Rebalancing vs Derisking

We'll start with this from Michael Kitces.

I've never been much of a strict rebalancer so much as a derisker. We use the word ergodic (ergodicity) here to talk about the natural tendency or inertia of equities to go up. That applies to sectors and good lucky stock picks. If the starting weight for a stock in a portfolio is 5% and it grows to 6.5% that means it is outperforming the portfolio but I don't think it is ideal to shave that down in the name of rebalancing. 

Meb Faber has asked rhetorically on Twitter a couple of times whether or not it is a good idea to buy gold when it is at all time highs. He said it is not a good time, it is a great time and of course has data to back that up. I am not concerned with taking that input literally so much as to take it as a reminder that setbacks along the way notwithstanding, broad equities tend to go up, same with sectors and same with many stocks (not all stocks). This is a variation on the Lindy Effect.

My preference is to think about reducing risk. I start most individual stocks at 2-3% of the equity portion of the portfolio. Over the course of more than 20 years of managing client portfolios, there have been several instances where individual stocks went on absolute heaters and did so for an extended period. I don't have a hard and fast rule about what percentage weight I take some off the table instead it is more of a combination of things to consider. It doesn't get better than this is a good time to take a little off the table. Also it is pretty easy to look at a chart and see where something has gone parabolic. The context here is not that something negative has happened to the company, just whether or not it has grown too large in relation to the portfolio.

At what percentage weighting would an implosion be problematic? If Sandisk now made up 5% of your portfolio and it cut in half, would that be problematic for you? What if it was currently at 10%? We're not trying to pick a top or predict something bad happening, this is simply a matter of risk management. If giving up 500% points quickly because of some sort of calamity for the stock would be too much, that tells you to sell some. I wouldn't sell all of it unless there was something negative about the company prompting action, I would sell enough to get down to an acceptable risk level if something terrible happened.

This gets us to looking through to your exposure to various sectors and themes in ETFs and making decisions about what sort of weighting to have. For example, the S&P 500 has just under 8% in Nvidia and about 18% overall in semiconductors. For someone who is a real indexer, they are probably content to have that much exposure. But from there, how many portfolios own both the S&P 500 and QQQ?Nvidia is just over 8% of QQQ and semiconductors are closer to 30% of that index. 

Copilot says there are at least 40-60 narrower ETFs that own Nvidia at more than a 5% weighting. One of the advisors I started subadvising for last year were quadrupling up on Nvidia exposure with the S&P 500, QQQ, SOXX and the actual stock. This would have been great for returns and terrible for risk management and the advisor didn't realize the duplication he had.

If you want to build that way by all means, make an informed decision and go for it but the point is more often than not, people do not realize the extent to which they are loading up on the same risk. That won't be a problem until it is a problem. 

Do you have emerging market equity exposure? Have you looked at what is going on with the holdings? Chances are the fund you use is heavy in Taiwan Semiconductor, Samsung and SK Hynix. So that is another avenue to the same sort of risk/theme. If you've looked through to your holdings and know what your exposure adds up to and you're comfortable with that weighting then you're all set. 

The top five in EEM add up to about 30% of the fund, tech more broadly is just shy of 37%. It is important to understand these exposures not to avoid being overweight the sector or the AI theme but to avoid being unintentionally overweight.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

A Great Result That Would Be Very Difficult To Live With

We've got a lot to pack in today starting with a two hour podcast with Jason Buck who created the Cockroach Portfolio and Jim O'Shaughnessy. I hopped around a bit and took in maybe 45 minutes. There was a lot of deep stuff, Jason is a complex guy. There are just two points that I wanted to explore here.

The first one is the difficulty in holding diversified portfolios. Jason cited the cliche we say here that if everything is going up together, you aren't diversified because they will all go down together. In other interviews Jason has said that being diversified means there's always at least one holding that will make you want to puke. 

We'll dig in a little on the Cockroach Portfolio in a moment but he talked about trying to talk people out of investing in his fund because of the behavioral challenges that go with sitting in one holding, even if it has a small weighting, that is down most of the time (your diversifier). 

