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This question from our friend Arjun is one that I get a lot:
 

“Do you ever change your strategies to reflect different market environments or are they always the same over time?”

 
This is a great question and I wanted to save it until I had a good live example to use as a backdrop.  So the short answer is yes I do change them, or more specifically I would say I “tweak” them.  At the end of this article I will show the results from my most recent tweaking of the VTS Tactical Balanced Strategy.  Before I do that though I want to address the macro picture and my general investing philosophy.

I’m not a day trader and throughout my investing career I’ve always believed there is a fine line between adapting to current market conditions and just over-trading and over-fitting a strategy.  It can be very tempting for people to abandon something as soon as it fails a few times.

 

You know I love my golf analogies, and considering it’s Masters week please indulge me.  Picture a player who starts the round with a solid game plan and a finely tuned swing that just won a tournament last week.  On the first tee everything is fine, but after a few bad shots on the opening holes it’s very tempting to start making changes.  I’ll narrow my stance they may say, giving me more stability.  Then they hit another loose shot and think, my grip is too strong so they change that.  Maybe they overshoot a green and think I’m swinging too hard, so they alter their swing speed.  They 3-putt a few times and now want to try a left hand low grip for the back nine.

Before you know it your grip doesn’t feel natural, your stance is uncomfortable, you’re tempo is off, and now you have almost no chance to swing free and confident.  And for what?  It was almost certainly just a bad day but the more you change the worse the situation gets.  One of the most valuable skills a golfer can have  (and investors as well)  and something that separates the champions from everyone else is simply staying out of your own way.  Staying committed to the process even when it’s not working in the short run.

 

The same applies to many investors out there.  A couple losing trades here and there and all of a sudden they are making major changes to the strategy and before you know it, it’s unrecognizable from what was working before.

So sticking to the long-term mechanics and fundamental rules is vital for continued success.  Now that doesn’t mean we can’t make minor tweaks along the way, but we have to be very mindful of not over-trading and over-fitting.  So to answer the original question, I make changes to every one of my strategies, but only minor changes and only a maximum of once per year.

Now sometimes my hand is forced as was the case with the termination of XIV for example, but for the most part I only make changes after a full year or two cycle under current rules.  It took me many years of studying markets, data mining, and trial and error to arrive at the strategies I have.  At this point it’s mostly about discipline and having confidence that what I’ve built will be there when I need it.  I’ve just finished up a long review of the VTS Tactical Balanced Strategy that hasn’t seen any changes since the end of 2015.

 

Sometimes investors who implement volatility into their models take for granted that we really only have VIX futures data going back to 2004, and VIX data itself only back to 1990.  In the grand scheme of things this is a pretty short data set so I find it very important to do regular reviews and add in all the new data points to expand my data set and hopefully produce more robust signals.

I’m very pleased with how quickly the Tactical Balanced strategy responded to the growing volatility in January and we exited our long stock position at nearly the perfect time.  We’ve not felt the financial or emotional effects of this latest stock market crash and all those -2% days.  In fact our strategy is up over 5% year to date yet the S&P 500 is currently in a -10% drawdown.  So the strategy has done what it’s designed to do.

The new data points that have now been added into the mix after my review should also allow us to get back into the markets a day or two sooner.  To me it’s always about minor improvements, not radical changes.  The underlying fundamentals of the strategy have been in place for years and with each passing year and an ever expanding data set we should benefit from better signal recognition.

Now I don’t ever show the updated backtests on my website.  Whatever was posted on there in real time can’t change of course, but I can show you what the improvements I’ve made would have looked like and why I’ve made these subtle changes: 

 The blue line being the new strategy rules, and the gray line being the results as they are on the website for the old strategy rules that I’ve been following since my last update I made at the end of 2015  (and before that no changes since 2012)

Not much difference, just 1.2% but it’s meaningful in the long-run.  Compounded over many years I think people would be surprised how much of a difference an extra 1% a year can make.  But recent results aside it’s important to remember the real reason the strategy exists is in response to the question, what happens during a recession?

So the new VTS Tactical Balanced Strategy is very much like the old one, just the best version of itself.  I’ll let it go for a year or so and revisit in the future.

 

Current VTS Total Portfolio Solution Allocations

10% VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

10% VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

50% VTS Tactical Balanced Strategy

20% VTS Iron Condor Strategy

10% VTS Discretionary Strategy

Temporarily paused:  VTS Tactical Volatility Strategy

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