Tips & Ideas 

The ultimate sophistication in investing?

The ultimate sophistication in investing?

It was Leonardo da Vinci who opined that "simplicity is the ultimate sophistication" and while the -3.47 per cent annual return (to 18 December 2015) for my rules-based global asset allocation system is not the stuff of genius, I am nevertheless pleased to have outperformed most broad equity indices.

The live track record for my US dollar-based proprietary account (trading Tactical Asset Allocation I) begins from August 2015 and is spliced with back-tested performance up until July. As I began trading for real, in the midst of a period of increased volatility in the summer and late autumn, the model largely exited risk markets and, as this pie chart of portfolio holdings shows, the level of cash has remained high ever since.


Portfolio constituents


The system's rules are detailed below, but essentially the idea is to invest in markets that are moving up and to exit markets that are going nowhere or down. In doing so, the goal is to provide an equivalent or superior return to the MSCI World USD Net with lower volatility and suffer less severe peak-to-trough drawdown in bear markets.


I hope to achieve this by investing in risk assets such as stocks and commodities while their momentum (return) is positive and retreating to the reserve asset (cash/bonds) during periods of market crisis. The model rotates into the top 10 performing markets out of a total potential universe of around 60 New York listed exchange-traded funds (ETFs), which includes a few commodity funds such as oil and gold.

For a more detailed explanation of the rules see:


My overriding investment philosophy

The traditional investment community should make you laugh, or possibly cry. The long-term track records of discretionary fund managers suggest that chance plays a far greater part than skill in investment performance and that the vast majority in the industry are fooling themselves and their clients. In general, investors have paid vastly inflated fees for lousy performance. Give me pure, quantitative, rules-based investing any time.

In terms of a cheaper, 'passive' approach to investing, the rise of index-tracking funds was the first decisive break in the right direction. For example, take the composition of the Russell indices:

■ Rank the US common stocks from largest to smallest market capitalisation at each annual reconstitution period (May 31).

■ Top 3,000 stocks become the Russell 3000 Index.

■ Largest 1,000 stocks become the Russell 1000 Index.

■ Next 2,000 stocks become the Russell 2000 Index.

■ The smallest 1,000 in the Russell 2000 Index plus the next smallest 1,000 comprise the Russell Microcap Index.

How refreshing. No swaggering nonsense here. No one ripping you off a precious few percentage points annually for attempting the non-achievable feat of providing consistently good returns. What you see is what you get: stocks that prosper will get into the index, stocks that crash and burn will exit. Simple, mechanical trend following.

But it needs to be taken much further. Diversification needs to be international and to cover as many asset classes as possible. Why bet on the dollar and the US to the exclusion of the rest of the world? Or the UK and GBP for that matter. Why just invest in stocks when you have real assets such as commodities, real estate and timber, which may even out the bumps a little with uncorrelated or at least low correlated returns?


Don't bother to forecast. You haven't a hope

Despite many conflicting theories and learned opinions we still have no idea whether we live in a deterministic or random universe. If the former, then like Hari Seldon, the hero of Isaac Asimov's Foundation Series, given enough information and computing power we should eventually be able to accurately predict the fall of every sparrow. If the latter, we are wasting our time with prediction and may as well throw dice.

Some things are much more predictable than others. The trajectory of planets for instance. But when it comes to complex systems such as the weather, human society or financial markets, even if the world is strictly deterministic, prediction in such matters is currently beyond us. Ask yourself, could you have accurately foreseen the hyperinflation experienced in Weimar Germany; the collapse of Barings; the rise of Christianity; or even that Leicester City would top the Premier League at Christmas? If the answer is no, then why is it you imagine you can pick investments any more successfully?

Therefore, instead of trying to forecast financial markets, I believe it is far better to follow a simple set of rules that gets you in and out of a wide range of diversified global investments and over the long term you should do as well as any 'professional'. You will take what the market has to give and will almost certainly be better off than if you had hitched your fate to the latest braggart in the City of London.

Subscribe today

Full access for just £3.37 a week:

• Tips and recommendations - to beat the market 
• Portfolio clinic & Mr Bearbull - build a well-planned portfolio 
• Expert tools - track and manage investments effortlessly
• Plus free delivery to your home or office

Subscribe Now