comfortable (Iceland was another one I forgot to mention). You can use 'natural' leverage though. For instance, I just happen now to be bullish in Greek stocks. Currently I have 35% of my assets in equities. about 3-4% of that is in Greek stocks. They are a lot more risky than SPY, offering a much bigger return and risk as well. So they are offering me 'natural' leverage (what I and Taleb call convexity) but A LOT less tail risks than debt leverage does. If Greece fall off the face of the earth, I cannot lose more than what I put in. Bitcoin is similar in that regard.
If you think about it, the best portfolio on earth (in risk adjusted terms) is 99% super safe assets and 1% tech startups that can be the next FB. You NEVER risk more than 1% drawdowns (in fact, less if you consider interest income) but you can STILL become a billionarie. That teaches us that in portfolio design what you want is safety+exponential returns (natural leverage). Plain old leverage can increase return but it comes with huge risks as well.

 

[BinaryAlgorithm]

I searched https://etfdb.com/etfdb-categories/ , and started to throw things into the correlation matrix against SPY/GLD/TLT. It's hard to find something that diversifies against SPY, and there are even fewer things that are not correlated to any of them (but maybe that is an opportunity to run it with more components?). To be honest I think a portfolio only needs 3-5 uncorrelated asset classes.

 

[traider]

First and foremost alpha is a syntax debate lol.

But imo alpha source is something that gives a significantly superior return profile vs. an easily replicated benchmark. And when enough people know about an alpha source it's eroded into a realistic risk premium for the risk factors associated with it, i.e. beta.

Private models or systemic trading logic that can't be easily copied by other alpha-seekers are more what I'm talking about. For example here's my best strategy quarter-to-date; I don't even know if I'd consider this pure alpha.. but stats like these are getting a little closer to the mark.

View attachment 215128

Is this on options trading? The sample period seems too short but the sharpe is fantastic.

 

[HobbyTrading]

@BinaryAlgorithm In case you are interested to visualize the portfolios you could use https://www.portfoliovisualizer.com/
In the section Portfolio Optimizer you can see a visual representation of the Efficient Frontier, giving a good indication of risk versus reward. By hovering over the resulting charts you can see what combinations of ETFs work well.

 

[BinaryAlgorithm]

Ah, yeah the same site that does the correlation matrix also does: https://www.portfoliovisualizer.com/optimize-portfolio , which is faster for testing any symbols I want to throw in. I'm running through dozens of high sharp ratio long lived ETFs for each component.

 

[BinaryAlgorithm]

After searching for ETFs for hours, I finally found something better than TLT + equity index 60/40:

Although for pure alpha, this looks promising: https://www.portfoliovisualizer.com/fund-performance?s=y&symbol=IOFIX , and http://alphacentricfunds.com/funds/IncomeOpp/FactSheet.pdf

 

[Magic]

Is this on options trading? The sample period seems too short but the sharpe is fantastic.

Yeah, options and options on futures. And you're absolutely right to take it with a big grain of salt. The more esoteric something is the more inherently unstable it is, unless you're got a high confidence arb going on.

Which is the main caution I wanted to issue to OP. Going into a medical devices ETF for an additional sliver of performance; the value you're giving up by losing robustness is way greater than the hypothetical jump in performance, even if it does materialize. Backtesting is fine, but take the concepts you learned and fit them to an intelligent forward-looking strategy. The fact that an allocation was had peak stats in a past period is to me almost a guarantee it's not going to be the best answer going forward. It may be close to the best answer at the start of the next regime which is similar to the one you just tested though.

But regarding my strategy, I don't think something this will ever make it to the confidence inspiring history you're alluding to. When the risk factors change or the yield doesn't seem as attractive for the risk I'm taking; I am going to pull the strategy. If we get another smooth quarter or two and I've done 150% on my risk capital, that's a great run. And if I have the time/inclination I'll start looking for something else. Or just keep this on the shelf in case another time comes along where the conditions seem very favorable to what this is tailored for.

 

[traider]

Yeah, options and options on futures. And you're absolutely right to take it with a big grain of salt. The more esoteric something is the more inherently unstable it is, unless you're got a high confidence arb going on.

Which is the main caution I wanted to issue to OP. Going into a medical devices ETF for an additional sliver of performance; the value you're giving up by losing robustness is way greater than the hypothetical jump in performance, even if it does materialize. Backtesting is fine, but take the concepts you learned and fit them to an intelligent forward-looking strategy. The fact that an allocation was had peak stats in a past period is to me almost a guarantee it's not going to be the best answer going forward. It may be close to the best answer at the start of the next regime which is similar to the one you just tested though.

But regarding my strategy, I don't think something this will ever make it to the confidence inspiring history you're alluding to. When the risk factors change or the yield doesn't seem as attractive for the risk I'm taking; I am going to pull the strategy. If we get another smooth quarter or two and I've done 150% on my risk capital, that's a great run. And if I have the time/inclination I'll start looking for something else. Or just keep this on the shelf in case another time comes along where the conditions seem very favorable to what this is tailored for.

My thinking is slightly different, I will first get a good day job. Then I will bet the farm if the strategy really has sharpe > 2. If it works out retire, else just continue slogging.

 

[Magic]

My thinking is slightly different, I will first get a good day job. Then I will bet the farm if the strategy really has sharpe > 2. If it works out retire, else just continue slogging.

Nothing wrong with that. A lot of trading questions are based off personal utility functions. Really pressing an advantage should lead to a good mean outcome for your distribution of possible outcomes. But that will also introduce some pretty poor outcomes in the left tail. In theory, with marginal utility of the next dollar dropping off, so even a slim chance of a significant loss isn't worth additional growth potential. When you're bootstrapping that isn't much of a concern. Most people I know who have been at it for a while naturally start to hedge their bets.

 

[clacy]

What you are describing is not too far off of Harry Browne's "Permanent Portfolio". There is a lot of info on the permanent portfolio.

25% Gold
25% US stocks
25% Long duration treasuries
25% short duration treasuries