Sunday, May 9, 2010

5.09.2010 On the peculiar advice of Mr. Salmon

Felix had some interesting advice the other day, which he updated tonight. Suffice it to say, I think a fair summary is something along the lines of "OH GOD SELL HOLY SWEET JEBUS WE'RE ALL GOING TO DIE" or something similar. Or at least that is, I am reasonably sure, the take away that people will have who read the Huffington Post as they log onto their eReaders and eTrade accounts after reading the weekends news, given my short tenure in the field of explaining the incomprehensible market volatility to nervous retail investors.

Nevertheless, my curiosity was piqued when Felix said:

With all those inputs, the Samuelson Share output is 78%: you should have 78% of your investments in stocks, on average, over the course of your investing life.

But now what happens if you change the 18% value for the VIX to its actual closing level on Friday, which is 40.95%? Suddenly, the Samuelson Share plunges to just 15%.

SURELY the “Felix Salmon Investment Advice” isn't saying that we should adjust our market exposure DAILY based off the closing VIX price? That would lead to CRAZY volatility and leverage in the portfolio, not to mention silly things like transaction costs. Perhaps it would be better to take a yearly average of the VIX, and adjust accordingly there, rebalancing the portfolio.

So, I charted the "Samuelson Share" based off the Daily close of the VIX and then took the 1 year moving average trend line. I also threw the daily close of the S&P500 on to get a better idea of what the market was doing during each allocation point:

So, the Felix/Samuelson approach would have you buy more and more (with leverage) as the bull markets increased, and sell into the bear markets. Buy high (with leverage), sell low.

I don't know if this strategy would have actually beat a buy and hold strategy since 1990 (as this is just the quick excel work I could piece together over 3 innings of the Sox/Yankee's game) let along longer time periods, but I suspect that this isn't really a winner, in the long term strategies for allocation of assets to produce satisfactory risk adjusted returns.


  1. Hi Brian, what's the y-axis here? The Samuelson Share should be somewhere between 0 and 1, no?

  2. y axis is Samuelson share (left side) and S&P level (right side).

    x axis is the date.

    I can send you the file if you wish.

  3. yes please!

  4. also, depending on the VIX, the Samuelson Share easily gets above 100% stocks.

    Of course, if you increase the RRA, you get below that, but the daily/yearly volatility of this type of strategy, I think, remains.