TIP382: Investing Mastermind Q3 2021

TL;DR

• Investing is 99% behavior and 1% selection
• The ideal portfolio (as Dalio would suggest) is 10-20 uncorrelated assets
• But, this kind of diversification comes with costs
• Some will work, others won't...expected volatility is modest but so are expected returns
• Leverage increases returns and increases risk of total loss
• Concentration can increase and will increase volatility
• Main benefit of concentration is enabling one to stay within their circle of competence and thus best control their behavior
• Seeking to take volatility out of concentration comes with added costs and execution risk
• Simple trend following (e.g. 200 day MA) will take one out of market during major drawdowns but will also miss "bounces". Can avoid major (e.g. 50%+) drawdowns, but also creates performance drag in non-downtrend markets (e.g. impossible to know when market has truly entered a downturn, therefore will get whipsawed at expenses of uptrend performance).
• Complex trend following (e.g. managed futures) require a large allocation (e.g. 20-50%) to keep portfolio neutral when market drops...but have minimal expected return therefore drag on long-term portfolio performance.
• Tail risk funds will consistently "blow up" (as designed)...dragging on returns unless/until they hit the very rare big payday, which might / might not compensate for aggregate losses.
• Keeping e.g. 5 years of cash also a drag on performance, measured by inflation and opportunity cost.
• This is all another way of saying: there's no such thing as a free lunch
• Alignment of behavior to investing style and strategy is the key factor
• If hedging or trend following, this includes having a plan for if/when hedges pay out (typically, doubling down on positions that are down with the market), otherwise fail to realize the benefits of the strategies