willthrill81 wrote: ↑
Thu Dec 20, 2018 11:41 pm
I'm a trend follower, but you make me look a dyed-in-the-wool buy and holder!
Are you primarily
trying to manage risk, or are you trying to generate alpha?
Primarily risk management. However, I have a fairly idiosyncratic measure of risk. Most people think of risk in terms of return variance measured in their local currency. My measure of risk is mostly based on future buying power. There is a well-cited paper by Campbell and Viceira that explores a similar idea: http://www.people.hbs.edu/lviceira/bondhold_aer2.pdf
The short summary of this paper is that long term bonds are very risky if measured in daily variance, but not risky at all if measured in terms of future buying power. In fact, a long lived investor with zero risk tolerance would invest exclusively in long term bonds.
In addition to risk of future buying power (best measured by extrapolating today's present value to a future value based on long term real yields), I consider risk premiums. Higher risk premiums are more desirable, as they tend to predict higher returns. However, higher risk premiums tend to occur alongside lower asset prices. That is, someone with an equity-heavy portfolio might actually desire lower equity prices if he has just started investing and has many years of contributions ahead.
Finally, I consider my future income streams and their correlation with asset prices. A similar idea is explored in Moshe Milevsky's book Are you a stock or a bond?
What I try to achieve with my portfolio is to have indifference to asset price movements. In the case of oil, lower prices mean my inflation rate is lower--a typical asset-liability hedging idea. In the case of stocks, higher risk premiums (lower prices) mean higher expected returns for my current portfolio as well as my future contributions. While working on a trading desk, I developed some home brewed strategies to generate alpha that are layered on top of this. A nice bonus of achieving indifference to asset price movements is better mental clarity when opportunities occasionally present themselves.