In my last piece I mentioned the importance of doing more than just buying and holding stocks and/or mutual funds. Nothing wrong with putting some money into the market and leaving it there. But if that’s all you ever do, then repeat after me.
The investor who puts all of his or her money in the stock market and leaves it there is like a ship at sea without a rudder. When the winds are favorable things will go really well. When a storm arises some very, very bad things can happen and you have absolutely no control (except to hold on tight and hope the storm passes while you are still afloat).
So for what it is worth, ponder the approach listed below:
*40% on a buy-and-hold basis in the stock and/or bond markets
*30% in objective trading and/or investment strategies that can outperform over time
*20% in short-term trading strategies (can go to cash and maybe go short, and may include options trading)
*10% in cash or hedging positions
You can include only 2 or 3 of the above and you can change up the percentages anyway you’d like. The point is not that the categories and percentages that I mentioned above are “optimal.” The point is that this approach of diversifying among different trading strategies affords you multiple opportunities to make money – possibly even while the stock and/or bond market is not performing well.
The Role of Objective Strategies
When I mention “30% in objective trading and/or investment strategies” I am talking about strategies with specific trading rules that can be back tested in order to give you some idea regarding potential returns. While “future results are never guaranteed” at least you can have some idea of what to expect and probably even more importantly, there will be no emotional reactions to market events. The trading rules trigger as designed and are followed rigorously.
Two strategies of note in this regard were developed by Alpha Investment Management. The company offers five managed account programs, each of which track a specific, objective trading strategy (including the Multi-Income Strategy for which I am the portfolio manager).
The two that I wish to highlight here are the Bonds Strategy and the Mid-Cap Power Index Strategy. Both of these strategies have excellent long-term track records and notably, both managed to sidestep the stock market plunge last week.
The Alpha Mid-Cap Power Index Strategy has sported an average annual gain of +13.23% (after fees) for the 15.5 years ended June 30, 2015**. As of June 30, 2015 the program was up +3.2% for the year and was (and still is) invested in an Intermediate Term Treasury Index fund.
** – Disclaimer: Past results are no guarantee of future results
Strategy Methodology: Each year, the Alpha Mid-Cap Power Index Managed Account holds an S&P Midcap 400 Index fund from late-October to the end of May and then invests in an Intermediate Treasury Index fund for the remaining months of the year. As a result, equity exposure is constrained to 60% of the available trading days each year. During the fourth quarter of each year, the strategy raises the beta of the mid-cap index fund by 50% during three “power period” trades totaling 20 days. These three sub-periods are influenced by end-of-month and holiday seasonal forces which are particularly robust in small and mid-cap stocks.
The Alpha Bonds Strategy has sported an average annual gain of +8.4% (after fees) for the 15.5 years ended June 30, 2015**. As of June 30, 2015 the program was up +0.3% for the year and was (and still is) invested 40% in intermediate corporate high grade bonds, 30% in intermediate term treasuries, and 30% in low duration securities (which reduces volatility due to interest rate changes).
** – Disclaimer: Past results are no guarantee of future results
Strategy Methodology: Each year, from January 1 until late-October, the Alpha Bonds Strategy holds a position of 70% intermediate-term bond funds / 30% short-term bond funds. Then in late-October, 40% of the portfolio remains in intermediate-term bond funds while 60% of the portfolio is devoted to three “power period” trades invested in a Russell 2000 Index fund leveraged by 50%. While not invested in the three fourth quarter trades, 60% of the funds are allocated to cash/money market fund.
Summary
The purpose of highlighting these two programs is simply to illustrate the fact that it is possible to make money in the stock and bond markets using objective trading strategies and that it is possible to do so while also avoiding some of the pain and suffering that can accompany traditional stock and bond market investing.
Diversifying the types of strategies that you use can not only enhance your long-term investment results, but can greatly reduce overall portfolio volatility.