Brief Description
So my grandparents gave me $1000 when I was 12. My parents put it in a mutual fund. When I turned 18 I was faced with the question -after my parents advised me wisely not to blow the money, and after developing a healthy respect for exponential growth- “How should I invest it?” The classic question. I played with it. I watched. I read books about derivatives, met with day traders, trading strategists, hung with the progeny of hedge fund execs. I made a fair number of poor decisions when I didn’t have much money. So when I actually did save money, I knew there were lots of choices.
Fast forward. I decided short term stuff wasn’t for me- too much money on the line, too much stress, not the kind of lifestyle I wanted. So, where does one put the money? I decided to put everything I had in mind together.
Specific Objective
To create a long term (>20 yr) portfolio allocation and rules and implement it on my meager savings.
Product/Results
When I’m 60, ask my about my rate of return. Oh, and there should be a fair bit of code involved for simulations (back testing if you use the finance lingo).
Status
Should be farther ahead than it is. Basically, a while ago I read Hulls Options, Futures and Other Derivatives. Recently I started Swenson’s Unconventional Success. I’ve organized some tools I found.
Current Research
It all started with a bunch of thought experiments and some brief looks at historical data. My basic idea is to “optionize” the Swenson portfolio. What I mean by this is as follows with a covered call example.
Imagine you have $100 you want to invest in the S&P. A typical strategy would be to go long $100 in an S&P ETF. While historically you would be getting in the 5-10% return in inflation corrected dollars, if you had done this a year ago, you would have lost big- like up to 45% (using the 52 week high/lows). However, if, instead of going long, you had instead bought a call option for a $5 fee on $95 worth of S&P ETF, you would have the same basic return profile if the ETF went up. However, by purchasing a call, you are protected if the price falls. If you had taken that $95 that covered the call and put it in government bonds or whatever, you wouldn’t have lost anything due to the S&P.
Basically, you could set up little hedges, and roll the hedges forward. I think those were the terms that Hull used. I think you need economies of scale to really get this going, but when the market is bubbling, it seems like the strategy to use. Now that the market might actually be reasonable priced, well, let’s see what the simulations say.
Some open questions I have are:
- The whole portfolio balancing thing relies on having uncorrelated baskets
- How do I find the best uncorrelated baskets?
- I was going to check to make sure that they weren’t cointegrated, but that’s about as far as I’ve gotten without actually touching data.
- Would using NCAIS data be helpful or just get in the way?
- What’s the best way to use historical data
- What matters is the return with respect to a particular currency at a particular time.
- As far as running simulations/backtesting, what time chunks should I be working with?
- Which particular values should I be worried about? Capital gains tax rates? Federal funds rate? Ted spread? Treasury bonds? Volatility? Inflation? The distributions probably aren’t independent.
- What does historical data tell us about different methods of choosing uncorrelated baskets?
- What data should I be using?
- Daily? Monthly? Yearly?
