Good performance over this last bit of market volatility. Looking at our optimistic projection, we are on track to be almost 1 year ahead by the end of this year if the market continues on it’s current trajectory.

This is current vs some of the original, and a new EOY 2019 projection

Liquid | Mortgage | Diff | |

Current 6/11/2019 | 301,114.00 | 290,526.00 | 10,588.00 |

2019 Original Projection | 272,866.00 | 279,808.00 | -6,942.00 |

2019 New EOY projection | 318,807.00 | 279,808.00 | 38,999.00 |

2020 Original Projection | 308,943.00 | 257,571.00 | 51,372.00 |

The new EOY 2019 projection accounts for a couple of stock bonuses, and assuming 3% growth across invested accounts. A 3% loss would leave us where we are today, but with mortgage down another 11K. Either way, much closer to the 51K number then the negative -7K number at the end of the year.

So different subject. I’ve been doing lots of portfolio backtesting, lots of risk analysis. Spending more time on this than I probably should. A few conclusions

- Uncorrelated assets doesn’t mean that the assets always move in the opposite direction
- Uncorrelated assets play an important role in managing risk
- The level of correlation changes over time, and is very hard to predict, so your risk is fluid but over the long haul seems to be handled well this way.
- I typically use TLT against stocks. A little gold, and now some real estate (which seems to be the most correlated to market).
- I probably need to start looking at currency pairs to find more uncorrelated assets.
- Having uncorrelated assets in my portfolio seems to smooth the curve (less volatility). It’s less risky, but of course less returns too.

Ideas:

- Do uncorrelated assets typically return to a mean? Ie, TLT and SPY correlation coefficient is typically -.3 (I’m totally making this up), then it goes to .1. Can I use that information to inform my asset allocation.
- Back to market timing models, or perhaps strategic allocation based on timing (adaptive allocation). I’m trying to back test ‘stupid’ ideas, check this result

Portfolio | Initial Balance | Final Balance | CAGR | Stdev | Best Year | Worst Year | Max. Drawdown | Sharpe Ratio | Sortino Ratio | US Mkt Correlation |
---|---|---|---|---|---|---|---|---|---|---|

1 | $10,000 | $22,446 | 6.73% | 6.57% | 13.37% | -2.21% | -13.69% | 0.90 | 1.37 | 0.62 |

2 | $10,000 | $25,187 | 7.72% | 6.92% | 13.72% | -3.16% | -12.97% | 0.99 | 1.60 | 0.67 |

3 | $10,000 | $43,468 | 12.56% | 11.45% | 34.85% | -13.09% | -25.26% | 1.02 | 1.70 | 0.81 |

Portfolio #1 is my basic portfolio I described in previous posts. Heavy bond portfolio, with some stock.

Portfolio #2, I swap out ITOT for QQQ, return is 1 point higher (which is somewhat meaningless, unless you believe Nasdaq will always out perform S&P…. so I would have to pick the right index).

Portfolio #3, I swap out QQQ for a leveraged Nasdaq stock fund (2x, QLD). It’s riskier, and way more volatile. But a 25% drawdown with 12% return per year.

Great, but what if I try something a bit dumber. TLT – QLD Split 50 50. I won’t show the numbers, but I get a 18% return with a 36% max draw down, vs a 100% QQQ which gives me 13% with a 50% drawdown.

So if you can somehow time your moves correctly to leverage up and down at the right times you might really have something. Yes you can’t pick tops and bottoms, but if the market drops 30%, I think it probable that there will be a recovery at some point, and your down side risk shouldn’t be as much (so right now, I figure the market could lose 50%, but if it loses 30% now, I’m thinking maybe another 20% max).

So double up at 20% drop, triple up at 30% drop, quadruple up at 50% drop…. but only half your portfolio. If things really go to shit, you’ve limited your risk somewhat as long as the uncorrelated asset TLT is moving somewhat in inverse (which I can think of scenarios where that wouldn’t be the case).

So trend followers would say stop betting against the down trend… This would have to be a pretty long play, and I would have to see if this actually works in the past, but the returns over a longer run should be decent with a little less volatility then a pure stock market investment…

Hoping to have results on this via a few backtests in the next few weeks.

Hi – nice post. I’m going to include you in my monthly update (if you don’t mind :)). As an aside, correlation between two assets does move. Its called correlation coefficient. Between SPY and TLT it does move about, but its not necessarily mean reverting. Also the mean could be -0.3 for example. If you could predict its movement, then you’d be the richest person alive cause you could corner the whole financial sector.

Use this https://www.portfoliovisualizer.com/asset-correlations to track. The rolling 36 month correlation graphically shows the movement.

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Thanks Jim! And thanks for the link on correlations. Helped me understand the correlation a bit better looking at the charts in the tool. Even though it’s not quite ‘mean reverting’, it still may have some value. I will hopefully get a chance to play around with back test (QuantConnect). Btw… enjoyed the analysis on your site.

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