What I’ve been reading…

Was 2015 a hard year to make money if you were managing a portfolio of global asset classes? Absolutely!

The Resolve Asset Management 2015 Annual Letter: “Navigating Active Asset Allocation When Diversification Fails”, helps to explain why.

You can read the summary of the letter and access the download link here.

It’s a fascinating piece of research which I would highly recommend reading, but if you haven’t got the time right away, I’ll give you the gist of it here.

Simply put, imagine that you had a crystal ball and at the beginning of each year you knew which assets would appreciate the most in the following 12 months.

Surely a licence to print money…You simply buy whichever assets produce the highest return 12 months later.

For example, suppose that you manage a portfolio of the following ETFs:

SPY – US Equities

EFA – Foreign Developed Equities

EEM – Emerging Market Equities

RWX – International Real Estate

VNQ – US Real Estate

IEF – 7-10 Yr US Treasury Bond

GSG – Commodities

GLD – Gold

TLT – 20Yr + US Treasury Bond

The strategy is to look into our crystal ball, and on the first trading day of each year we buy the 4 ETFs which our crystal ball has shown us will produce the highest returns if sold 12 months later.

For simplicities sake, the portfolio will be equally weighted with an annual rebalance.

Remember, we have a crystal ball and we know before we buy them which ETFs will produce the greatest returns 12 months later .

Here are the results of the Crystal Ball strategy since 2007…


Crystal Ball Strat

Look at 2015…even with our crystal ball, we barely broke even.

It’s also worth recognising that a crystal ball would not have prevented us from getting fired in 2008. That’s because even though we were able to look into the future, we still experienced a 35% draw-down!

What if we improve our crystal ball and only buy the strongest ETFs if we KNOW that the return in 12 months will be positive. Here are the results of that strategy…

Crystal Ball Strat2

Bloody hell, we still couldn’t make a return in 2015! The unusual thing is that however you try to improve the Crystal Ball strategy, it falls on its face in 2015. Bonds, equities, real-estate or commodities, none of them produced a meaningful return.

So what’s the take-way from all of this?

As I said, you really should read the original paper. It is far more comprehensive and insightful than what I’ve just shown…Here’s the link again.

Disclaimer: The results are hypothetical results and are ABSOLUTELY NOT an indicator of future results and do DEFINITELY NOT represent returns that any investor actually attained. The Strategies above used a NON-EXISTENT CRYSTALL BALL WHICH LOOKED INTO THE FUTURE. UNLESS YOUR NAME IS MARTY MCFLY AND YOU’VE JUST ARRIVED FROM JAN 2017, THE RESULTS OBTAINED BY THESE TESTS ARE IMPOSSIBLE TO ACHIEVE. 


  • Matt haines

    Reply Reply March 3, 2016

    I always appreciate a humorous disclaimer! Interesting to think that crystal balls are not the answer. Unless perhaps trading on a shorter horizon.

    • Llewelyn

      Reply Reply March 3, 2016

      What strikes me is how well the experiment shines a light on the folly of having a short-term investment horizon and/or assessing performance over short horizons.

      If I was a Hedge-Fund Manager with a crystal ball and persuaded a typical investor (shouldn’t be too hard) to give me all their money on Jan 1st 2015…

      By Dec 31st 2015, that investor would be cursing my funds performance and re-allocating their money to some other manager… who doesn’t have a Crystal Ball!

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