Jason has talked frequently about Nassim Taleb and Universa (a hedge fund that specializes in tail risk strategies) but I didn't realize the influence that Universa had on Jason. He said the Cockroach came about from reading Taleb and then trying to reverse engineer the concepts that Taleb wrote about. 

Here's how the Cockroach is allocated;

Below is the most recent version of the Cockroach that we tried to reverse engineer;

And here is how it has done through yesterday;

I threw in the Permanent Portfolio Fund (PRPFX) because quadrant style investing is also a source of influence on the Cockroach and I included the Trinity ETF (TRTY) because I think there is some conceptual overlap. We can't really backtest further than with BTCFX for Bitcoin because if we use GBTC we would get some results that I don't believe could be repeated but for the almost five years, the Cockroach has done very well. It kept up with PRPFX and outperformed VBAIX with a lot less volatility than both of them. 

While that is good of course there are a few holdings that do dreadfully bad occasionally. There might be a better mousetrap than TAIL but that one is a tough hold. Managed futures funds are frequently difficult to hold. Bitcoin is currently in a 40% drawdown. I think people give gold the benefit of the doubt but 12% is a lot when it's on a downswing. All of that and our version of the Cockroach works.

Here's a more extreme example of holding something that goes down a lot from time to time from an article that tries to deconstruct Mulvaney, the CTA shop that made news for making a fortune on cocoa a couple of years ago. 

80% of their trades lose money? The long term result is fantastic but the drawdowns can be brutal. The strategy is that trades are small and allowed to grow unconstrained until they get stopped out, constantly increasing stop levels for a trade that works. Risk is managed with stop orders not position sizing or risk weighting per the link above. A reader turned me on to the article when I asked if anyone knew about any funds more volatile than MFTNX that we looked at yesterday. 

Pivoting to leverage that I think I can weave into today's discussion, Jeremy Schwartz from Wisdomtree sat for a much shorter podcast with Ben Carlson. Wisdomtree has quite a few capital efficient (leveraged) ETFs and they appear to do exactly what they say they will do. Part of the argument in favor of these funds is that the leverage is not being used to magnify one position, instead the leverage is used to add diversification without having to take away from the stocks and bonds allocations.

The idea makes sense but that doesn't necessarily remove the risk that the disparate assets in the fund both go down. If sized appropriately, that isn't necessarily catastrophic but while VBAIX was down 16.87% in 2022, NTSX, which leverages up such that a 67% weight to it equals a 100% weight to VBAIX, was down 25%. The math checks out in terms of the fund working correctly but sized incorrectly, 25% is a big decline. Additionally, with the stocks/bonds combination funds, you have to want the bond exposure they offer. NTSX has AGG-like bond exposure, RSSB has a treasury ladder of sorts that takes on plenty of duration. 

Stocks and bonds can go down together. In terms of being willing to look different, these funds are about not looking different. The ReturnStacked guys talk about their funds helping to avoid tracking error. The bond market is a great place to want tracking error, to want to look different. The benefit of looking different with respect to bonds for individuals is less volatility and the benefit of looking different with respect to bonds for portfolio managers is better risk adjusted performance.

Here's a little more about effective use of leverage from RCM.

We've looked at leverage a little differently. More real world, we've looked at how a small exposure to negative convexity can allow for a little more exposure to equities. Not a lot more, a little more. If equities start to decline, the fund with negative convexity will grow to hedge more of the portfolio. A little more theoretically, we've done some things will small exposure to SSO which is 2X S&P 500 and much smaller exposure to TECL which is 3X technology. Putting 5% into TECL only to see it blow up would be a bad outcome of course but no catastrophic.

Investors are leery of leverage which is a good starting point but as the pro-leverage crowd will tell you, serious problems comes from misusing leverage. I would tread very carefully with any of this and I would avoid a fund that leverages equities and duration. I don't know if there are more bond market declines coming but I do think there is more bond market volatility coming.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

A Portfolio To Make You Throw Up

I was intrigued by the comment from Eric Crittenden that we shared yesterday about using very volatile managed futures. With that in mind, a truly awful portfolio that no one could endure despite the decent long term result. 

