We live in very interesting times. There were many record ‘firsts’ in 2020 due to the Covid-19 global selldown, which have sent cold sweat down the spines of even the hardiest of investors and traders. Here’s an example of a record ‘first’ reported by CNBC on the 23rd March 2020 – we had the fastest 30% sell off in 22 trading days ever in history. Additionally, the selldown was so bad and extreme all asset classes including conventional hedges like Gold and Treasuries all sold off hard on that particular day.
Will more of these record high volatility events continue to occur? Do long term investors need to re-think their investment strategies going forward? Does the adage “Buy and hold will not go wrong in the long term” still hold truth in this day and age?
These questions have been repeatedly asked down the years, and true enough there have been no evidence to date that has suggested a buy and hold strategy of a diversified portfolio of multiple asset classes cannot generate favourable returns over the long run.
However, one specific question is still worth asking – Can we expect greater volatility in days to come, and how will it impact particularly those investing in markets for retirement?
In this article, we plan to examine mutual funds in order to answer the question above, especially since mutual fund investments typically go hand in hand with retirement planning and strategizing.
What Are Mutual Funds?
Think of mutual funds as a diversified portfolio containing a variety of products like cash (or money funds), bonds and equities. Within the context of a product category, say equities, you can also design a mix of large, mid, small and/or overseas stocks. Where it gets interesting is how one defines the allocation between the products, and more importantly having an element of how the allocation can change with respect to time.
In general there are industry rules of thumb in setting this up. Broadly speaking there are 3 portfolio types, aggressive, moderate and conservative. What drives which portfolio type for every individual investor will largely depend on their investment time horizon and risk appetite. So for example an individual close to retirement may prefer a conservative approach, and therefore have a portfolio mix skewed towards money funds and bonds. In his/her stock portfolio that investor may choose to be overweight in blue chip and defensive stocks.
Current Trends For Mutual Funds
According to Bloomberg BusinessWeek 2020-04-13 edition, most Americans currently hold their retirement accounts in so-called 401(k) retirement plans. Increasingly, one stop investments like “target date” funds are becoming very popular because all these investors have to do is find a fund that matches their retirement dates. These target date funds will then do the rest by allocating a different mix of stock versus bond ratio with respect to time. For example, the stock bond ratio will decrease as the fund draws closer to the target date.
What’s coming to light is that these target date mutual funds are increasingly becoming more aggressive. For investors retiring this year, Vanguard Group and Fidelity Investments
put roughly half in stocks; T. Rowe Price’s main target-date fund for that age is 55% equities, which is surprisingly large. What will shock the investing community is that Vanguard, Fidelity, and T. Rowe Price, all together manage 69% of all target-date assets. In saying this, it is not to say all mutual target funds are that aggressive. Investors will have to choose a retirement plan befitting their risk tolerance, and there will be those that are less aggressive and volatile available in the market.
This begs the question – how did these target date mutual funds perform during the Feb to March 2020 market sell down period due to Covid-19? And how will the performance of these funds affect those due to retire at this time of the year? The chart below summarises the returns of these common target date funds for T.Rowe, Fidelity, Vanguard, BlackRock and Putnam.
Basically these drawdowns are fairly disappointing, and bearing in mind people are living longer than a generation ago and are more reliant on savings in 401(k) plans compared to what they get from Social Security – such drawdowns will definitely have a significant impact on those expected to retire this year.
How Does Trident Compare With These Mutual Funds?
Surprisingly, our Trident robot has a significantly lower drawdown -1.7% compared to these popular target date mutual funds – so how did we achieve this with a 100% stock only system? Is it even possible for a solution that trades only equities to have portfolio volatility that is even lower than these target date retirement funds?
Interestingly, the answer is a definite yes, and this is made possible only with a unique out of the box Artificial Intelligence trading solution.
What Makes Trident So Unique?
Interestingly, when you scour the financial literature, articles, tweets and experiences shared by Traders and Investors, you will often read that when it comes to equities trading/investment it is commonly acknowledged to be a high risk and high reward venture. Risk and volatility can almost be thought of as being part and parcel of an investor/trader’s path towards rewards. One has to come with the other – just no two ways about it.
With Trident, we have a proven technology that defies this conventional thinking. The only reason why Trident has time and again proven different and unique, is because she adopts what is loosely termed as Alpha strategies. In a nutshell, an Alpha strategy simply has little or no correlation to general market risks/returns or what is commonly known as Beta.
For clarity, not all Alpha strategies trade in the same way, and can often have very different behaviours and approaches to generating higher than expected returns when markets are bullish, and lower than market losses during selldowns, which believe you me, will be what many will expect. In fact, you may often find many Alpha strategies in the market that do generate very aggressive returns during bull runs, and correspondingly high losses during bear markets. One can very well classify such extreme strategies under the umbrella of Alpha strategies.
However, at Algomerchant, we adopt a stricter definition of Alpha. The way we view Alpha is higher than expected returns during bull runs, and lower than market losses during massive selldowns.
Trident is a complex machine and churns massive amounts of data that will probably implode the human brain CPU. To humanise Trident will not do her justice, but it can be summarised she adopts a statistical edge approach to trading. What this simply means is if statistically she sustains losses, she keeps the loss percentages small and win percentages high. Trident has to date 73.2% win rates, so statistically she wins more than she loses by total trade counts. Trident’s reward to risk ratio is 1.21 to date, which means that on average for every trade she enters statistically it has proven to win by value 1.2 times more than it loses by value.
If we move away from looking at Trident with statistical tinted lenses, there are also several ways we can qualify Trident as an Alpha strategy that actively seeks to avoid volatility and drawdowns:
#1
Limiting Time Exposure
The maximum period Trident will hang on to a position is 3 weeks. In extreme sell down conditions we have seen Trident enter and exit trades with 2 trading days. Thus, Trident does not buy and hold for the long term. It does this so that she avoids general market beta risk exposures.
#2
Buying when markets are inefficient
Imagine this, if you are able to consistently buy at the market lows, and stay position free when markets are free falling, will you consider such a strategy as low risk and low volatility? This is exactly what Trident does and how she behaves in general. One way to look at this is Trident is able to take the good out of markets when markets are bullish, remove the part and parcel of the beta portion of market drawdowns/losses during selldowns!
#3
Smart Cash to Equities Ratio Allocation
In general, when markets are on a long term bull run, Trident tends to take on minimal trade positions at any point in time. However (to every investors’ benefit of course), Trident will put more of your capital to work by entering into more trade positions during periods of market inefficiency!
Trident is unique due to her ability to profit yet not volatile
