→ 🎧 Animal Spirits: I had the pleasure of joining Michael Batnick – Director of Research at Ritholtz Wealth Management – to "talk my book." We chatted all things tactical equity, including: the risks of failing fast and slow, diversifying your diversifiers, and benchmarking alternatives. You can listen to our conversation here.
This will be our last "new" research note of the year; next week, we'll provide a re-cap of everything we've learned over 2019.
If you've enjoyed reading Newfound's research this year, we'd sincerely appreciate a nomination for category #31 – "ETF Investor of the Year" – in the 2019 ETF.com award nominations.
For our last note, we wanted to come full circle back to a series of articles we wrote at the end of 2018 about diversifying model specification risk through ensembles.
What we wanted to ask this week was whether specification choices could be timed using momentum. For example, if we build a simple trend-following system using a 200-day moving average and one using a 13/36 week cross-over system, can we switch between them based upon prior returns?
Put more succinctly: do trend model specification choices exhibit persistent relative returns?
It should come as no surprise that naive diversification is hard to beat. But the evidence we find also suggests that within naive diversification lies an opportunity to further maximize long-term growth: rebalancing. (PDF)
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What We're Reading
→ PURITY: "We present a new portfolio construction framework called Pure Quintile Portfolios ... They have the same exposures to the target factor as naive quintile portfolios, but zero exposures to other factors." Pure Quintile Portfolios