MFTNX is managed by Dunn Capital and is one of the most volatile managed futures funds. Please leave a comment if you know of one more volatile. Look at how much time it has spent down 30%!

Portfolio 1 compounded 132 basis points better than VBAIX despite MFTNX' low growth rate. Including client/personal holding Merger Fund in Portfolio 2 made it more palatable by lowering the volatility noticeably but not dramatically without sacrificing too much growth. The drawdown numbers are only slightly better but deconstructing that a little, there was pretty much no help with fast declines but a huge help in 2022 when Portfolio 1 eeked out a small gain and Portfolio 2 was down less than half of VBAIX' decline.

I'm a big believer in small exposure to one or maybe two negatively correlated holdings but this is a good example to show that purely by the numbers, a large holding in one of these can improve risk adjusted results. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

A Sitdown With Standpoint

Eric Critten sat for Matt Zeigler's podcast with Jason Buck joining in. Eric manages client/personal holding Standpoint Multi-Asset Fund (BLNDX) which combines global equities and managed futures. There were some good tidbits in there to share. 

The origin of the fund came from conversations with advisors expressing similar ideas of what they were looking for in an alt; capture some upside soften the downside and do that with lower volatility. Those ideas also tied in what what Eric would want to do with his own money. 

Researching and backtesting led him to conclude that a mix of global equities and managed futures was the best way to achieve this. If you look at how the fund has done it is hard to argue with the conclusion but there was an interesting part of the conversation early in the pod about how difficult spring of 2025 was emotionally before just about everything bottomed a few days after the Tariff Panic. 

He didn't waiver, didn't deviate from the system or do anything but stick to the process but his comments made it seem he was worried. I know Eric personally and so this surprised me. They said that this period was the worst drawdown for managed futures in a very long time but I seem to recall late 2022/early 2023 being worse but maybe not. 

BLNDX is 50% managed futures (there's a little more to it than just saying 50% though) because that is optimal per Eric's research but the three of them agreed that no one is going to have that much of their portfolio in managed futures. Eric made an interesting comment in passing that if you're only going to have 10% in managed futures, you should use the most volatile exposures you can find. 

Let's check that out using AQR Managed Futures High Volatility Strategy (QMHIX), KraneShares Mount Lucas Managed Futures Index Strategy (KMLM) and Arrow Managed Futures Strategy Fund (MFTNX).

Although Portfolio 1 and SPY look very similar, Portfolio 1 was down much less than SPY at the 2022 low and although not shown, it was down less than VBAIX' low too. 

Another important topic in the discussion was that to be willing to own managed futures means being willing to look different which is not easy to do they said. You really have to want to look different and endure the times when that is difficult. 

I've long been willing to have the portfolio look different and I try to explain how the various diversifiers tend to behave to clients so they are not surprised. Part of the conversation on the pod was directed at Matt who is a practitioner and he gave an analogy of dogs and their owners who look alike. I think he was saying that investors who would be interested in alts will find their way to advisors who use alts but that wasn't crystal clear.

A final topic to point out was the idea that advisors should have a higher percentage of their money in managed futures than their clients. The idea is one we explored a long, long time ago that Meb Faber is known for but I may have beat him to the punch on the original iteration of the blog. I said that I have very little in equities so that I never get to a point where I am so worried about my portfolio that I neglect clients or that I am so busy trading my own account that I neglect clients. Meb's point is that as advisors our livelihoods, our actual business and our client outcomes all serve to lever us up considerably and so having a full equity allocation would just compound that leverage. 

A few weeks ago we looked at a portfolio that consisted of just nine or ten managed futures funds thinking that mixing that many would blend out some of the negative dispersion which it did. Let's update that though to include the funds we looked at already in this post. 

The portfolio with just the managed futures funds is not too compelling but Portfolio 2 is a little more interesting. It has a similar CAGR as Portfolio 1 with half the volatility (a little less volatility than AGG too). In the period studied, inflation compounded at 3.61% so the real return was just a shade above 300 basis points which is pretty good for someone who is looking to avoid equity beta which is the context here. 

If we add 5% of Direxion 3X Tech (TECL) at the expense of managed futures, the CAGR goes up to 10.03% while the volatility only goes up to 7%. The drawdown numbers of the TECL version also look pretty good if you want to go in an see for yourself.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Jim Cramer's Retirement Advice

Jim Cramer had some simple retirement saving advice that downplays doing a lot of trading. As opposed to chasing short term gains, in this article he suggests putting close to half in index fund, then close to half in four or five individual stocks and then a little bit in some combo of gold and/or bitcoin. For someone who is younger, at least one of the stocks should be "speculative."

I'm not a huge fan of 10% into just one stock but I might be in the minority on that. 

That article also included some thoughts about the age that Millennials and Gen-z's think is the right age to retire; 61 and 59 respectively. There's probably not much that is new with those ages but they are at odds with the lack of progress toward being able to retire that many Gen-Xers find themselves confronting. 

One thought from me that I think might be new is that when you retire at 60, you forgo some number of years at what is probably your highest earning years. If you've done a decent job of avoiding lifestyle creep then your 60's provides a great opportunity to meaningfully add to your retirement balances. That assumes you haven't had your hand forced at work to retire early. 

It's not for me to say don't retire early, I've been seeing people from high school and college do it over the last few years, but it is important to dig into any financial tradeoffs.

Today's post cut short. We had to go looking for this;

With these guys;

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Checking Out Of Beta

There's been a lot of content lately about equities being too expensive and the potential index manipulation coming to market cap weighted indexes as they try to shoehorn SpaceX, Anthropic and OpenAI in. There are of course many pundits besides me chirping up about the visibility for more pain in bonds if price inflation remains elevated or even continues to work higher. 

All that might be enough to make someone want to check out from the typical equity beta/bond beta construct entirely and do something completely different. I don't know about completely, but maybe very different will do. 

Part of the inspiration comes from updating the 75/50 portfolio. The basic idea is a portfolio that captures 75% of the upside with only 50% of the downside. It's not easy to pull off but if you play with the numbers, you'll see it works. Although it is not easy to pull off (repeated for emphasis) the way that ETFs and mutual funds are evolving, it is becoming a little more attainable. 

The versions include funds that we don't use too often for blog purposes but they allow for a little longer backtesting. The mix has no bond duration and other than the small slice to Direxion 3X Tech (TECL), the holdings mostly do their own thing when compared to equity beta. TECL of course is equity beta but it's more about adding positive convexity. TECL would account for a disproportionate amount of the growth but be a very small drag, due to its weighting, when equities go down a lot.

GPAIX and MBXIX are in the realm of multi-asset, multi-strategy funds. They aren't totally uncorrelated to equities or VBAIX but they do often deviate from them by quite a bit. Gold has the potential to hedge a few different things and we talk about SHRIX and client/personal holding Merger Fund all the time. 

The growth rates are an easy observation. The version with just gold doesn't quite capture 75% of the upside while the other two do better than 75%. All three offered a little less downside in the fast declines, in the 2020 Covid Crash they were down a lot less though and they were very effective in the much slower 2022 decline. 

If you want to keep up with equities, this is not the idea for you. In the same nine year period, the S&P 500 compounded at just over 15%. 

The fund universe has expanded dramatically since the backtest's start date so anyone actually interested in trying to build this sort of portfolio for themselves would have more funds to choose from and would be able to diversify a little better. Instead of just one managed futures fund, that portion could be split into two different funds. We've explored the dispersion in managed futures performance many times and having a couple of different funds would probably give a better result.

The 50% in GPAIX and MBXIX could probably be split between four or five funds not just two. Merger arb is great but 15% is more than I would want in real life and if I was willing to allocate 15% to catastrophe bonds, I would probably split that between two funds. 

Getting 60/40-like returns over intermediate and longer periods with a lot less volatility is an outcome that I think many people would be pleased with but it requires being uncomfortable in random short term periods when the sort of portfolio we built today lags by a lot, 2019 and 2023 would have been rough in this context. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Barron's Says To Lift Weights

Over the last few months it seems like Barron's has expanded its coverage of retirement related issues including a lot of content about health and fitness. This is an important part of the equation of course, one I spend a lot of time trying to learn more about and hope that more people take an active interest. 

There have been a couple of articles this weekend, one was about the costs of biohacking and some potential investment angles too. The other article was a simpler look at exercising.

The biohacking article is far beyond what I am interested in doing. There was mention of a company called Radence that has a $50,000 entrance fee and then $50,000 annual fee to use tech to find problems earlier than other means (how it was represented in the article but I can't vouch for that), do countless blood tests and so on. 

There was a mention of Bryan Johnson who might be the most well known biohacker. He is constantly taking blood samples, tracking just about everything in his body and he takes "upward of 100 supplements a day." There is a documentary on Netflix about Johnson called Don't Die: The Man Who Wants To Live Forever. It's difficult to watch

A little less dramatically there was talk of the role GLP1s now play in everyday life and the various wearables that people can use like Garmin or Apple. 

GLP1s seem to be miracle drugs. I am not even a little bit dismissive of that, they work. The side effects are brutal though, that is something not to be dismissed either. They seem to be constantly finding new things that GLP1s might help with beyond Type 2 Diabetes and obesity like Alzheimer's and most recently cancer. These are all things that a ketogenic diet address too. I've seen commentary that says GLP1s mimic keto diets but Gemini says no. Fair enough but if you can get the same or similar benefits with keto without the side effects of GLP1s, that's worth looking into. 

I don't use any wearables. I have nothing negative to say about them, I just don't feel the need to monitor my stuff in that manner. My wife has a Fitbit watch but doesn't go all in with her metrics, it's convenient for getting texts bluetoothed from her phone, but she does track her sleep closely. 

Over optimizing has a lot of negatives and I think what Johnson does is way beyond that line. Doing 1/4 of what he does is way beyond that line. I don't think wearables go down that road. The idea of spending thousands of dollars on a recurring basis seems like throwing money away. 

The article on exercise didn't have a lot of depth to it. As we get older, certain things naturally diminish and vigorous exercise can slow the diminishment which is probably obvious. It goes deeper than that though. The article didn't get into it and you can follow @mangan150 on Twitter for more details but weightlifting triggers countless metabolic processes that have the effect of slowing down the aging process both at the metabolic level but also in terms of appearance. 

The article mentions grip strength as being an important indicator but it did not include retaining the ability to walk fast. Both are important and easily worked on. 

If it's useful for anyone, this is my typical weightlifting routine, I do it twice a week, Monday and Thursday.

• Skip rope
• Deadlift
• Romanian deadlift
• Incline dumbbell benchpress
• Pushups
• Landmine squats
• Leg press
• Dumbbell rows
• Farmers carry
• Landmine rotations
• Chin ups 
• Narrow incline bench (triceps)
• Squat with a dumbbell on a wedge (kind of like goblet squat, not sure the proper name)

Just one set each, it usually takes 50 minutes. 

One most Saturdays I do a mini workout where I do a set of jump rope and then three or four of the above. Another mini workout includes cleaning the bar twice, then doing two front squats and two overhead presses all as one set. Most other days I do a longer jump rope session. 

For diet, I usually don't eat until around 11:30 so a form of intermittent fasting but more precisely it's time restricted feeding. My first meal is usually either eggs with cheese (no carbs), a package of smoked salmon (packaged as one serving from Trader Joes) which is also no carbs or some combination of meat at cheese. With the meat and cheese, I usually put it in a low carb tortilla which has two carbs. I usually have a Quest bar (4 carbs) which gets me to the middle of the afternoon in the single digits of grams of carbs consumed. Contrast that with one bowl of Wheaties which has about 30 carbs. From there I am not too worried about dinner but I do avoid rice and pasta.

The list of metabolic benefits from reducing carb consumption seems to be endless, again follow @mangan150 for more details. 

It is up to us to figure all of these things for ourselves. You might disagree with every conclusion I have made for myself but hopefully you actively engage for your own health outcomes.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.